WHEN TEAM WORK MATTERS, YOU ARE WHEN TEAM WORK MATTERS, YOU ARE IN SAFE HANDS WITH DHANALAKSHMI IN SAFE HANDS WITH DHANALAKSHMI BANK BANK
WHEN TEAM WORK MATTERS, YOU AREWHEN TEAM WORK MATTERS, YOU ARE
IN SAFE HANDS WITH DHANALAKSHMIIN SAFE HANDS WITH DHANALAKSHMI
BANKBANK
CHAPTER – I
EXECUTIVE SUMMARY
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 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 Dhanalakshmi
Bank Limited., Kerala on “An analysis of NPA in commercial banks with special
reference to Dhanalakshmi Bank Limited”. 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..
1. To analyze the NPA level of Dhanalakshmi bank Limited.
2. To study the recovery procedures of Dhanalakshmi Bank Limited.
3. To examine how far the bank has been successful in reducing the NPA
level.
4. 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 also increasing
• staff productivity is increasing but is not 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.’
CHAPTER – 2
INTRODUCTION
2.INTRODUCTION
The Indian has been liberalized and globalize during the last decade or so. It
has exposed the Indian financial sector to international competition in fairly
significant manner. To cope with the growing competition in the present scenario
the Indian banks have embarked on a massive exercise to revamp the system.
Despite the overall progress made by the financial system over the years, the
operational efficiency of the banking system has been unsatisfactory,
characterized by low profitability, high and growing NPAs and relatively low
capital base.
NPAs have turned out to be a major stumbling factor affecting the
profitability of Indian banks. Before 1992,bank did not disclose the bad debts
sustained by them and the provision made by them fearing that it may have an
adverse impact. The banks used to take income even on NPAs on accrual basis.
This helped them to disclose false profits. Owing to low levels of profitability, the
banks owned funds had to be strengthened by repeated intention of additional
capital by the government. The introduction of prudential norms to strengthen the
banks financial position and enhance transparency is considered as a milestone
measure in the financial sector reforms. These prudential norms, which relate to
income recognition, asset classification, provisioning for bad and doubtful debt
and capital adequacy serve three great purposes.
1. Income recognition norms reflect a true picture of the income and
expenditure of the bank.
2. The asset classification and provisioning norms help in assessing the quality
of the asset portfolio of the bank.
3. They also act as tool of financial discipline and compel banks to look at the
quality of loans assets and the risk attached to the lending
In India, NPAs are considered to at higher levels than most other countries,
have of late attracted the attention of public as also of international institutions.
This has gained further prominence in the wake of transparency and disclosures
measures initiated by R.B.I. during the recent years .We have also to conform to
international accounting standards, if Indian banks are to get their due place and
recognition in the global market.
The present study was undertaken in this context to analyze and understand
the impact of NPA are having on the performance of commercial banks in general
there affecting the whole financial system. The scope of this study is limited
especially to the organization selected ie. Dhanalakshmi Bank.
2.1. OBJECTIVE OF THE STUDY
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.
1. To analyze the NPA level of Dhanalakshmi bank Limited.
2. To study the recovery procedures of Dhanalakshmi Bank Limited.
3. To examine how far the bank has been successful in reducing the NPA
level.
4. To suggest measures for efficient management of NPAs.
5. To bring out en explorative & descriptive report on “Analysis of NPA in
commercial banks, with special reference to Dhanalakshmi Bank Ltd., Kerala.”
2.2. METHODOLOGY OF THE STUDY
A purposeful investigation of a problem research helps an organization in finding out
causes and clues for making sound and effective decisions by applying scientific
methodology to the art of management. Research can be of two types namely
Exploratory research and Conclusive research.
Exploratory research is investigation of relationships among variables
without knowing why they are studied. It borders on an idle curiosity approach,
differing from it only in that the investigator thinks there may be a payoff in the
application somewhere in the forest of questions. In Conclusive research there are
two types namely Descriptive research and Experimental research.
Descriptive research allows both implicit & explicit hypotheses to be tested
depending on the research problem. Experiments are artificial in the sense that the
situations are usually created for testing purposes in experimental research. Based
on all these facts and suggestion from the project guide ‘Descriptive &
Exploratory Research Methodology’ is adapted for this project work.
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. He is interviewed at the Bank’s
Head Quarters at Thrissur, Kerala, and the necessary primary data is collected
using Inventory Schedule. 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 Dhanalakshmi
Bank Ltd.
Secondary data:- were collected from the published annual reports of the
Dhanalakshmi Bank and other sources. Such data collected were analyzed for
some kind of a trend and its impact on the profit of the bank.
2.3. 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.
2.4. SCOPE OF THE STUDY
The was conducted in the Head Office of the Dhanalakshmi Bank limited in
Kerala.Thefollowing are the main scope of the study:
Scope of this study is limited to the organization selected ie.
Dhanalakshmi bank.
Present a picture of the movement of NPA in Dhanalakshmi Bank
Limited.
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.
Finance Manager of the bank, is covered in this study and he is interviewed in presence of the other departmental officials of the bank.
2.5 STATEMENT OF PROLEM
A casual interaction with the officials of the bank revealed that NPA is a severe
factor, which has been affected their profitability for years. Therefore the problem
identified is to understand and identify the drawback of the current recovery
strategy and to come out with a set of recommendation which will help them to
effective recovery of borrowings. Therefore the problem chosen for the study of
“analysis of NPA in commercial banks with special reference to Dhanalakshmi
Bank Limited”.
2.6 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:
1. This study is restricted to Dhanalakshmi Bank Ltd., Kerala only.
2. 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
creped into the data given.
3. Though the subject matter pertains to commercial banks, only one scheduled
bank. i.e. Dhanalakshmi bank ltd. is considered for this study. Other commercial
banks, as also the other scheduled banks are outside the purview of this study.
4. Data pertains to NPA from 1995 - 1996 to 2001 – 2002 only.
2.7. SCHEME OF CHAPTERS
• Chapter 1- This chapter discuss the executive summary of the
study.
• Chapter 2-This chapter explains introduction, objective, scope,
and limitation of the study.
• Chapter 3- This chapter gives a brief outline about the
background of the study.
• Chapter 4- This chapter gives a brief description about the
analysis of NPA in commercial banks.
• Chapter 5- This chapter describes the company profile ie.
Dhanalakshmi bank limited.
• Chapter 6- This chapter describes the analysis of NPA in
Dhanalakshmi bank limited.
• Chapter 7-This chapter describes the recovery procedure followed
by the Dhanalakshmi bank limited.
