A Summer Training Report

On

ANALYSIS OF ON NON PERFORMING ASSETS OF PUNJAB AND SIND BANK

Undertaken at

SUBMITTED TO PUNJABI UNIVERSITY,PATIALA IN PARTIAL FULFILLMENT OF THR REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION(SESSION 2009-2011)

Submitted to :-

Submitted by:GEETIKA MBA(III) PUNJABI UNIVERSITY,PATIALA

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DECLARATION

I, GEETIKA hereby declare that this project report entitled Analysis of non performing assets of Punjab and Sind bank Prepared by me is a confide record of work done at Punjab and Sind bank, Branch Office, Patiala, under the guidance of Prof S.S Virdhi, faculty, PUNJABI UNIVERSITY, Patiala in partial fulfilment of MBA Program- during academic year-2009-11. I further declare that the information presented in this project is true and original to the best of my knowledge.

(GEETIKA)

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PREFACE

Research Project is an integral part of the professional studies and its purpose is to provide the students with the practical exposure of the market in todays changing scenario. It helps in the development of knowledge, skills and analytical thinking progress. Theoretical Knowledge without practical learning is of little value. To fulfill the need, the management course has the provision of practical learning. We took our summer training in PUNJAB AND SIND BANK. It was our fortune that we got the opportunity to do our summer training in an esteemed organization in very healthy and co-operative atmosphere. In the forthcoming pages, an attempt has been made to present a comprehensive report concerning different aspects of our training.

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ACKNOWLEDGEMENT

If words are considered to be signs of gratitude then let these words convey the very same. My sincere gratitude to PUNJAB AND SIND BANK for providing me with an opportunity to work with BANK and giving necessary directions on doing this project to the best of my abilities. At the very outset I would like to express my sincere gratitude to Mr.Surjeet Singh, Branch Manager,Sector-34, Chandigarh, who was kind enough for providing me this opportunity to supervise my summer training in this organization. I would like to extend my heartfelt thanks to the staff members of Punjab and Sind bank, Branch Office, G.N.N Tripuri, Patiala without whose guidance and support I would not have been able to successfully complete my project. I also offer my sincere appreciation to the staff in PSB. My several well-wishers helped me directly or indirectly; I virtually fall short of words to express my gratefulness to them. Therefore I am leaving this acknowledgement incomplete in their reminiscence.

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TABLE OF CONTENTS

S.NO
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

TOPICS
Introduction Company Profile Literature Review Research Methodology NPA and Provisioning Analysis and Interpretation Recovery Procedure Suggestions and Conclusion Bibliography Annexure

PAGES
8-12 13-22 23-26 27-30 31-62 63-75 76-79 80-85 86 87

EXECUTIVE SUMMARY

NPAs have turned to be a major stumbling block affecting the profitability of Indian banks before 1992,banks did not disclose the bad debts sustained by them and provision made by them fearing that it may have an adverse. Owing to the low levels of profitability, banks 86

owned funds had to be strengthened by repeated infusion of additional capital by the government. The introduction of prudential norms strengthen the banks financial position and enhance transparency is considered as a milestone measure in the financial sector reform. These prudential norms relate to income recognition, asset classification, provisioning for bad and doubtful debts and capital adequacy. An Explorative & Descriptive study was considered to be adequate to achieve the objectives of the study, and the study was conducted in PUNJAB AND SIND BANK, on An analysis of NPA in commercial banks with special reference to Punjab and Sind Bank. The general objective of the study was to analyze the NPA level in commercial banks. However the study was conducted with the following specific objectives.. To analyze the NPA level of Punjab and Sind bank. To study the recovery procedures of Punjab and Sind Bank. To examine how far the bank has been successful in reducing the NPA level. To suggest measures for efficient management of NPAs. The major limitation of the study was the paucity of time. Even then, maximum care has been taken to arrive at appropriate conclusion. The method adopted for collection of data was personal interview with bank officials using Inventory schedule as a tool for the same, and it was also sourced from the secondary data. After collecting data from the respective sources, analysis & interpretation of data has been made. On analyzing the data, the following findings were arrived at:

Net advances are an upward trend. Net NPAs are decreasing. Staff productivity is increasing and is reflected the recovery results.

Based on the findings, logical conclusions are drawn, and further, suitable suggestions & recommendations are brought out. The entire project report is presented in the form of a report

using chapter scheme, developed logically and sequentially from introduction to bibliography & references.

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HISTORY OF BANKING

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Banks were born to facilitate trade to lend monies to purchase goods, to store monies and to change currencies. Banking began thousands of years ago. The Assyrians, Babylonians and Ancient Greeks practiced simple forms of banking safekeeping, exchanging foreign coins and making loans mainly in connection with trade. Temples such as those of Ephesus and Delphi were Greek banking institutions. The Romans did not have State Banks but had minute regulations regarding private banks. These were calculated to create utmost confidence in the system. Banking is nearly as old as civilization. The history of banking could be said to have started with the appearance of money. The first record of minted metal coins was in Mesopotamia in about 2500B.C. the first European banknotes, which was handwritten appeared in1661, in Sweden. cheque and printed paper money appeared in the 1700s and 1800s, with many banks created to deal with increasing trade. The history of banking in each country runs in lines with the development of trade and industry, and with the level of political confidence and stability. The ancient Romans developed an advanced banking system to serve their vast trade network, which extended throughout Europe, Asia and Africa. Modern banking began in Venice. The word bank comes from the Italian word ban co, meaning bench, because moneylenders worked on benches in market places. The bank of Venice was established in 1171 to help the government raise finance for a war. At the same time, in England merchant started to ask goldsmiths to hold gold and silver in their safes in return for a fee. Receipts given to the Merchant were sometimes used to buy or sell, with the metal itself staying under lock and key. The goldsmith realized that they could lend out some of the gold and silver that they had and charge interest, as not all of the merchants would ask for the gold and silver back at the same time. Eventually, instead of charging the merchants, the goldsmiths paid them to deposit their gold and silver.

The bank of England was formed in 1694 to borrow money from the public for the government to finance the war of Augsburg against France. By 1709, goldsmith were using bank of England notes of their own receipts.

BANKING HISTORY OF INDIA

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Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. NATIONALIZATION The next significant milestone in Indian Banking occurred on July 19, 1969 when the then Indira Gandhi government nationalized the 14 largest commercial banks. A second nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. After this, until the 1990s, the nationalized banks grew at a leisurely pace of around 4%, closer to the average growth rate of the Indian economy. LIBERALIZATION In the early 1990s the Narasimha Rao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as new generation tech-savvy banks, which included banks such as UTI Bank (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth

with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%.

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The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

BANKING STRUCTURE IN INDIA In todays dynamic world banks are inevitable for the development of a country. Banks play a pivotal role in enhancing each and every sector. They have helped bring a draw of development on the worlds horizon and developing country like India is no exception. Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for

moving finance from those who have surplus money to (however temporarily depositors whose accounts are in credit to borrowers who are in debit. Without the intermediary of the banks both their depositors and their borrowers would have to contact each other directly. This can and does happen of course. This is what has lead to the very foundation of financial institution like banks. Before few decades there existed some influential people who used to land money. But a substantially high rate of interest was charged which made borrowing of money out of the reach of the majority of the people so there arose a need for a financial intermediate. The Bank have developed their roles to such an extent that a direct contact between the depositors and borrowers in now known as disintermediation. Banking industry has always revolved around the traditional function of taking deposits, money transfer and making advances. Those three are closely related to each other, the objective being to lend money, which is the profitable activity of the three. Taking deposits generates funds for lending and money transfer services are necessary for the attention of deposits. The Bank have introduced

progressively more sophisticated versions of these services and have diversified introduction in numerable areas of activity not directly relating to this traditional trinity

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COMPANY OVERVIEW
(a)HISTORY

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It was in the year 1908, when a humble idea to uplift the poorest of poor of the land culminated in the birth of Punjab & Sind Bank with the far-sighted vision of luminaries like Bhai Vir Singh, Sir Sunder Singh Majitha and Sardar Tarlochan Singh.They enjoyed the highest society in respect their with economic the endeavours to people raise their of Punjab. of life. The bank was founded on the principle of social commitment to help the weaker section of the standard Decades have gone by, even today Punjab & Sind Bank stands committed to honor the social commitments of the founding fathers. (b)VISION AND MISSION

CORPORATE VISION

We envision to emerge as a strong vibrant Bank through synchronization of the human, financial and technological resources.