CHAPTER III
NON-PERFORMING ASSETS AND
PROVISIONING
A CONCEPTUAL REVIEW
3.1 Narasimham Committee
The government of India set up a nine member committee under the
chairman ship of Mr. Narasimham, the former of governor of Reserve bank of
India, to examine the structure and functioning of the existing financial systems of
India and suggest financial reforms. The report of the committee was tabled in the
parliament of December 17th 1991.
The main recommendations of the committee are
1. A phased achievement of 8% capital adequacy ratio.
2. A phased reduction f statutory liquidity ratio;
3. Prudential guidelines governing the functioning of financial institutions; and
4. Proper classification of assets and full disclosure and transparency of banks
and financial institutions.
Most of the recommendations have been accepted by the government.
While the most of the recommendations made by the committee in the 1 phase
have been accepted for implementation, either in a single step or in a phased
manner, some of them are yet to be considered for the same. These measures
implemented so far have revolutionized the structure of the banking industry and
its operations.
3.1.1 Concept of NPAs as per Narasimham Committee
Recommendations
The Narasimham committee recommendations suggested that loans and
advances in banks should classified in to performing and non performing on the
basis of the health of the loans assets and the record of adherence to repayment of
installments and interest on due dates. The committee also recommended that the
banks be allowed to book to income by way of interest debited to an account only
when it was found realizable with in a given time frame.
The committee suggested that the banks should make provision for all NPAs on
the basis of classification of such assets based on the age of irregularity, security
cover available etc. The RBI accepted the recommendations of the committee with
regard to introduction of norms for income recognition and asset classification and
provisioning an advised the banks to implement the same in a phased manner
beginning 1st April 1992.
The asset of a bank are cash and balances with RBI, balances with banks and
money at call and short notice, investment in government and other securities,
advances (including loans and advances, bill purchased, discounts and other credit
facilities), fixed and other assets.
3.1.2 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.
3.1.3 Identification of NPAs
Identification of an account as NPA depends upon the nature of borrowal
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: -
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.
3.1.4 Gross NPA and Net NPA
As per RBI circular gross advance means all outstanding loans and advances
for which refinance has been received but excluding rediscounted risks and
advances written off at Head Office level. The gross NPA and net NPA are
always expressed as a percentage of advances. The percentage of gross NPA to
advances including all Interest Suspense account where the bank is following the
accounting practice of debiting interest to the customer account and crediting
Interest Suspense account. The following are deducted from gross NPA to arrive
at net NPA.
a. Balance in Interest Suspense account, if applicable;
b. Deposit Insurance Guarantee Corporation / Export Credit Guarantee
Corporation claim receive and pending adjustment;
c. Part payment received and kept in Suspense account;
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.
3.1.5 Asset classification Norms
A critical analysis for a comprehensive review and uniform credit
monitoring was introduced in 1985 to 86 by RBI by way of the Head Code system
in banks which provide information regarding the health of the individual
advances, quality of credit portfolio and the extend of advances causing concern
in relation to total advances. It was consideredthat information would be off
immense use to bank management for control purposes. RBI advised all
commercial banks on 07/11/1985 to introduce the Health code classification
assigning each approval account with a health code (in eight categories) indicating
its quality.
Despite all these true picture was still not displayed. In order the ensure
greater transparency in the borrowal account and to reflect actual health quality of
banks in the balance sheet, RBI introduced prudential regulation relating to
Income Recognition, Asset classification and provisioning as recommended by
the Narasimham Committee with certain modifications in a phased manner over a
three year period beginning from 1992 – 1993.
The Narasimham committee is of the view that for the purpose of
provisioning banks and financial institutions should classify their assets by
compressing the health V code into four broad groups, taking into account the
degree of well defined credit weakness and the extend of dependence on security
for realization of dues as below:
Standard asset: Standard asset is one, which does not disclose any problems and
does not carry more than normal risk attached to the business.
Sub standard assets: Sub standard asset is one, which is a non-performing asset
for a period not exceeding 18 months.
Doubtful assets: Doubtful asset is one, which has remained as a non-performing
assets for a period exceeding 18 months. A loan classified as doubtful has all the
weakness inherent as that of substandard account with the added characteristics
that the weaknesses make collection or liquidation of outstanding dues in such an
account in full, on the basis of currently known facts, conditions and values,
highly questionable and improbable.
Loss assets: Loss assets is one, where loss has been identified by the banks or
internal or external auditors or RBI inspecting official but the amount has not been
written off, wholly or partly.
3.1.6 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% provision to be found out.
3.1.7 Guidelines for classification 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.
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.
Asset classification of accounts under consortium should be based on the
record of recovery of the individual member banks and other aspects having a
bearing on the recoverability of the advances. Where the remittances by the
borrower under consortium lending arrangements are pooled with one bank and /
or where the banks receiving remittances is not parting with the share of other
member banks, the account will be treated as not serviced in the books of the
other member banks and therefore, be treated as NPA. The banks particularly in
the consortium should, therefore, arrange to get their share of recovery transferred
from the lead bank or get an express consent from the lead bank for the transfer of
their share of recovery, to ensure proper asset classification in their respective
books.
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.
3.1.8 Up gradation of NPA
Up gradation of with in the doubtful status or upgrading it from the doubtful
to substandard shall not be made due to subsequent recoveries unless the account
is regularized and comes out of the NPA status. In other words, the date on which
an account become irregular shall not be changed due to subsequent recoveries,
till regularization of the account.
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.
Provisioning
There is time lag between an account becoming doubtful for recovery, the
realization of security and erosion over a period of time in its value. So RBI
directive now requires the banks to make provisions in their balance sheet for all
non-standard loss assets.
The entire assets should be written off if the assets are permitting to remain
in the books for any reason, 100% of the outstanding should be provided for.
Doubtful assets:
a. 100 percent of the extend to which the advance is not covered by realizable
value of the security to which the banks has a valid recourse and the realizable
value is estimated on a realistic basis.
b. In regard to the secured portion, provision may be made on the following basis,
at the rate ranging from 20% to 50% of the secured portion depending upon the
period for which the asset has remained doubtful.
Table 3.1
Period for which the advance has been considered as doubtful and provision
requirement (%) for each period.
Period for which the
advance has been
considered as doubtful
Provision requirement (%)
Upto one Year 20
1- 3 Year 30
More than 3 Year 50
c. Additional provisioning consequent upon the change in the definition of
doubtful assets effective from March 31st 2001 has to be made in phases as under.
Ø As on 31-03-2001, 50% of the additional provisioning requirement on the
assets, which became doubtful on account of new norm of 18 months for
transition from substandard asset to doubtful category.
Ø 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.
d. Banks are permitted to phase the additional provisioning consequent upon
the reduction in the transition period from sub standard to doubtful assets from 18
to 12 months over a four year period commencing from the year ending March
31st 2005, with a minimum of 20% each year.
Sub standard assets
A general provision of 10% on total outstanding should be made without
making any allowance for DICGC / ECGC guarantee cover and securities
available.
Standard assets
a. From the year ending 31-03-2000, the banks should make a general
provision of a minimum of 0.25% of standard assets on global loan portfolio
basis.
b. The provisions on standard assets should not be reckoned for arriving at net
NPAs.
c. The provision towards standard assets need not be netted from gross
advances but shown separately as “contingent provisions against standard assets”
under ‘other liabilities and provisions – others’ in schedule five of the balance
sheet.
For arriving at the provision amount, the following matters may be kept in
mind.
a. For finding the secured portion only the tangible security (both primary and
collateral) is considered.
b. As the outstanding in the ledger as on March 31st include interest transferred
to the uncollected INTEREST account. This amount has to be reduced from the
outstanding amount.
DICGC/ECGC cover available cannot be reduced in the case of advances
classified as sub standard before applying 10% provision.
3.2 THE UNSEEN AND UNPERCEIVED EDGE OF
NPA
NPA surfaced suddenly in the Indian banking scenario, around the Eighties,
in the midst of turbulent structural changes overtaking the international banking
institutions, and when the global financial markets were undergoing sweeping
changes. In fact after it had emerged the problem of NPA kept hidden and
gradually swelling unnoticed and unperceived, in the maze of defective
accounting standards that still continued with Indian Banks up to the Nineties and
opaque Balance sheets.
In a dynamic world, it is true that new ideas and new concepts that emerge
through such changes caused by social evolution bring beneficial effects, but only
after levying a heavy initial toll. The process of quickly integrating new
innovations in the existing set-up leads to an immediate disorder and unsettled
conditions. People are not accustomed to the new models. These new formations
take time to configure, and work smoothly. The old is cast away and the new is
found difficult to adjust. Marginal and sub-marginal operators are swept away by
these convulsions. Banks being sensitive institutions entrenched deeply in
traditional beliefs and conventions were unable to adjust themselves to the
changes. They suffered easy victims to this upheaval in the initial phase.
Consequently banks underwent this transition-syndrome and languished
under distress and banking crises surfaced in quick succession one following the
other in many countries. Elaborating a cross-country description of this
phenomenon a study by FICCI depicts as under:
"Since the mid-eighties, banking crises have come to the forefront of economic
analysis. Situations of banking distress have quickly intensified and in the
process, have become one of the main obstacles to stability to the financial
system. According to Lindgren et.al. (1996), 73 per cent of the member countries
of the International Monetary Fund's (IMF) experienced at least one bout of
significant banking sector problems from 1980 to 1996. More importantly, such
crises have resulted in severe bank losses or public sector resolution costs. As
Caprio and Klingebiel (1996) observe, such costs amounted to 10 per cent or
more of GDP in at least a dozen developing country episodes during the past 15
years. Recent studies by Honohan (1996) provide the estimated resolution costs of
banking crises in developing and transition economies since 1980 are pegged at
US $ 250 billion reinforce this view."
But when the banking industry in the global sphere came out of this
metamorphosis to re-adjust to the new order, they emerged revitalized and as more
vibrant and robust units. Deregulation in developed capitalist countries particularly
in Europe, witnessed a remarkable innovative growth in the banking industry,
whether measured in terms of deposit growth, credit growth, growth intermediation
instruments as well as in network.
During all these years the Indian Banking, whose environment was insulated
from the global context and was denominated by State controls of directed credit
delivery, regulated interest rates, and investment structure did not participate in
this vibrant banking revolution. Suffering the dearth of innovative spirit and
choking under undue regimentation, Indian banking was lacking objective and
prudential systems of business leading from early stagnation to eventual
degeneration and reduced or negative profitability. Continued political
interference, the absence of competition and total lack of scientific decision-
making, led to consequences just the opposite of what was happening in the
western countries. Imperfect accounting standards and opaque balance sheets
served as tools for hiding the shortcomings and failing to reveal the progressive
deterioration and structural weakness of the country's banking institutions to
public view. This enabled the nationalized banks to continue to flourish in a
deceptive manifestation and false glitter, though stray symptoms of the brewing
ailment were discernable here and there.
The government hastily introduced the first phase of reforms in the financial
and banking sectors after the economic crisis of 1991. This was an effort to
quickly resurrect the health of the banking system and bridge the gap between
Indian and global banking development. Indian Banking, in particular PSBs
suddenly woke up to the realities of the situation and to face the burden of the
surfeit of their woes. Simultaneously major revolutionary transitions were taking
place in other sectors of the economy on account the ongoing economic reforms
intended towards freeing the Indian economy from government controls and
linking it to market driven forces for a quick integration with the global economy.
Import restrictions were gradually freed. Tariffs were brought down and
quantitative controls were removed. The Indian market was opened for free
competition to the global players. The new economic policy in turns
revolutionalised the environment of the Indian industry and business and put them
to similar problems of new mixture of opportunities and challenges. As a result
we witness today a scenario of banking, trade and industry in India, all undergoing
the convulsions of total reformation battling to kick off the decadence of the past
and to gain a new strength and vigour for effective links with the
global economy. Many are still languishing unable to get released from the old
set-up, while a few progressive corporate are making a niche for themselves in the
global context.
During this decade the reforms have covered almost every segment of the
financial sector. In particular, it is the banking sector, which experienced major
reforms. The reforms have taken the Indian banking sector far away from the days
of nationalization. Increase in the number of banks due to the entry of new private
and foreign banks; increase in the transparency of the banks' balance sheets
through the introduction of prudential norms and norms of disclosure; increase in
the role of the market forces due to the deregulated interest rates, together with
rapid computerisation and application of the benefits of information technology to
banking operations have all significantly affected the operational environment of
the Indian banking sector.
As banking in the country was deregulated and international standards came
to be accepted and applied, banks had to unlearn their traditional operational
methods of directed credit, directed investments and fixed interest rates, all of
which had led to deterioration in the quality of loan portfolios, inadequacy of
capital and the erosion of profitability. Banks have now an entirely different
environment under which to operate, to innovate and thrive in a highly
competitive market and their success depended on their ability to act and adopt to
market changes. These called for new strategies, different from those that related
to regulated banking in a captive environment
In the background of these complex changes when the problem of NPA was
belatedly recognised for the first time at its peak velocity during 1992-93, there
was resultant chaos and confusion. As the problem in large magnitude erupted
suddenly banks were unable to analyze and make a realistic or complete
assessment of the surmounting situation. It was not realised that the root of the
problem of NPA was centered elsewhere in multiple layers, as much outside the
banking system, more particularly in the transient economy of the country, as
within. Banking is not a compartmentalized and isolated sector delinked from the
rest of the economy. As has happened elsewhere in the world, a distressed
national economy shifts a part of its negative results to the banking industry. In
short, banks are made ultimately to finance the losses incurred by constituent
industries and businesses. The unprepared ness and structural weakness of our
banking system to act to the emerging scenario and de-risk itself to the challenges
thrown by the new order, trying to switch over to globalisation were only
aggravating the crisis. Partial perceptions and hasty judgments led to a policy of
ad-hoc-ism, which characterized the approach of the authorities during
the last two-decades towards finding solutions to banking ailments and
dismantling recovery impediments. Continuous concern was expressed. Repeated
correctional efforts were executed, but positive results were evading. The problem
was defying a solution.