CORPORATE MISSION

To put in place the effective risk management and internal contol system. To adopt and operationalise high-level technology standards. To strive to achieve excellence in customer service. To achieve the highest standards of transparency and accountability in the conduct of

banking business.

To maximize profitability and profits of the Bank with due compliance of prudential

guidelines.
To maximize competitive risk adjusted return on capital, through planned reduction in the

average cost of funds, increased yield on advances and investments besides reduction in cost of operations.

(c) MANAGEMENT

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SHRI PARVEEN KUMAR ANAND EXECUTIVE DIRECTOR DIRECTORS SHRI A. BHATTACHARYA DIRECTOR (Ministry of Finance, Deptt. of Financial Services, New Delhi) SHRI R. SADANANDAM (RBI Nominee Director) SHRI SANDIP GHOSE, ADDITIONAL DIRECTOR (Regional Director, RBI New Delhi) NON- OFFICIAL DIRECTORS SHRI MATTA VENKATA SIVA PRASAD SHRI KRISHAN MURARI GANGAWAT SHRI HARI CHAND BAHADUR SINGH SHRI A.K. SURANA (C.A. Category) SHRI KARANPAL SINGH SEKHON SHRI MANISH GUPTA GENERAL MANAGERS SARDAR GURCHARAN SINGH REKHI (Chief General Manager) SARDAR HARCHARAN SINGH MAKKER (Posted at H.O.) (Posted at H.O.)

SARDAR HARCHARN SINGH LAMBA SARDAR PARAMJIT SINGH GHAWRI SARDAR JASPAUL SINGH KOCHAR SARDAR GURVINDER SINGH BINDRA SARDAR KULWANT SINGH SUCHDEVA

(Posted at H.O.) (Posted at H.O.) (Posted at H.O.) (Posted at H.O.) 86

(Posted at H.O.) SARDAR GURCHARAN SINGH SARDAR GURPAL SINGH MALIK SARDAR HARVINDER PAL SINGH SARDAR MANJIT SINGH SHRI DINESH KUMAR GUPTA (Posted at Z.O. KOLKATTA) (Posted at Z.O. MUMBAI) (Posted at H.O.) (CVO - Posted at H.O)

(d) SERVICE PROFILE DEPOSITS Different types of deposit accounts: Different types of deposit accounts: (a) Saving Bank account (c) interest rate account (e) Recurring deposit account ADVANCES Base rate Priority sector Housing Consumer Conveyance Personal loan Education Debt restructuring Other loans FPC leading (b) Term deposit account (d) Current account (f) Lockers account

SERVICES

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 ATM branches Locker facilities Credit cards RTGS/NEFT PSB-eFunds transfer

(e) SPL TIEUPS PSB AVIVA ALLIANZ-Insurance

Punjab & Sind Bank has special tie-up arrangements for Non Life insurance business with M/s Bajaj Allianz General Insurance Company and Life Insurance business arrangements with M/s Aviva Life Insurance Company India Pvt. Ltd. for providing its valued customers all the insurance related services under one roof. The Bank has established insurance desks throughout the country at different branches where Insurance Officers are posted and have also allotted cluster of surrounding branches. About PSB and Aviva Tie-up Aviva signed Corporate Agency Agreement with PSB in September 2004 under which the bank deployed its Insurance Officers (Specified Persons) to sell the Life Insurance products to its customers through vast network of 918 branches spread over 175 Districts ,25 States and Union Territory of Chandigarh.

The Bank has tied up with Bajaj Allianz Life Insurance Company Ltd. (BALIC) to provide Low Cost Life Insurance Cover to New & Existing Education Loan and Housing Loan borrowers on voluntary basis, under the Group Insurance Scheme.

PSB-MARUTI SUZUKI

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The Bank having signed MOU with MSIL for Auto financing through their approved dealers. The features of the scheme under Tie-up arrangement are as under

1 . 2 .

Purpose

To finance new Maruti Suzuki vehicles

Eligibility:

Quantum of Loan Thrice the average of annual (i) to income of past three years as per ITR/ Salary details subject to a maximum of Rs.10 lac . ( Income of spouse can be clubbed) Thrice the average of annual income of the past three years as per ITR ( Income of spouse can (v) be clubbed ) . Maxm.Rs.10 lac . 40% of the total income to meet day to day expenses should be ensured.

Employees of Central/ (i) State Government PSUs, Organisations. Employees of established & recognized schools/ colleges / local registered bodies, where loan (ii) installment is paid by salary deduction or undertaking from employer for remitting the terminal benefits is available. Employees of Corporate clients of Bank, where loan (iii ) installment is paid by salary deduction or undertaking from employer for remitting the terminal benefits is available. Employees of reputed (iv) Corporates in regular service and having permanent residence proof. Professionals/ Self (v) employed, CAs doctors , Architects and General public.

(iv):

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PSB- Tata Motors Ltd.

In order to boost lendings under Commercial Vehicle segment Bank has entered into an MOU with Tata Motors Ltd Indias largest Commercial Vehicle Co for financing of commercial vehicles . In this context, under this arrangement, Bank has introduced a competetive and innovative credit delivery system in association with TML, effective implementation which will be a source of successful business growth for the Bank.

The salient features of the approved scheme are as under: 1. Eligibility a)Individuals, proprietorship/partnership firm./ Limited company, trust, society, owning and operating or proposing to own and operate transport vehicles for carrying passengers or good on hire. b) The borrower should have sufficient net worth to pay for the margin and initial recurring expenses like registration, Insurance, etc. In case where the borrower does not meet this requirement, a co-borrower having sufficient net worth to be included. .
2.

Margin: DSCR

15% on chasis and 25% on body. Minimum 1.75

3.

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THE DEPOSITS OF PUNJAB AND SIND BANK (FROM 04-05 TO 09-10) Amount in crores

Year

Deposits of the bank (Rs)

Increase / Decrease over the previous years figure --6.31 10.20 12.81 23.60 18.54

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

11844.02 12591.50 13877.06 15656.46 19351.26 22939.56

The aggregate deposits of the bank has increased from 11844.02 crores to 22939.56 crores during the period 2004-05 to 2009-10. On analyzing the trend of such increase in the deposits over the period we can clearly see that it is increasing at a increasing rate. The modest growth especially during the last three years is mainly due to a conscious decision on to shed the 86

highest cost deposits. With focus on bringing down the cost of deposit, field function areas have been constantly exhorted to step up the share of low cost of deposit.

ADVANCES OF THE PUNJAB AND SIND BANK (FROM 2004-05 TO 2009-10) Amount in crores %Increase / Year Advance of the Bank (Rs) Increase/decrease over the previous year figure _ Decrease over the previous years figure --3.20 0.18 17.68 49.38 (21.46)

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

39567.33 40834.71 48271.60 56810.81 84868.22 66648.85

1267.38 7437.89 8538.21 28057.41 (18219.37)

The aggregate advances of the bank has increased from 39567.33 crores to 66648.85 crores during the period 2004-05 to 2009-10.The credit appraisal system was fine tuned and effective system was put to place to ensure the quality of asset. A tenor linked prime lending rate was introduced during the year 2006 to give a boost to short term lending. Exposure to various sectors is strictly maintained within the stipulated ceiling. The system and procedures were

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streamlined to incipient irregularities in the asset step without delay. A substantial positive change in credit dispensation and monitoring was initiated through a visited credit policy. Which primarily aim at segmentation of the retail and corporate portfolios for improved thrust in both these areas.