But why? The threat of NPA was being surveyed and summarized by RBI
and Government of India from a remote perception looking at a bird's-eye-view
on the banking industry as a whole delinked from the rest of the economy. A
bird's eye view is distinct, extensive and even sharp, but it is limited to the view
appearing at the surface or top-layer. It is a not an exhaustive or in-depth view.
Restricted merely as a top-layer view it is partial and is not even a top-to-bottom
view, where a bottom-to-top-view alone can enlighten the correct contributing
factors. Flying at a great height the bird can of-course survey a wide area, but it
perceives only a telescopic view of the roof- top and not the contents that exist
inside the several structures. A simple look at the whole provides summarised
perception. But it is not a homogeneous whole that is being perceived. RBI looks
at the banking industry's average on a macro basis, consolidating and tabulating
the data submitted by different institutions. It has collected extensive statistics
about NPA in different financial sectors like commercial banks, financial
institutions, RRBs, urban cooperatives, NBFC etc. But still it is a distant view of
one outside the system and not the felt view of a suffering participant. Individual
banks inherit different cultures and they finance diverse sectors of the economy
that do not possess identical attributes. There are distinct diversities as among the
29 public sector banks themselves, between different geographical regions and
between different types of customers using bank credit. There are three weak
nationalised banks that have been identified. But there are also correspondingly
two better performing banks like Corporation and OBC. There are also banks that
have successfully contained NPA and brought it to single digit like Syndicate
(Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so
simple to be generalised for the industry as a whole to prescribe a readymade
package of a common solution for all banks and for all times.
Similarly NPA concerns of individual Banks summarised as a whole and
expressed, as an average for the entire bank cannot convey a dependable picture.
It is being statistically stated that bank X or Y has 12% gross NPA. But if we look
down further within that Bank there are a few pockets possessing bulk segments
of NPA ranging 50% to 70% gross, which should consequently convey that there
should also be several other segments with 3 to 5% or even NIL % NPA,
averaging the bank's whole performance to 12%. Much criticism is made about
the obligation of Nationalised Banks to extend priority sector advances. But banks
have neither fared better in non-priority sector. The
comparative performance under priority and non-priority is only a difference of
degree and not that of kind.
The assessment of the mix-of contributing factors should have included
1. Human factors (those pertaining to the bankers and the credit customers),
2. Environmental imbalances in the economy on account of wholesale changes
and also
3. Inherited problems of Indian banking and industry.
While banks functioned for several decades under ethnic culture, Indian
business and industry were owned, controlled or managed by single families, all
having been nurtured and developed through innovative zeal of pioneers,
represented by one dominant individual towering at each set-up. This inherently
convey the sole-proprietorship culture and unable to quickly transform to modern
professionally managed corporations of the global standard, where operations
should be conducted on a decentralized knowledge-based work-group- an
integrated teams of specialists each contributing to a core area of management.
The Indian management set up everywhere turns mostly as one-man show even
today.
Variable skill, efficiency and level integrity prevailing in different branches
and in different banks accounts for the sweeping disparities between inter-bank
and intra-bank performance. We may add that while the core or base-level NPA in
the industry is due to common contributory causes, the inter-se variations are on
account of the structural and operational disparities. The heavy concentrated
prevalence of NPA is definitely due to human factors contributing to the same.
No bank appears to have conducted studies involving a cross-section of its
operating field staff, including the audit and inspection functionaries for a candid
and comprehensive introspection based on a survey of the variables of NPA
burden under different categories of sectoral credit, different regions and in
individual Branches categorized as with high, medium and low incidence of NPA.
We do not hear the voice of the operating personnel in these banks candidly
expressed and explaining their failures. Ex-bankers, i.e. the professional bankers
who have retired from service, but possess a depth of inside knowledge do not
out-pour candidly their views. After three decades of nationalised banking, we
must have some hundreds of retired Bank executives in the country, who can
boldly and independently, but objectively voice their views. Everyone is satisfied
in blaming the others. Bank executives hold 'willful defaulters' responsible for all
the plague. Industry and business blames the government policies.
An important fact-revealing information for each NPA account is the gap
period between the date, when the advance was originally made and the date of its
becoming NPA. If the gap is long, it is the case of a sunset industry. Things were
all right earlier, but economic variance in trade cycles or market sentiments have
created the NPA. Credit customers who are in NPA today, but for years were
earlier rated as good performers and creditworthy clients ranging within the top 50
or 100. But what is the proportion of this content? Significant part of the NPA is
on account of clout banking or willfully given bad loans. Infant mortality in credit
is solely on account of human factors and absence of human integrity.
Credit to different sectors given by the PSBs in fact represents different
products. Advance to weaker sections below Rs.25000/- represents the actual
social banking. NPA in this sector forms 8 To 10% of the gross amount. Advance
to agriculture, SSI and big industries each calls for different strategies in terms of
credit assessment, credit delivery, project implementation, and post advance
supervision. NPA in different sector is not caused by the same resultant factors.
Containing quantum of NPA is therefore to be programmed by a sector-wise
strategy involving a role of the actively engaged participants who can tell where
the boot pinches in each case. Business and industry has equal responsibility to
accept accountability for containment of NPA. Many of the present defaulters
were once trusted and valued customers of the banks. Why have they become
unreliable now, or have they?
The credit portfolio of a nationalised bank also includes a number of low-
risk and risk-free segments, which cannot create NPA. Small personal loans
against banks' own deposits and other tangible and easily marketable securities
pledged to the bank and held in its custody are of this category. Such small loans
are universally given in almost all the branches and hence the aggregate
constitutes a significant figure. Then there is food credit given to FCI for food
procurement and similar credits given to major public Utilities and Public Sector
Undertakings of the Central Government. It is only the residual fragments of Bank
credit that are exposed to credit failures and reasons for NPA can be ascertained
by scrutinising this segment.
Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact
an all-pervasive national scourge swaying the entire Indian economy. NPA is a
sore throat of the Indian economy as a whole. The banks are only the ultimate
victims, where life cycle of the virus is terminated.