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SWOT ANALYSIS OF PSB MISSION Promotion and sustenance of economic interest & providing easy finance, cost effective and quality banking services to customer & PACs. STRENGTHS Special incentives in form of aides and subsidised loans given by state and central government in order to expand credit to rural and priority sector. Diversified Portfolio with innovative schemes like Revolving Cash Credit to farmers (RCC), Conversion loan facility, Commercial Dairy development scheme, Non Farm sector loan scheme(NFS) that caters to the special needs of farmers and other priority sectors. Well laid organisation structure and effective leadership. Well Qualified and trained staff fully dedicated towards fulfillment of banks objectives. WEAKNESSES No provision of new age services like Home Banking, On-line Banking, Telephone Banking. Lack of ATMs and debit card facility to its customers. Limited Branch network. Partial computerization of the operations. OPPURTUNITIES Introduction of new and innovative loan schemes like Dairy loan scheme for purchase of cow, Advances to salary earners etc. THREATS Increased competition from innovative service profile of private sector banks like ICICI, HDFC etc. Competition in core sectors like rural advances, SSI loans from other UCBs and public sector banks

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Caprio & Klingebiel (1996), studied the Bank insolvency is more costly in the developing world, where losses represent a greater share of income. The authors present data on bank insolvency episodes since the late 1970s. This new database can be used in conjunction with readily available data. Information and insights are presented in seven tables on: a) major bank insolvencies episodes and systemic banking crises; b) main characteristics of banking crises; c) trade terms in crisis countries; d) trade concentration prior to crises; e) restructuring characteristics; f) financial analysis of crisis countries; and g) restructuring outcome in crisis countries. In a companion paper the authors discuss possible preventatives and the tradeoff between safety and soundness versus efficiency. Meanwhile, this initial database suggests further avenues for research. There is a dearth of widely available indicators on bank performance. More attention should be focused on developing indicators that might predict bank insolvency for individual banks and systems as a whole. The authors devise criteria for assessing how governments deal with insolvency and find that countries handle it well. Lawrence Sez (2001), analyzes the important process about financial reform in the area of bank illiquidity in low-income emerging markets. This process is taking place within the context of a debate as to whether or not governments should try to rehabilitate existing stateowned banks or allow a new or parallel banking system to emerge in order to reduce nonperforming assets from state-owned commercial banks. A comparison of institutional development in China and India suggests that new entry rather than the rehabilitation approach may work more favorably to reduce non-performing assets. The paper offers an explanation as to why governments choose rehabilitation over new entry. Milind Sathye(2001), measured the productive efficiency of banks in a developing country, that is, India. The measurement of efficiency is done using data envelopment analysis. Two models have been constructed to show how efficiency scores vary with change in inputs and outputs. The efficiency scores, for three groups of banks, that is, publicly owned, privately owned and foreign owned, are measured. The study shows that the mean efficiency score of Indian banks compares well with the world mean efficiency score and the efficiency of private sector commercial banks as a group is, paradoxically lower than that of public sector banks and foreign banks in India. The study recommends that the existing policy of reducing nonperforming assets and rationalization of staff and branches may be continued to obtain

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efficiency gains and make the Indian banks internationally competitive which is a declared objective of the Government of India. Reddy Prashanth K. (2002), studied financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries. Reddy, Mohan (2003, 2004),examined that several studies have underscored the role of banks lending policy and terms of credit, which include cost, maturity and collateral in influencing the movement of non-performing assets of banks. Satish Kumar B. (2005), analyzed that in liberalizing economy, banking and financial sector get high priority. Indian banking sector is having a serious problem due to non performing loans. The financial reforms have helped largely to clean NPA was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability of the bank are highly affected due to this. The extent of NPA is comparatively higher in public sectors banks. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard. Dhanuskodi R. (2006), studied the Non-Performing Assets (NPAs) in Commercial Bank of Ethiopia. Banks play a very important role in the economic development of every nation. They have control over a large part of the supply of money in circulation. Banks are the main stimulus of the economic progress of a country. In general there are several challenges confronting of commercial banks. The main challenge confronting the commercial bank is the disbursement of funds in quality assets (loans and advances).

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He, Dong (2008), reviewed the nature of NPAs in the Indian banking system and discusses the key design features that would be important for the (asset reconstruction company) ARCs to play an effective role in resolving NPAs. The analysis draws upon recent regional and cross-country experiences in dealing with impaired assets during periods of financial crises.

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RESEARCH METHODOLOGY
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The purpose of research is to discover answers to the questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. Though each research study has its own specific purpose, we may think of research objectives as falling into a number of following broad categories: group. To determine the frequency with which something occurs or with which it is To test a hypothesis of a casual relationship between variables. associated with something else. To gain familiarity with a phenomenon or to achieve new insights into it. To portray accurately the characteristics of a particular individual, situation or a

Research methodology is a way to systematically solve the research problem . it may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. Research methodology has many dimensions and research methods do constitute a part of the research methodology. The scope of research methodology is wider than that of research methods. Thus, when we talk of research methodology we not only talk of the research methods but also consider the logic behind the methods we use in the context of our research study and explain why we are using a particular method or technique and why we are not using others so that research results are capable of being evaluated either by the researcher himself or by others. Why a research study has been undertaken, what data have been collected and what particular method has been adopted, why particular technique of analyzing data has been used and a host of similar other question are usually answered when we talk of research methodology concerning a research problem or study. Research is often described as active; diligent and systematic process of inquiry aimed at discovering, interpreting and revising facts. This intellectual investigation produces a greater understanding of events, behaviors or theories and makes practical application through laws and theories. In other words we can say, the purpose of research is to discover answers to the questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet.

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Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. OBJECTIVE OF THE STUDY The general objective of the study was to analyze the NPA level of banks. However the study was conducted with the following specific objectives. To analyze the NPA level of Punjab and Sind bank. To study the recovery procedures of Punjab and Sind bank To examine how far the bank has been successful in reducing the NPA level. To suggest measures for efficient management of NPAs.
To bring out an explorative & descriptive report on Analysis of NPA in banks, with special

reference to Punjab and Sind bank,Patiala METHODOLOGY OF STUDY

The research methodology adopted for carrying out the study were: In this project Descriptive research methodologies were use. At the first stage theoretical study is attempted. At the second stage Historical study is attempted. At the Third stage Comparative study of NPA is undertaken.

SAMPLING TECHNIQUE Sampling refers to selecting a part of the population to represent the characteristics of the population. However, in this study, Finance Manager of the bank is the source of data and therefore, since he is the only one source of information, there is no question of any sampling. Both primary and secondary data were collected & used for drawing conclusions for the study. Primary data:- were collected using Inventory schedule & also through interview, held with the Finance Manager in presence of the other officials of Punjab and Sind bank .

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Secondary data:- were collected from the published annual reports of the Bank and other sources. Such data collected were analyzed for some kind of a trend and its impact on the profit of the bank.

TOOLS USED FOR ANALYSIS OF DATA The data collected were analyzed with the help of statistical tools like frequency, percentage and trend analysis. Tables are used to represent the consolidated data. Graphical representation is also used for better comprehension & presentation. SCOPE OF THE STUDY The study was conducted in the Punjab and Sind bank,Patiala.The following are the main scope of the study:
Scope of this study is limited to the organization selected.

Present a picture of the movement of NPA in Punjab and Sind bank. This study will help to know the drawbacks of the present recovery strategies. This study will help them to think about new innovative recovery strategy. For this purpose I have covered officials of the bank from various department. LIMITATIONS OF THE STUDY The major limitation of the study was the paucity of time. Even then, maximum care has been taken to arrive at appropriate conclusion. Following are the limitations of the study: given.

For the purpose of collecting vital information, Finance Manager of the bank is only

contacted & interviewed. Since he is an individual, his biases may have crept into the data Data pertains to NPA from 2004-05 to 2009 10 only. Due to time constraint depth analysis could not be made. Some of the information is considered confidential and not available for the study.

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

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

PERFORMING AND NON PERFORMING ASSETS

A performing asset is an advance, which generate income to the bank by way of interest and their charges. An NPA is an advance of borrower account which does not generate income for the bank but they incur various inherent costs like a) Cost of deposit b) Cost of servicing c) provisioning at appropriate rates d) Capital adequacy requirements on these assets and e) Cost of recovery.

NON PERFORMING ASSETS (NPA)

Nonperforming asset means an asset or account of borrower ,which has been classified by bank or financial institution as sub standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI .

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IDENTIFICATION OF NPAs
Identification of an account as NPA depends upon the nature of borrowable account whether it is a) Operative b) Non operative c) Bills d) Agricultural advances or any other miscellaneous accounts. A. Operative like cash credit, over draft etc: -

A cash credit / over draft account will have to be treated as NPA if account remains out of order for more than 180 days. An account shall be out of order if any one of the following conditions exist:a. The balance outstanding remakes continuously in excess of the sanctioned limit

during the last six months prior to balance sheet. b. The balance outstanding is within the limit / drawing / drawing power but there is no

credit in the account continuously for six months as on the balance sheet date. c. There is credit but such credit is not enough to cover the interest debited during the

six month as on the date of banks balance sheet. B. Non operative like term loans, borrowal account with repayment programs: -

If interest / installment of principal remain overdue for a period of more than 180 days. Note: When the prudential norms were introduced in 1992, the concept of past due was incorporated and it was classified that an amount should be classified as past due when it remains outstanding for 30 days beyond the due date. However due to improvement in the payment and settlement systems, recovery climate, up gradation of technology in banking systems etc. It has been decided by RBI to dispense with the past due concept with effect from 31st March 2001. Hence to all account to become NPA, cut off date is September 30th of the Year under audit. C. Bill purchased / Discounted / Negotiated:

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A bill purchased / discounted / negotiated becomes NPA, if it remains overdue and unpaid for two quarters or more. For bills discounted, for the unusance period and grace period should be taken to consideration for arriving at the due date.

D.

Agricultural advances: -

Agricultural advances where interest and or installments of principal remains unpaid after it has become past due for two harvest season but for a period exceeding to half years should be treated as NPA. E. Miscellaneous accounts:-

Any other credit facility or account should be treated as NPA if any amount to be received in respect of that facility or amount remains unrealized / uncovered for a period of two quarters. Adoption of 90 days norm: The RBI has advised banks to adopt 90 days norm instead of 180 days for classification of assets as in impaired one with effect from MARCH 2004 and to start making additional provisions for such asserts from March 2002 to absorb the impact due to reduction of NPA period. The accounts which may turn NPA with 90-day period have to be identified and 10% rprovision to be found out. 90 Days Norms: With a view to moving towards international best practices and to ensure greater transparency, the 90 days overdue norm for identification of NPAs has been adopted, from the year ended March 31, 2004. The 90 days norm would continue to be applicable for the Balance Sheet as at 31.03.2007. Accordingly, a Non Performing Asset shall be a loan or advance where: Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a Term loan. The account remains out of order in respect of an Overdraft/ Cash Credit (OD/CC). The bill remains overdue for a period of more than 90 days in the case of Bills Purchased and Discounted.

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 In case of advance granted for agricultural purposes interest and/or installment of principal remains for two crop seasons (in case of short duration crops) and for one crop season (in case of long duration crops)

Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. Even though, interest is being charged at monthly rests, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Branches should therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully with in 90 days from the end of the quarter. '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 six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. Overdue: Any amount due to the bank under any credit facility is overdue if it is not paid on due date fixed by the bank. Due Date: Due Date refers to the date on which interest/installment is payable by the borrower. Interest has to be collected at monthly rests in respect of Working Capital and Term Loans, except Agriculture Advances as per instructions. Normally interest falls due for payment immediately on the date of debit. In respect of certain category of advances such as Project Finance, Agricultural Advances (including Gold Loans), Loans granted to Staff, Education Loan etc., where repayment holiday is granted, the due date should fall only after the expiry of the said specified period. The installment of principal falls due for payment as per the term of sanction. In case of EMI Loans, due date refers to the due date for the stipulated installment which comprises both principal and interest.

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Asset classification Norms Standard Assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan do not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories. 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 the realisability of the dues: (1) Sub-standard Assets (2) Doubtful Assets (3) Loss Assets

(1) Sub-standard Assets:-With effect from 31 March 2005, a sub standard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by sub standard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. (2) Doubtful Assets:-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 basis of currently known facts, conditions and values highly questionable and improbable.

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With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months.

(3) Loss Assets:-A loss asset is one which 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. Also, these assets would have been identified as loss assets by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly. Guidelines for classificationn of assets The classification of assets into above categories should be done taking into account the degree of well-defined credit weakness and the extend of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The bank 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 will be valid for the entire accounting year. Accounts with temporary deficiencies: The classification of assets as NPA should be based on record of recovery. Banks should not classify an advance as NPA merely due to the existence of some deficiencies which are temporary in nature such as non availability of adequate drawing power base don the latest available stock statement, balance outstanding exceeding the limits temporarily, non submission of stock statements and non renewal of the limits on the due date etc.

Asset classification to be borrower-wise and not facility-wise a. It is difficult to envisage a situation when only one facility to a borrower becomes a

problems credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or part there of which has become irregular.

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b.

If the debits arising out of development of letters of credit or invoked guarantees

are parked in a separate account, the balance outstanding in that account also should be treated

as a part of the borrowers principal operating account for the purpose of application of prudential loans on income recognition, asset classification and provision. Accounts where there is erosion in the value of security a. A NPA need not go through various stages of classification in cases of serious credit

impairment and such assets should be straight away classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when realizable value of the security is less than 50% of the value assessed by the bank or accepted by the RBI at the time of last inspection, as the case may be. Such NPAs may be straight away classified under doubtful category and provisioning should be made as applicable to doubtful assets. b. If the realizable value of the security has assessed by the bank/approved valuers /

RBI is less than 10% 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.

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TYPES OF NPA

A] Gross NPA B] Net NPA

A] Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio

Gross NPAs Gross Advances

B] Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated as follows: Net NPAs Gross NPAs Provisions Gross Advances - Provisions

The following are deducted from gross NPA to arrive at net NPA. 86

a. Balance in Interest Suspense account, if applicable;

b. Deposit Insurance Guarantee Corporation / Export Credit Guarantee receive and pending adjustment; c. Part payment received and kept in Suspense account;

Corporation claim

d. Total provisions held excluding technical write off made at Head Office and provision of standard assets. RBI has advised that while reporting banks has to reduce technical write off made at Head Office from gross advance also.

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INCOME RECOGNITION
Interest income is recognized on an approval basis except in case of NPAs where it is recognized on receipt. This means income can be recognized only on receipt for NPA accounts. For performing assets, income can be recognized on the basis of receipts, accrual or both. Due to the implementation of the prudential norms accrual concept has been changed into recoverability concept in recognizing in the income on NPA.

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 recognised 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, IVPs, 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 re-negotiations or

rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. If Government guaranteed advances become NPA, the interest on such advances

should not be taken to income account unless the interest has been realised

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 realised. This will apply to Government guaranteed accounts also.

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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.

PROVISIONING NORMS

Loss assets: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. Doubtful assets: 100 percent of the extent to which the advance is not covered by the realisable value

of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. In regard to the secured portion, provision may be made on the following basis, at the

rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful:

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Period for which the advance has been considered as doubtful Up to one year One to three years More than three years: (1) Outstanding stock of

Provision requirement (%) 20 30 60% with effect from March 31,2005. 75% effect from

NPAs as on March 31, 2004. (2) Advances classified as on or after April 1, 2004. March 31, 2006. 100% with effect from March 31, 2007.

doubtful more than three years

Additional provisioning consequent upon the change in the definition of doubtful

assets effective from March 31, 2003 has to be made in phases as under: As on 31.03.2003, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category.
As on 31.03.2002, balance of the provisions not made during the previous year, in addition

to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning consequent upon the

reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.

Note: Valuation of Security for provisioning purposes 86

With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per the guidelines approved by the Board of Directors should get collaterals such as immovable properties charged in favour of the bank valued once in three years. Sub-standard assets: A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available. Standard assets: From the year ending 31.03.2000, the banks should make a general provision of a The provisions on standard assets should not be reckoned for arriving at net NPAs. The provisions towards Standard Assets need not be netted from gross advances but

minimum of 0.40 percent on standard assets on global loan portfolio basis.

shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet. Floating provisions: Some of the banks make a 'floating provision' over and above the specific provisions made in respect of accounts identified as NPAs. The floating provisions, wherever available, could be set-off against provisions required to be made as per above stated provisioning guidelines. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice.