Now, is not the Government an equal sufferer? What about the recurring loss
of revenue by way of taxes, excise to the government on account of closure of
several lakhs of erstwhile vibrant industrial units and inefficient usage of costly
industrial infrastructure erected with considerable investment by the nation? As
per statistics collected three years back there are over two and half million small
industrial units representing over 90 percent of the total number of industrial units.
A majority of the industrial work force finds employment here and the sector's
contribution to industrial output is substantial and is estimated at over 35 percent
while its share of exports is also valued to be around 40 percent. Out of the 2.5
million, about 10% of the small industries are reported to be sick involving a bank
credit outstanding around Rs.5000 to 6000 Crore, at that period. It may be even
more now. These closed units represent some thousands of displaced workers
previously enjoying gainful employment. Each closed unit whether large, medium
or small occupies costly developed industrial land. Several items of machinery
form security for the NPA accounts should either be lying idle or junking out. In
other words, large value of land, machinery and money are locked up in industrial
sickness. These are the assets created that have turned unproductive and these
represent the real physical NPA, which indirectly are reflected in the financial
statements of nationalised banks, as the ultimate financiers of these assets. In the
final analysis it represents instability in industry. NPA represents the owes of the
credit recipients, in turn transferred and parked with the banks. What is the effect
of the dismal situation on the psychology of entrepreneurs intending fresh entry to
business and industry?
Recognizing NPA as a sore throat of the Indian economy, the field level
participants should first address themselves to find the solution. Why not
representatives of industries and commerce and that of the Indian Banks'
Association come together and candidly analyze and find an everlasting solution
heralding the real spirit of deregulation and decentalisation of management in
banking sector, and accepting self-discipline and self-reliance? What are the
deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check
misuse and abuse at source? How to deal with erring Corporate? In short, the
functional staff of the Bank along with the representatives of business and
industry have to accept a candid introspection and arrive at a code of discipline in
any final solution. And preventive action to be successful should start from the
credit-recipient level and then extend to the bankers. RBI and Government of
India can positively facilitate the process by providing enabling measures. Do not
try to set right industry and banks, but help industry and banks to set right
themselves. The new tool of deregulated approach has to be accepted in solving
NPA.
3.3. REASONS FOR MOUNTING NPA s
As a first step to the analysis the institutional and infrastructure factors that
are fundamentally responsible for the problem are outlined below:
3.3.1.The Legal Framework
The RBI sees NPAs in the Indian banking sector as a historic legacy due to
lacunae in credit recovery, largely and arising from inadequate legal provisions on
foreclosure and bankruptcy, long drawn legal procedures and difficulties in
execution of the decrees awarded by the court. At the end of March 1998, about
46 per cent of NPAs were in respect of suit filed accounts (Filed by 27 public
sector and 6 private sector banks) where the recovery was as low as 4.3 per cent
and significant portion of suits have been pending for more than a decade.
The efficiency of our legal system can also assessed by the value of cases
pending in the courts of law representing about Rs. 21,825 crores. In order to
expedite disposal of high value claims of banks Debt Recovery Tribunals (DRTs)
were set up. The performance of ten DRTS currently working may also not be
considered satisfactory. Out of Rs. 8.900 crores transferred to DRTs by March
1997, only a sum of Rs. 178 crores has been recovered.
3.3.2.Political interference
The Indian banking system has been extensively misused for political
reasons in the past. A large part of their bad debts are a legacy of this misuse.
The NPAs in priority sector advances of public sector banks are 46 to 49 per cent
of their overall NPAs while priority sector advances from only 30 to 32 per cent
of them total advances. In addition the large-scale loan write-off ordered by
politicians promote a culture of indiscipline and lawlessness among borrowers.
This adds to the problems of banks already functioning in a hostile legal
environment.
3.3.3.Competitions and Liberalization
The winds of liberalization have opened up new vistas in the banking
industry resulting in the generation of an intensely competitive environment. The
banking arena has been almost flooded with new entrants including private banks,
foreign banks, non-banking finance companies merchant bankers, chit funds etc.
Heavy weight foreign banks with huge capital base, latest technology innovative
and globally tested products are spreading their wings and wooing away
customers from the Indian banks that are steeped in a tradition of inefficiency and
lethargy. These banks enjoy a competitive edge in providing services, which are
competitively priced and have better quality, wider range of products and
specialized services. They are technology drive and have locational advantages.
The large branch network of Indian public sector banks serves as a non-
regulatory barrier to competition. It is found that after the entry of new private
sector banks in India the market share of foreign banks in the market for deposits
suffered. This was because the new entrants were primarily competing with these
banks. In this context the recent trends in the NPA profile of the players is
interesting. The following Table shows that in the past three years the NPAs of
the public sector banks have been falling while those of private and foreign banks
have been rising. It appears that intense competition in a small segment of the
market is pushing private and foreign banks to take excessive risk.
3.3.4.. Inadequate Risk Management Practices
The banks are now exposed to a much greater degree of risk primarily
arising out of the potential loss on an asset or a portfolio. For this the banks have
to develop skills to identify assess and minimize the risks and enhance the returns.
If there is a mismatch between assets and liabilities the banks may be exposed to
interest rate risk, liquidity risk and foreign exchange risk, credit risk and price
risk. Narasimham Committee II has also addressed this issue bringing into focus
the dangers to liquidity and solvency due to mismatches. A good risk
management is possible with only a sound banking system conforming to
international prudential and supervisory norms. This underscores the importance
of internal risk management systems in banks. Risk management should be
proactive rather than reactive. Under risk management, corporate governance has
also to be stressed to develop an effective control system. Information networking
among banks can further improve their risk management abilities.
3.3.5. Lack of prudential Norms
Risk management practices can be effective only when financial statements
present accurate picture of the level of risk. The income recognition norms being
followed by banks prior to 1992-93 involved recognition of income earned on bad
debts in their books on accrual basis. Thus these financial statements did not
reflect the level of bad debts and presented a misleading rosy picture of their
health. This allowed the situation to degenerate considerably before it was
detected.
Besides the above there are several factors related to the borrower, which
adversely affect their repayment. These include:
· Diversion of funds as revealed by an RBI study.
· Technological changes
· Power shortage
· Business failures
· Inefficient management
· Industrial recession
· Strained labour relations
· Price escalation
· Serious inherent operational problems
· Natural calamities
3.4. ADVERSE EFFECTS OF NPA ON THE WORKING OF
COMMERCIAL BANKS
NPA has affected the profitability, liquidity and competitive functioning of
PSBs and finally the psychology of the bankers in respect of their disposition
towards credit delivery and credit expansion.