Provisions on Leased Assets:

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Leases are peculiar transactions where the assets are not recorded in the books of the user of such assets as Assets, whereas they are recorded in the books of the owner even though the physical existence of the asset is with the user (lessee). __(AS19 ICAI) Sub-standard assets : -

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

100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. Realisable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which asset has been doubtful: Period Up to one year One years More than three years 50 to three %age provision 20 30 of

Loss assets :86

The entire asset should be written-off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for. ('net book value')

Guidelines for Provisions under Special Circumstances

Government guaranteed advances With effect from 31 March 2000, in respect of advances sanctioned against State Government guarantee, if the guarantee is invoked and remains in default for more than two quarters (180 days at present), the banks should make normal provisions as prescribed in paragraph above. As regards advances guaranteed by State Governments, in respect of which guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year. Advances granted under rehabilitation packages approved by BIFR/term lending institutions: In respect of advances under rehabilitation package approved by BIFR/term lending institutions, the provision should continue to be made in respect of dues to the bank on the existing credit facilities as per the their classification as sub-standard or doubtful asset. As regards the additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions, provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement. In respect of additional credit facilities granted to SSI units which are identified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and where rehabilitation packages/nursing programmes have been drawn by the banks themselves or under consortium arrangements, no provision need be made for a period of one year.

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Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies are exempted from provisioning requirements. However, advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements.

Treatment of interest suspense account:

Amounts held in Interest Suspense Account should not be reckoned as part of provisions. Amounts lying in the Interest Suspense Account should be

deducted from the relative advances and thereafter, provisioning as per the norms, should be made on the balances after such deduction. Advances covered by ECGC/DICGC guarantee: In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provision made as illustrated hereunder: Example Outstanding Balance DICGC Cover Period for which the advance has remained doubtful Value of security held Rs. 4 lakhs 50 percent More years doubtful Rs. 1.50 lakhs (excludes worth of Rs.) than 3 remained

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Provision required to be made Outstanding balance Less: Value of security held Unrealised balance Less: DICGC Cover (50% of unrealisable balance) Net unsecured balance Provision for unsecured portion of advance Provision for secured portion of advance Total provision required to be made Rs. 1.25 lakhs Rs. 1.25 lakhs (@ 100 percent portion) Rs. 0.75 lakhs (@ 50 percent portion) Rs. 2.00 lakhs of secured of unsecured Rs. 4.00 lakhs Rs. 1.50 lakhs Rs. 2.50 lakhs Rs. 1.25 lakhs

Advance covered by CGTSI guarantee In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for nonperforming advances. Two illustrative examples are given below:

Example I Asset classification status: Doubtful More than 3 years; 86

CGTSI Cover

75%

of

the

amount

outstanding or 75% of the unsecured amount or Rs.18.75 Realisable value of Security Balance outstanding Less Realisable Rs.10.00 lakh Rs. 1.50 lakh Rs. 8.50 lakh Rs. 6.38 lakh Rs. 2.12 lakh Provision Required Secured portion Unsecured uncovered portion Total required provision & Rs.1.50 lakh Rs.2.12 lakh Rs. 0.75 lakh (@ 50%) Rs. 2.12 lakh ( 100%) Rs. 2.87 lakh Rs.1.50 lakh lakh, whichever is the least

value of security Unsecured amount Less CGTSI cover (75%) Net unsecured and uncovered portion:

Example II Asset classification status CGTSI Cover Doubtful More than 3 years; 75% of the amount outstanding or75% of the unsecured amount or 86

Rs.18.75 Realisable value of Security Balance outstanding Less Realisable Rs.40.00 lakh Rs. 10.00 lakh Rs. 30.00 lakh Rs. 18.75 lakh Rs. 11.25 lakh Rs.10.00 lakh

lakh,

whichever is the least

value of security Unsecured amount Less CGTSI cover (75%) Net unsecured and uncovered portion: Provision Required Secured portion Unsecured uncovered portion Total required provision & Rs.10.00 lakh Rs.11.25 lakh Rs. 5.00 lakh (@ 50%) Rs.11.25 lakh (100%) Rs. 16.25 lakh

Take-out finance The lending institution should make provisions against a 'take-out finance' turning into NPA pending its take-over by the taking-over institution. As and when the asset is taken-over by the taking-over institution, the corresponding provisions could be reversed. Reserve for Exchange Rate Fluctuations Account (RERFA) When exchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign currency denominated a loan (where actual disbursement was made in Indian Rupee)

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which becomes overdue goes up correspondingly, with its attendant implications of provisioning requirements. Such assets should not normally be revalued. In case such assets need to be revalued as per requirement of accounting practices or for any other requirement, the following procedure may be adopted: The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account. Besides the provisioning requirement as per Asset Classification, banks should treat the full amount of the Revaluation Gain relating to the corresponding assets, if any, on account of Foreign Exchange Fluctuation as provision against the particular assets.

REPORTING OF NPAs
Banks are required to furnish a Report on NPAs as on 31st March each year after

completion of audit. The NPAs would relate to the banks global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure I.

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While reporting NPA figures to RBI, the amount held in interest suspense account,

should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing

advance accounts, may furnish the amount of interest receivable on NPAs as a foot

note to the Report. Whenever NPAs are reported to RBI, the amount of technical write off, if any,

should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

IMPACT OF NPA
Profitability:NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of 86

reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank. Liquidity:Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shorter period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money, Routine payments and dues. Involvement of management:-

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

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

REASONS FOR NPA:

Reasons can be divided in to two broad categories:A] Internal Factor B] External Factor [ A ] Internal Factors:Internal Factors are those, which are internal to the bank and are controllable by banks.

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 Poor lending decision: Non-Compliance to lending norms: Lack of post credit supervision: Failure to appreciate good payers: Excessive overdraft lending:
Non Transparent accounting policy:

[ B ] External Factors:External factors are those, which are external to banks they are not controllable by banks. Socio political pressure: Chang in industry environment:
Endangers macroeconomic disturbances:

Natural calamities Industrial sickness

Diversion of funds and wilful defaults

Time/ cost overrun in project implementation Labour problems of borrowed firm Business failure Inefficient management Obsolete technology Product obsolete

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

Four categories of early symptoms:--------------------------------------------------(1) Financial: Non-payment of the very first instalment in case of term loan. 86

Bouncing of cheque due to insufficient balance in the accounts. Irregularity in instalment. Irregularity of operations in the accounts. Unpaid overdue bills. Declining Current Ratio. Payment which does not cover the interest and principal amount of that instalment. While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company. (2) Operational and Physical:

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

( 3 ) Attitudinal Changes: Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank.

Problem between partners. (4) Others: Changes in Government policies. Death of borrower. Competition in the market.

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PREVENTIVE MEASUREMENTS FOR NPA

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

Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters sincerity, and capability to achieve turnaround. Based on this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. In this regard banks may consider having Special Investigation of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.

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

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Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoters commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option. Focus on Cash Flows:While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.

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

MEASURES INITIATED BY RBI AND GOVERNMENT OF INDIA FOR REDUCTION OF NPAs

Compromise settlement schemes

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The RBI / Government of India have been constantly goading the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. More significant of them, I would like to recapitulate at this stage. The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Banks are free to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements with the approval of their Boards, particularly for old and unresolved cases falling under the NPA category. The policy framework suggested by RBI provides for setting up of an independent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinize and recommend compromise proposals.Specific guidelines were issued in May 1999 to public sector banks for one time non-discretionary and non-discriminatory settlement of NPAs of small sector. The scheme was operative up to September 30, 2000. [Public sector banks recovered Rs. 668 crore through compromise settlement under this scheme.] Guidelines were modified in July 2000 for regcovery of the stock of NPAs of Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001 helped the public sector banks to recover Rs. 2600 crore by September 2001] An OTS Scheme covering advances of Rs.25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Honble Finance Minister providing for OTS for advances up to Rs.50,000 in respect of NPAs of small/marginal farmers are being drawn up. Lok Adalats

Lok Adalat institutions help banks to settle disputes involving accounts in doubtful and loss category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs.10 lakhs and above. The public sector banks had recovered Rs.40.38 crore as on September 30, 2001, through the forum of Lok Adalat. The progress

through this channel is expected to pick up in the coming years particularly looking at the recent initiatives taken by some of the public sector banks and DRTs in Mumbai. For more details about Lok Adalats please refer to page Lok Adalat Debt Recovery Tribunals

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The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of more than one Recovery Officer, power to attach defendants property/assets before judgment, penal provisions for disobedience of Tribunals order or for breach of any terms of the order and appointment of receiver with powers of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals located in five centers viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could decide only 9814 cases for Rs.6264.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30, 2001.The amount recovered in respect of these cases amounted to only Rs.1864.30 crore. Looking at the huge task on hand with as many as 33049 cases involving Rs.42988.84 crore pending before them as on September 30, 2001, I would like the banks to institute appropriate documentation system and render all possible assistance to the DRTs for speeding up decisions and recovery of some of the well collateralized NPAs involving large amounts. I may add that familiarization programmes have been offered in NIBM at periodical intervals to the presiding officers of DRTs in understanding the complexities of documentation and operational features and other legalities applicable of Indian banking system. RBI on its part has suggested to the Government to consider enactment of appropriate penal provisions against obstruction by borrowers in possession of attached properties by DRT receivers, and notify borrowers who default to honour the decrees passed against them. Circulation of information on defaulters

The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors /proprietors / partners of these entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks

and FIs for recovery of their funds, as on 31st March every year. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. However, they serve as negative basket of steps shutting off fresh loans to these defaulters. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers. 86

Recovery action against large NPAs

After a review of pendency in regard to NPAs by the Honble Finance Minister, RBI had advised the public sector banks to examine all cases of willful default of Rs 1 crore and above and file suits in such cases, and file criminal cases in regard to willful defaults. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff accountability. On their part RBI and the Government are contemplating several supporting measures including legal reforms, some of them I would like to highlight.

Asset Reconstruction Company:

An Asset Reconstruction Company with an authorized capital of Rs.2000 crore and initial paid up capital Rs.1400 crore is to be set up as a trust for undertaking activities relating to asset reconstruction. It would negotiate with banks and financial institutions for acquiring distressed assets and develop markets for such assets.. Government of India proposes to go in for legal reforms to facilitate the functioning of ARC mechanism Legal Reforms

The Honorable Finance Minister in his recent budget speech has already announced the proposal for a comprehensive legislation on asset foreclosure and Securitization. Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December 2002.

Corporate Debt Restructuring (CDR)

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the banks and financial institutions. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a

Standing Forum and Core Group for administering the mechanism had already been put in place. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. As announced by the Honble Finance Minister in the Union Budget 2002-03, RBI has set up a high level Group under the Chairmanship of Shri. Vepa Kamesam, Deputy Governor, RBI to review the implementation procedures of CDR mechanism and to make it more effective. The Group will review the operation of the CDR 86

Scheme, identify the operational difficulties, if any, in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. Credit Information Bureau

Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system. The main recommendations of the Group include dissemination of information relating to suit-filed accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. This, I hope, would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large amounts against same assets and property, which had in no small measure contributed to the incremental NPAs of banks. Proposed guidelines on willful defaults/diversion of funds

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working out a proper definition covering such classes of defaulters so that credit denials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against willful defaulters. Corporate Governance

A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis--vis compliance, transparency, disclosures, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimizing risks and over-exposure. The Group is finalizing its recommendations shortly and may come out with guidelines for effective control and supervision by bank boards over credit management and NPA prevention measures.

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A bank is an institution, which deals with money and credit. It accepts deposits from public, makes the funds available to those who need them, and helps in the remittances of money from one place to another. In other words, a banks collects money from those who have it to spare or who are saving it out of their income and it lends money to those who require it. A unique function of the bank is to create credit. In fact, credit creation is the natural outcome of the process of advancing loans as adopted by the banks. When a bank advances a

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loan to its customers it does not lend cash but open an account in the borrowers name and credit the amount of loan to this account. Thus whenever a bank grants a loan, it creates an equal amount of bank deposit. Creation of such deposit is called credit creation. Which results in a net increase in the money stock of the economy. Banks have the ability to create many times more than their deposit and this ability of multiple credit creation depends up on the cash reserve ratio of the banks. When these loans taken are not repaid so much of funds has gone out of the financial system and the cycle of lending-repaying-re lending is broken. The bank has to repay its depositors and others from whom money has been borrowed. If the borrowers does not repay, the bank has to borrow additional capital funds to repay the depositors and creditors. This lead to a situation where bank also reluctant to lend fresh loans thus chocking the system. Once the the credit to the various sectors of the economy slows down, economy is badly hurt. There will be slow down in the growth in industrial output and fall in the profit margins of the corporate and subsequent in the markets. NET NPA FIGURES OF PUNJAB AND SIND BANK (FROM 2004-05 TO 2009-10) In crores

Year

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Net NPA Particulars:

993.3

890.84

781.94

727.70

984.69

799.85

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ANALYSIS The aggregate net non-performing asset of the bank is at decreasing trend. But taking on a yearly basis, not much trend could be identified out of the six years of data considered for analysis, net non-performing asset, has decreased from year 2005 to 2008 but has increased in year 2009. INTERPERTATION It can be seen from the trend that net NPA is decreasing from year 2005 to 2008 . So from data analyzed above, it can be assumed that the bank has taken stringent steps to reduce the NPA or it might not have given more advances during that year.

NET ADVANCES OF PSB 86

(FROM 2004-05 TO 2009-10)

In crores

Year

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

PARTICULARS:

Net Advances

39567.33

40834.71

48271.60

56810.81

84868.22

66648.85

ANALYSIS The advances of the bank show an upward trend through the period 2004-05 to 2008-09 but has decreased during year 2010. This can be seen from the data regarding the advances of the

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bank during this period.The decrease in advances in the year 2010 due to increase in NPAs as compared to last year as NPA is directly related to amount of loan advanced.

INTERPRETATION Non-performing assets being a direct result of advances, it may have resulted from increase in the net advances. While increasing advances may be necessary for the survival & progress of the bank itself, it should not mean increased justification for the higher incidence of nonperforming assets. If recovery were good, perhaps, NPA could have been reduced. In other words, increased NPA can be directly attributed to non-recovery advances made to borrowers, in time.

NET NON PERFORMING ASSETS OF PSB AS A PERCENTAGE OF NET ADVANCES (FROM 2004-05 TO 2009-10)

Year

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Particular: Net NPA to Net Advances

2.51

2.18

1.62

1.28

1.16

1.20

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ANALYSIS To understand the real impact of non-performing assets, the chart is drawn taking the net nonperforming assts of the bank as a percentage of the net advances. From such chart, what can be seen is that the said percentage (the net non performing assets as percentage of net advances) is nearly constant from year 2006 to 2010.

INTERPRETATION Even though there was a sharp increase in the advances given by the bank in the year 2009, it can be seen that Net NPA has maintained a constant level in that year. From this we can assume that bank must have taken up fruitful efforts to recover money from the willful defaulters. During the year 2004-05 to 2009-10,there has been steady and considerable

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decrease in percentage of net NPA to net Advances. The trend line also show that there is a decreasing trend and net NPAs over subsequent years would decrease considerably.

THE DEPOSITS OF PUNJAB AND SIND BANK (FROM 04-05 TO 09-10) Amount in crore

Year

Deposits of the bank (Rs)

Increase / Decrease over the previous years figure --6.31 10.20 12.81 23.60 18.54

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

11844.02 12591.50 13877.06 15656.46 19351.26 22939.56

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ANALYSIS The aggregate deposits of the bank has increased from 11844.02 crores to 22939.56 crores during the period 2004-05 to 2009-10. On analyzing the trend of such increase in the deposits over the period we can clearly see that it is increasing at a increasing rate. The modest growth especially during the last three years is mainly due to a conscious decision on to shed the highest cost deposits. With focus on bringing down the cost of deposit, field function areas have been constantly exhorted to step up the share of low cost of deposit. INTERPERTATION The bank has recognized the up gradation of deposits from year 2004-05 to 2009-10.The reason behind the upgradtion is the higher rate of interest as compared to other banks on deposits especially on fixed deposits.The accounts like saving bank account,recurring deposit account,current account,term deposit account,lockers account, also have the higher interest rate as compared to other banks.