3.4.1. Impact on Profitability
Between 01.04.93 to 31.03.2001Commercial banks incurred a total amount
of Rs.31251 Crores towards provisioning NPA. This has brought Net NPA to
Rs.32632 Crores or 6.2% of net advances. To this extent the problem is contained,
but at what cost? This costly remedy is made at the sacrifice of building healthy
reserves for future capital adequacy. The enormous provisioning of NPA together
with the holding cost of such non-productive assets over the years has acted as a
severe drain on the profitability of the PSBs. In turn PSBs are seen as poor
performers and unable to approach the market for raising additional capital.
Equity issues of nationalised banks that have already tapped the market are now
quoted at a discount in the secondary market. Other banks hesitate to approach the
market to raise new issues. This has alternatively forced PSBs to borrow heavily
from the debt market to build Tier II Capital to meet capital adequacy norms
putting severe pressure on their profit margins, else they are to seek the bounty of
the Central Government for repeated Recapitalisation.
Considering the minimum cost of holding NPAs at 7% p.a. (reckoning
average cost of funds at 6% plus 1% service charge) the net NPA of Rs.32632
Crores absorbs a recurring holding cost of Rs.2300 Crores annually. Considering
the average provisions made for the last 8 years, which works out to average of
Rs.3300 crores from annum, a sizeable portion of the interest income is absorbed
in servicing NPA. NPA is not merely non-remunerative. It is also cost absorbing
and profit eroding.
In the context of severe competition in the banking industry, the weak banks
are at disadvantage for leveraging the rate of interest in the deregulated market
and securing remunerative business growth. The options for these banks are lost.
“The spread is the bread for the banks”. This is the margin between the cost of
resources employed and the return there from. In other words it is gap between the
return on funds deployed (Interest earned on credit and investments) and cost of
funds employed(Interest paid on deposits). When the interest rates were directed
by RBI, as heretofore, there was no option for banks. But today in the deregulated
market the banks decide their lending rates and borrowing rates. In the
competitive money and capital Markets, inability to offer competitive market rates
adds to the disadvantage of marketing and building new business.
In the face of the deregulated banking industry, an ideal competitive
working is reached, when the banks are able to earn adequate amount of non-
interest income to cover their entire operating expenses i.e. a positive burden. In
that event the spread factor i.e. the difference between the gross interest income
and interest cost will constitute its operating profits. Theoretically even if the bank
keeps 0% spread, it will still break even in terms of operating profit and not return
an operating loss. The net profit is the amount of the operating profit minus the
amount of provisions to be made including for taxation. On account of the burden
of heavy NPA, many nationalised banks have little option and they are unable to
lower lending rates competitively, as a wider spread is necessitated to cover cost
of NPA in the face of lower income from off balance sheet business yielding non-
interest income.
It is worthwhile to compare the aggregate figures of the 19 Nationalised
banks for the year ended March 2001, as published by RBI in its Report on trends
and progress of banking in India.
Table 3.2
Nationalised banks operational
statistics……….. (Amount in
Crores) Performance indicator
Year ended
Mar. 2000
Year ended
Mar. 2001
Earnings - Non-interest 6662.42 7159.41Operating expenses 14251.87 17283.55Difference - 7589.45 - 10124.14Earnings - interest income 50234.01 56967.11Exp.-Interest expenses 35477.41 38789.64Interest spread 14756.60 18177.47Intt. On Recap bonds 1797.88 1795.48Operating Profit 5405.27 6257.85Provisions 4766.15 5958.24Net Profit 639.12 299.61
Interest on Recapitalization Bonds is a income earned from the Government, who had issued the Recapitalization Bonds to the weak banks to sustain their
capital adequacy under a bail out package. The statistics above show the other weaknesses of the nationalised banks in addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under:1. Their operating expenses are higher due to surplus manpower employed. Wage costs to total assets is much higher to PSBs compared to new private banks or foreign banks.2. Their earnings from sources other than interest income are meagre. This is due to failure to develop off balance sheet business through innovative banking products.3.4.2 How NPA Affects the Liquidity of the Nationalised Banks?
Though nationalised banks (except Indian Bank) are able to meet norms of Capital Adequacy, as per RBI guidelines, the fact that their net NPA in the average is as much as 7% is a potential threat for them. RBI has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA within limits of tolerance the nationalised banks are holding an uncomfortable burden at 7.1% as at March 2001. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market, but have resorted to II-Tier capital in the debt market or looking to recapitalization by Government of India.3.4.3 How NPA Affects the Outlook of Bankers towards Credit Delivery
The fear of NPA permeates the psychology of bank managers in the PSBs in entertaining new projects for credit expansion. In the world of banking the concepts of business and risks are inseparable. Business is an exercise of balancing between risk and reward. Accept justifiable risks and implement de-risking steps. Without accepting risk, there can be no reward. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit growth compared to growth of deposits, resulting a low C/D Ratio around 50 to 54% for the industry.
The fear psychosis also leads to excessive security-consciousness in the approach towards lending to the small and medium sized credit customers. There is insistence on provision of collateral security, sometimes up to 200% value of the advance, and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over-confidence), a tendency towards laxity in the standards of credit appraisal comes to the fore. It is well known that the existence of collateral security at best may convert the credit extended to productive sectors into an investment against real estate, but will not prevent the account turning into NPA. Further blocked assets and real estate represent the most illiquid security and NPA in such advances has the tendency to persist for a long duration.
Nationalised banks have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution of this hovering threat.
3.5 MEASURES INITIATED BY RBI AND GOVERNMENT OF
INDIA FOR REDUCTION OF NPAs
3.5.1. Compromise settlement schemes
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 recovery of the stock of NPAs of
Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid
up to June 30, 2001 helped the public sector banks to recover 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
Hon’ble Finance Minister providing for OTS for advances up to Rs.50,000 in
respect of NPAs of small/marginal farmers are being drawn up.
3.5.2. 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
3.5.3. Debt Recovery Tribunals
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
defendant’s property/assets before judgment, penal provisions for disobedience of
Tribunal’s 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.
3.5.4.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.
3.5.5. Recovery action against large NPAs
After a review of pendency in regard to NPAs by the Hon’ble Finance
Minister, RBI had advised the public sector banks to examine 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.
3.5.6.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
3.5.6. 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.
3.5.7.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 Hon’ble Finance
Minister in the Union Budget 2002-03, RBI has set up a high level Group under
the Chairmanship of Shri. Vepa Kamesam, Deputy Governor, RBI to review the
implementation procedures of CDR mechanism and to make it more
effective. The Group will review the operation of the CDR Scheme, identify the
operational difficulties, if any, in the smooth implementation of the scheme and
suggest measures to make the operation of the scheme more efficient.
3.5.8. 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
3.5.9. 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.
3.5.10. 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-
à-vis compliance, transparency, disclosures, audit committees etc. and make
recommendations for making the role of Board of Directors more effective with a
view to minimizing 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.