NET PROFIT AND PROVISION TOWARDS NON-PERFORMING ASSETS OF PUNJAB AND SIND BANK (FROM 2004-05 TO 2009-10)

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Year

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Particulars:Provision towards NPA Net profit during the year

N.A

637.24

632.58

642.65

669.26

697.01

295.3

262.43

237.26

103.65

117.36

75.54

ANALYSIS

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On analyzing profit and loss account of the bank, it could be seen that provisions and contingencies is one herd, which has a negative impact on the net profit of the banks, and provisions made towards non-performing assets, being item contributing to such head. On going through the figures of the PSCB relating to net profit and provision made towards non performing assets, a increase can be seen in the provision made towards non performing assets insubsequent years, which could be explained by the tightening of provision norms which made it compulsory for banks to keep a provision of .25% even on their standard assets . INTERPRETATION Profit is the most important parameter for evaluating the performance of a bank. In the present day scenario profit is not just an accounting concept of excess of income over the expenditure, but is surely more which ensures survival and growth in the future. Level of non-performing asset is an important factor affecting the profit of the bank,. as the profit margin depends up on the synthesis of cost and yield (by yielding no income) reduce the profit. Here in the case of PSCB, the provision made towards NPA has increased at an increasing rate over the year, which has a negative impact on the profit of the bank. So we can assume that profit of the bank might have affected negatively because of the exorbitant provision towards NPA. This may be because, in the event of absolute non-recovery of the

lent money, certain provisions become necessary in order to reduce profits, so that taxation can be under control.

NET RECOVERY OF PUNJAB AND SIND BANK (FROM 2006-07 TO 2009-10)

Year

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Particulars:86

RECOVERY AS a% OF GROSS NPAs

6.25

7.45

8.1

6.45

5.8

ANALYSIS The net recovery during the year 2004-05 was 6.25% of gross non performing assets, while it was 7.45% and 8% in the following two years i.e., in 2005-06 and 2006-07 respectively, i.e., the net recovery is increasing over time and has declined in year 2009,serious efforts were taken to set it right.

INTERPRETATION

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The above analysis reflects that the Banks recovery strategy is effective., So we can conclude that banks NPA has decreased perhaps because of efficient recovery strategy. While the strategy for recovery may have been good, the banks recovery in-charge officials may not have taken the necessary Herculean efforts towards the same in order to save the bank from the declining trend in year 2009.

COST OF DEPOSIT OF PUNJAB AND SIND BANK (FROM 04-05 TO 09-10) Amount in crores Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Percentage of Increase / Decrease over cost 6.06 5.67 5.68 7.38 7.84 6.95 the previous year --(0.39) 0.01 1.7 0.46 (0.89)

The cost of deposit of PSB shown a constant increase during the period 2004-05 to 2008-09 except for the year 2009-10 in which there was a slight decrease of 0.89%. On analyzing the trend of increase in the cost of deposit we can see that it is increasing at decreasing rate. As it can seen from the trend that it has decreased in year 2009-10 and it is achieved by systematic branch wise monitoring. Also shift in deposit portfolio of the bank from high cost deposit to low cost deposit also has contributed to the effort.

NET PROFIT OF PUNJAB AND SIND BANK (FROM 04-05 TO 09-10) Amount in crores

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Year

Increase / Net Profit of Decrease over the Bank the previous years figure 295.31 262.43 237.26 103.65 117.36 75.54 --(33.88) (24.43) (134.61) 13.71 (41.82)

% Increase / decrease over the previous years figure --(11.2) (9.35) (56.51) 13.50 (35.57)

2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010

There is no particular trend in profits.One of the reasons was the continuous fall in the interest and the adverse market conditions due to which the profit in trading in investment was reduced . Voluntary Retirement Scheme (VRS) also added to the burden by an amount of 248 lakhs. Another major contribution was the impaired loan assets, which were written off instead of being provided for. The continuous fall in the interest rate continued even in 2008, but the treasury market contributed appreciably to the profitability.

STAFF PRODUCTIVITY OF PUNJAB AND SIND BANK (FROM 04-05 TO 09-10)

Year

Productivity / Business per employee 571.47 670.18 723.84 914.25 1238.76 1374.74

Increase / Decrease over the previous years figure --98.71 53.66 190.41 324.51 135.98

% Increase / decrease over the previous years figure --17.2 8 26 35.4 10.97 86

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

The staff productivity of the banks has increased from 571.47 crores to 1374.74 crores over the period 2004-05 to 2009-10.The bank has recognized that up gradation of employee skills at all levels is essential to meet competitive challenges. Accordingly, the PSB staff training imparts timely training to the employees covering areas like forex, credit, non-performing assets management, priority sector, human resource management, automation, customer service, marketing etc. The bank is also at times introduce staff welfare measures aimed at increasing the motivational level of employees with a futuristic vision .

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COMPLIANCE ADVICE FOR BRANCH FUNCTIONARIES NPA accounts are to be grouped and classified borrower wise and not facility wise ie. If a borrower enjoys more than one facility and one of them become NPA, than all facilities enjoyed by the borrower should be treated as NPA and classified under the same asset classification. NPA account where the recovery would become difficult on account of erosion in the value of security or non-availability of security and existence of factors such as fraud committed by borrowers should be straight away classified as doubtful and loan asset without keeping them under sub-standard asset. The bank also keeps flagging the NPA accounts to have real time surveillance over such accounts. The TBA package available in the computer is made use of in doing so. The bank as its recovery policy follows the measures like ; Conduct over recovery melas Offer compromise proposal or Filing suits RECOVERY MELAS

The letter sent to the borrower should not include a general offer of discount, reduction of interest etc. Such offers should be made only during individual discussions depending up on the merit of each case. Confidentiality of information should be respected even in respect of small clients. Other borrowers/customers should not be permitted to be present while discussions are going on with one borrower Conduct recovery Melas It has been decided to organize recovery melas in respect of accounts, which are either border line or identified as NPAs in certain identified centers where the incidents of NPAs Sis on the higher side. The venue of such recovery Melas is usually the branch premises.

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Action Points Branches to contact the NPA / border line borrowers personally and fix a date(s) mutually convenient for the Mela.Mela will be attended by senior executives from central office in addition to zonal head so as to enable to take spot decisions according to the merit of the case. Where there is cluster of branches situated in a particular area, the borrower of the near by branches may also be called to attend the Mela. Branches / Zonal heads should also explore the possibility of the recovery / settlement in respect of suit filed as well as decreed accounts also. COMPROMISE PROPOSALS

Compromise means agreement reached between two parties by mutual concession. Here it means a process of reconciliation with the borrower for recovery of dues with sacrifice. The sacrifice is on the part of the bank only and not the borrower. Compromise proposals cannot be encouraged as a routine. It is the bank, who decides whether to go in for compromise or not. It is not the right of any customer. The compromise should be negotiated settlement under which the bank should ensure the recovery of dues to the maximum extend possible at minimum expense. FILING SUITS

Recourse to legal procedure is not only time consuming but also expensive. Bank resorts to legal recourse for recovery of the dues as a last resort even though other process will also be continued simultaneously for realization of the amount.The avoidable delay on the part of the operating staff may on account of the misplaced optimism based on the promise made by the defaulting borrowers without making any substantial remittance towards the account shall not be relied upon. LEGAL PROCESS(ADVISE TO BRANCHES)

On the receipt of necessary approval / sanction for filing suit, branches shall arrange to issue legal notice within five days if not already issued. If issued before, a fresh notice to be issued. During the notice period, draft plaint shall be got prepared from the advocate.On the expiry of the notice period given at the time of issuance of legal notice, branches shall furnish the

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response of the parties along with draft plaint, together with all security documents, title deed etc. of zonal office / legal sanction of company office for necessary approval. On getting the draft plaint duly approved by the zonal office / company office, arrangements for filing suit to be made and completed within 10 days.