[Dr. Bimal Jalan, Governor, RBI, in a speech titled "Banking and Finance in
the New Millennium." delivered at 22nd Bank Economists Conference, New
Delhi, 5th February, 2001]
3.6. NPA ORDINANCE: EMPOWERING BANKS
There seems to be late realization that the financial sector is heading
towards a major crisis because of the mounting bad loans and the inability of
lender to recover them under the existing legal frame work. The government has
passed a new ordinance in June, which seeks to change all this and empower the
lenders to recover their dues without going through prolonged legal battles in the
courtrooms.
Banks are equally responsible. The big question now is, to what extend the
new legislation would help in recovering the NPAs?
The new Finance Minister, Jaswant Singh, deserves to be complimented for
introducing the Securitization and Reconstruction of financial assets and
enforcement of security interest bill in Loksabha despite orchestrated attempts by
industry associations to sabotage the NPA ordinance issued in this regard earlier.
Drawing attention to the gravity of the problem facing the country’s
financial sector, he made a categorical statements in the Rajyasabha that “non –
performing assets of Rs. 83,000 crore is a loot and not debt”.
Despite all efforts by the government and Reserve Bank of India, post-
reforms, to bring down the mounting bad loans or so-called non-performing
assets, the problem has persisted and in fact it has aggravated. Incidentally, the
figure of Rs. 83 crore mentioned by Finance Minister pertains to NPA given out
by the bank and financial institutions. There is reason to believe that the actual
NPA are much higher than this official figure. Audit and Consulting firms such as
Ernest and Young put real NPAs at 1,30,000-1,50,000 crore.
Evidently, there seems to be a belated realization that the Indian financial
Sector is heading towards a major crisis because of mounting bad loans and the
inability of the lenders to recover them under the existing legal frame work.
The Government had to inject a massive Rs. 20,446 crore towards
recapitalization of public sector banks till end March 1999 to help them fulfill the
new capital adequacy norms. Again in 2000-2001, a bailout package of Rs. 2,550
crore was worked out for 3 weak public sector banks – Indian bank, UCO Bank
and United Bank of India. This was against the Verma Pannel recommendation to
inject Rs. 5,000 crore in these banks. In 1999 to 2000-01, the Government had
allowed 27 Public Sector Banks to write off corporate loans worth Rs. 8,246 crore
to reduce the level of bad debts.
The health of Financial Institutions is more worrisome with their declared
NPAs amounting to nearly Rs. 20,000 Crore. In addition, they are also stock with
a huge liability of Rs. 6,200 crore in the ill-conceived Enron project. The
Government had to worked out huge bailout packages for the Unit Trust of India
and the Industrial Financial Corporation of India. The IFCI has been kept alive by
huge infusion of funds by the Government. Last year, the Government provided
Rs. 400 crore for its survival. Now, within 12 months, it is set to provide it with a
guarantee of Rs. 1,500 crore on its borrowings.
The IFCI’s liabilities this year add upto Rs. 4500 crore with another Rs.
5000 crore debt maturing next year. The institution has a liquidity gap of Rs.
7100 crore over a 3-year period till 2002-2004.
The consulting firm, McKinsey and Co. has recommended a capital infusion
of upto 8800 crore for IFCI. It is against this backdrop that some financial experts
have recommended the winding up of the IFCI.
The Industrial Development Bank of India’s NPAs are also an unsustainable
19% and its profitability has come down drastically over the past 2 years because
of higher provisioning for bad debts over Rs. 5500 crore. It may also need a
bailout soon.
The downfall of the once strong and powerful UTI is well known. The
second bailout package for the UTI will cost the Government Rs. 5,000 crore.
Moreover, the Finance Ministry is still struggling to work out the modalities of
bridging the gap estimated at over 10000 crore, between the promised return and
actual earnings in UTI’s various assured return schemes. The real hurdle facing
the lenders in recovering their dues all these years has been the extend legal
framework governing the operations of the public financial institution and banks.
The rules of the game are severely tilted against lenders who find it extremely
difficult to enforce the contracts signed with the borrowers. To make matters
worse, the institutional set up created by the government to the revival of the so-
called ‘Potentially viable sick unit’ has made the task of loan recovery even more
difficult.
The Sick Industrial Companies Act and the Board for Industrial and
Financial Reconstructions have played a notorious role in providing an easy
shelter to defaulters rather than in reviving the sick units.
Loans turn bad because of the incidents of industrial sickness. While some
instances of industrial sickness are no doubt because of unforeseen changes in
business environment and beyond the control of the managements, in most cases
bad management and poor standards of corporate governance are to blame. This
is well documented by a number of studies, including those by the RBI.
While the reasons for sickness are well known, there seems to be a total lack
of professional approach in tackling the problem. There have been a number of
instances where even when an Industrial group bleeds a company to sickness by
diverting funds and indulging the other malpractices, its other constituent unit to
continue to receive funds from Financial Intuitions and banks. The Omkar
Goswami Committee report on industrial sickness and corporate restructuring
aptly summed up the situation in its preamble thus “There are sick companies,
sick banks, and unpaid workers. But there are hardly any sick promoters. There
lies the heart of the matter”.
The new ordinance passed in June seek to change all this and empower the
lenders to recover their dues without going through protracted legal battles in the
courtrooms. It would enable the creditors, after 60 days notice, to take possession
of, or sell or lease the assets financed by them, take over the management of the
business of the borrower; and recover any money payable by the third parties to
the borrower. All that is required is that creditors accounting for 75% or more of
the secured lending should agree to initiate recovery proceedings.
While the borrowers are allowed to seek protection from secured creditors
by filing an appeal to debt recovery tribunal, they will also be required to deposit
75% of the amount claimed by the creditors in order to prevent misuse of appeal
provisions. The Debt Recovery Tribunal can, at its discretion; reduce the deposit
amount, but only after recording its reason for doing so.
The ordinance also provides for the setting up of Asset Reconstruction
Companies (ARCs) to be regulated by the RBI. The ARC can issue Security
Receipt (SRs) that will be tradable instrument that the lenders can sell at market
determined prices.
To begin with it is proposed to set up the Asset Reconstruction Company of
India Ltd. (ARCIL) with 51% shareholding by private bank and the rest by the
State Bank of India and IDBI. The ARCIL will act as a catalyst to bring together
creditors accounting for the minimum 75% of secured lending and to take the lead
in the recovery process.
As expected, industry associations and chambers such as CII and the FICCI
have been quick to protest against the provisions of the ordinance, which they call
draconian. Their main objection is that it does not make any distinction between
willful and genuine defaulters.
They have expressed a fear that the provisions could make bankers trigger happy in seizing the assets of the defaulters.