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FINDINGS

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From analyzing the data collected, the various parameters like the deposits, advances, gross NPA, Net NPAs, cost of deposits, staff productivity etc. of the bank over a past few years, the following findings were arrived at. Net advances is increasing at increasing rate over the period under study. The decrease in advances in the year 2010 due to increase in NPAs as compared to last year as NPA is directly related to amount of loan advanced. The aggregate net NPAs of the bank are showing decreasing trend. Staff productivity of the bank is increasing, which indicates efficient recovery measures . The net result, the recovery is showing increasing trend.

The major reasons for NPAs are: Lack of proper and systematic appraisal system Flouting of stipulations and conditions in the sanction advice, which includes: Non-conduct of post sanction inspections Defective documentation Lapses in creation of mortgages and registration of charges with the registrar of companies. Non-ostentation of stock / receivable statement and failure to calculate eligible drawing power. Lack of regular follow up. Absence of proper systems at the branches and controlling offices resulting in. Failure to detect incipient signs of sickness. Persistent difficulties in accessing collaterals and recovering their market values because of legal hurdles.

SUGGESTION FOR MANAGEMENT OF NPAs

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It has been proved beyond doubt that non-performing assets in banks ought to be kept at lowest level. NPA menace, following suggestions is necessary. PREVENTIVE FRAMEWORK

Banks need a robust end-to-end credit management process begins with an in depth appraisal focused on risk inherent in proposal and credit rating of clients and ends with effective value addition to the bank. Appraisal and monitoring are therefore the two most important factors in order to prevent the occurrence of NPAs at the first instance. Some of the strategies at the preventive stage are as follows: Maintenance and regular upgradation of client profile. Credit rating of clients Computerization of loan accounts. Strong inter-department management information system among loans, operations and recovery departments. To establish a system of early warning for potentially weak loan accounts. Observance of limitation period.

Timely extension of period of limitation. FOLLOW-UP OF DEBT RECOVERY TRIBUNAL (DRT) CASES.

Coping in line with the international trends on helping financial institutions recover their bad Debt quickly and efficiently, the Government of India has constituted thirty three Debt Recovery Tribunal and five Debt Recovery Appellate Tribunal across the country.

The Debt Recovery Tribunal are located across the country. Some cities have more than one Debt Recovery Tribunal located therein. New Delhi and Mumbai have three Debt Recovery Tribunal. Chennai and Kolkata have two Debt Recovery Tribunal each. One Debt Recovery Tribunal each has been constituted at Ahmdabad, Allahabad, Arungabad, Bangalore, Chandigrah, Coimbatore, Cuttack, Ernakulam, Guwahati, Hydrabad, Jabalpur, Jaipur,

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Lucknow, Nagpur, Patna, Pune, Ranchi and Vishakapatnam. Depending upon the number of cases a Debt Recovery Tribunal is constituted.

There are a number of States that do not have a Debt Recovery Tribunal. The Banks & Financial Institutions and other parties in these States have to go to Debt Recovery Tribunal located in other states having jurisdiction over there area. Thus the territorial jurisdiction of some Debt Recovery Tribunal is very vast. For example, the Debt Recovery Tribunal located in Guwahati has jurisdiction over all the seven North Eastern States. Similarly, the territorial jurisdiction of the Debt Recovery Tribunal located at Chandhigarh too has a very wide jurisdiction over the States of Punjab, Harayana, Chandhigarh. COMPROMISE AND ONE TIME SETTLEMENT Recalcitrant borrowers are coming forward, especially from the areas where functioning of DRTs is stabilized, with compromise offers to repay the banks dues. Needless to mention, delays in processing compromise proposals must be avoided at every stage with the objective of setting the issue. WRITE OFFS With view to cleaning the balancing the balance sheet , write offs in small NPA account of doubtful and loss categories where chances of recovery are bleak, need to be expedited by formulating broad parameters/guidelines. HUMAN RESOURCE DEVOLOPMENT Regular training programme on credit and NPA management for all levels of executives are desirable to upgrade the skills necessary to : Prevent deterioration of assets Limit losses on fuzzy assets and Effect quicker recovery/realization in NPA accounts.

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IDENTIFICATION OF PROBLEM LOAN

Tackling NPAs through non legal measures like quick review of potential NPA account, compromise/OTs, write offs, rehabilitation, rephasement etc. would go long way in guiding bank functionaries to effectively deal with problem loan account. RECOVERY CAMP By holding recovery camps and Lok Adalat, counseling the borrowers could be done. REHABILITATION There should be normally no case for rehabilitation and banks financial assistance, if the unit is sick due to technical obsolescence/ inefficient management, financial irregularities. The sooner we settle the dues of such companies/OTs or through legal action, the better it is. RESCHEDULEMENT The public sector banks should use their wide network of branches and infrastructure to deepen their lending for whole sale and retail trade, housing, agriculture etc. with a view to reducing NPA ratios. NARROW BANKING To mitigate the problem of NPAs, reduce the incremental credit deposit ratio of banks over a period. So that the banks reduce their average credit deposit ratios and the incremental NPAs will be zero. If by investing in safer securities though at high rates of interest, the banks can earn sufficient net margins, then it is possible to gradually eliminate their high NPA levels. It is possible that average yields on loans and advances net of default provisions and service costs may not far exceed the average yields on safer security which net yield by definition because of absence of risk and service costs. BANK SHOULD REDUCE DEPENDENCE ON INTEREST INCOME Indian banks are largely dependent on the lending and investment, while the banks in the developed countries do not depend up on this income. 86%of income of Indian banks is accounted by interest, U.S. banks derive only 62% of income from interest, for U.K. banks is only 59%, Germany 64% and Switzerland 51%. The rest of income is fee based. Indian banks have to look for source from services and products. Non-interest income should come from

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innovative products and not through higher service changes that the public sector banks charges to the customer.

INTRODUCE MARKETING CONCEPTS AND NEW TECHNOLOGIES TO

SHARPEN COMPETITIVE EDGE According to Sir De, the winner of writers association life time achievement award 1997, on banking research, the basic pitfalls of Indian banking systems are:Absence of marketing concepts in the business development plans. Lack of skill and inefficiency to adopt new technology to sharpen competitive edge. Indian banks have to give more concentration to remove the above-mentioned problems to reduce NPA level.

GENERAL STRATEGIES

Effective recovery Compromise to improve recovery status of account. Partial write off. Adjustment of collateral security. Pressure on guarantors. Special recovery drive Help from revenue authority. Settlement of claims with DIGGC/ECGC.
Officials from controlling offices should visit branches frequently and should check for any

incipient irregularities\sickness.

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BIBLIOGRAPHY

BOOKS REFERRED:
Macro economics MISHRA and PURI Banking and law practices-S.L. GUPTA Marketing Research NARESH MALHOTRA.

JOURNALS REFERRED:
Journal of Reserve Bank of India Economic survey

WEBSITES VISITED:
Marketresearch.com Psb.com Google.com RBI.com Businessstandard.com

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ANNEXURE
REPORTING FORMAT FOR NPA GROSS AND NET NPA Name of the Bank: Position as on PARTICULARS Gross Advanced * 2) Gross NPA * 3) Gross NPA as %age of Gross Advanced 4) Total deduction( a+b+c+d ) ( a ) Balance in interest suspense a/c ** ( b ) DICGC/ECGC claims received and held 1) pending Adjustment ( c ) part payment received and kept in suspense a/c ( d ) Total provision held *** 5) Net advanced ( 1-4 ) 6) Net NPA ( 2-4 ) Net NPA as a %age of Net Advance *excluding Technical write-off of Rs.________crore.

7)

**Banks which do not maintain an interest suspense a/c to park the accrued interest on NPAs may furnish the amount of interest receivable on NPAs. ***Excluding amount of Technical write-off (Rs.______crore) and provision on standard assets. (Rs._____crore).

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