There fear is clearly misplaced. Banks and financial institutions do reschedule loans when they are conceived that there is great chance for a defaulting company to service and payback its loans.
The demand to make a distinction between willful and genuine default make no sense. In any case, the banks and financial institutions do fear the normal risk of lending and are prepared for certain permissible percentage of loans turning into NPAs.
Quite a few financial institution and banks have already initiated measures to recover their dues from chronic defaulters. ICICI bank, IDBI and IFCI, for instance, have sent notices to 22 companies, which collectively owe them Rs. 1,200 crore. In addition, IDBI has issued notices to 17 borrowers for an amount
aggregating Rs. 1,640 crore. The State Bank of India has issued notices to about 70 defaulters while others are also in the process of doing so.
According to banking sources, initially the banks and FIs would target only units defaulting willfully as selling off of assets of going concerns will not be difficult.
They feel that once the asset reconstruction companies get established, seizing agencies and turnaround specialists come into being and receivers and liquidators tone up their act, banks and Fls would be in a position to make use of the legislation on a much bigger scale.
The big question now is: To what extent the new legislation would help in recovering the ‘loot’? Not much, unless the banks and financial institutions make a conscious and serious effort to change their work culture and strengthen the regulatory framework and standards of governance. For the present state of affairs, the Fls, and banks are equally responsible.
The standards of professional competence and governance in these institutions are far from satisfactory. There are no proper project appraisals at the time of granting loans, political interference and corruption are rampant, and papering over bad loans and granting of fresh advances to defaulters is a rule rather than an exception.
The second prerequisite for success in significantly bringing down the NPAs with the help of new provisions would be the redesigning of the entire financial sector matrix.There is an urgent need to create an array of liquidators, receivers, seizing and securitizing agencies, legal experts and industry specialists.
At present, the banks and FIs do not have the requisite expertise for taking over the assets or managements of the defaulters or to liquidate the assets of the defaulting companies.
It needs to be ensured that the lenders are not stuck with the assets taken over. The accent should be on quick liquidation of the seized assets and realization of dues within a reasonable time frame.
3.7. NPA RECOVERY: MYTH AND REALITY
“Indian banks are weighed down by enormous amounts of bad loans that
threaten the very health of banking system. Surely, banks in China which are far
more advanced economically and industrially would be healthier than Indian
banks. Among the Indian banks, public sector is worst affected and among banks
in private sector, the newer tech-savvy and the foreign banks are the least
vulnerable to bad loans. If only the hard core bad loans are separated and sold to
an outside agency, the problem could be largely resolved”. These and similar
opinions are held by knowledgeable persons both in banking system and outside
it. But then, these contain untruth and half-truth, as discussed below.
It is a fact that the problem of bad loans is plaguing the banking system for
quite some time. The quantum of bad loans, called in elegantly as non-performing
assets is a fairly high proportion of total loans. The percentage of net NPA to
non-advances of scheduled commercial banks in India was 6.2 percent on March
31st 2001, according to the Reserve Bank of India report, on trends and progress
of banking in India. The relative level in the US would be less than 2%. Given
the fact that the total capital and reserves of SCBs were around 5.23% of total
assets, one might jump to the conclusion that NPA was more than capital and
reserves. But, the net NPA amounting Rs. 32,468 crore represent less than half of
capital resources at Rs. 67,741.47 crore. This is because a good chunk of the
assets of banks comprises investment in Government securities which is fully
realizable and risk free. Further, all NPAs are not irrecoverable and banks do
have some securities to back up the NPAs. Therefore, it is clear that the Indian
banking system is basically safe; well, some banks are reportedly more
adventurous than others, like a south based private bank that was in the headlines
recently.
In any comparison between Indian and China, except perhaps in the area of
democracy, China comes out on top. Certainly, in industrialization, export
performance; in the level of discipline among the populace and adherence to law,
China should rank better. Therefore, banks in China would, one might presume,
be healthier than Indian banks. Facts portray a contrary picture. As per the
banker magazine (A sister publication of financial times of U.K), the level of NPA
to total assets I the two biggest banks in China, commercial bank of China and
bank of China were 25.01 % and 28.8% respectively in 200. As against this,
NPAs of Indian banks were 2.5% of total assets (Not advances) as on March 31st
2001. Banks in India are thus in a much better state of health than their counter
parts in China.
In some respects, the problem of NPA in public sector banks is more acute
than private banks, but the picture is somewhat blurred. The NPA was 6.7% of
advances for public bank sector against 5.4% for private sector banks and 2.2
percent for foreign banks in 2001. However, for the older private sector banks,
that are other than those that started in the 1990s, the NPA was 7.3%, which is
higher than public sector banks. These are average figures. Looking at figures of
individual banks, some of the private and foreign banks reflect a pathetic figure as
compared to the public sector. The highest level in public sector bank was in
Dena Bank (18.29%) and four others have higher than 10%. The highest figure
among all banks was a foreign banks, Bank International Indonesia at 50.75% and
four other foreign banks have more than 20%.
The belief that, by separating the hard core NPA and selling them to a
recovery agency, the problem of NPA could be resolved has caught the
imagination of many seasoned veterans in Banking. Many expert committees
have recommended the setting up of Asset Reconstruction Company or Fund
(ARC or ARF) on the lines of the model tried out in the US and other country. It
is debatable if ARC would be a useful tool under Indian conditions.
The borrowers of the banking system could be broadly classified into
business and industrial concerns and households and individuals. Households and
individuals, including agricultural sector, contribute to around 26% of total
advances, excluding loans to food procurement agencies.
In these cases, the ARF would not be of any help as banks do succeed in
enforcing their rights against recalcitrant borrowers to a considerable extent or
recover by reducing the dues by mutual agreement.
The first Narasimham Committee which brought about revolutionary
changes in the banking and financial system in 1991 suggested the formation of
ARF “to facilitate recovery of dues from clients in respect of whom banks and
financial institutions have already taken a decision to recall the loan and proceed
with the enforcement of security”.
It was also stressed that ARF should focus on large borrowers. The total number of suit filed against borrowers enjoying advances of Rs. 1 crore and above from the banking system was 5013 aggregating Rs. 27988.59 crore as on March
31st 2000, according to the RBI publication. These suits are pending in various courts to cope with the enormous number of cases before them; one estimate puts these at a few crore cases. It is extremely doubtful if a separate ARF can expedite matters.
In any case, these would have already been fully written of in the banks books and the cases would be handled to the law departments of various banks.
The ARF would only act as the extended legal arm of banks; it would certainly be inappropriate to buy these dues from banks, as the recovery would take years.
ARF or ARC might be helpful in cases of commercial borrowers who default in payment of their dues, where banks have not written them off. In such cases, if the borrowers are industrial companies, the cases would come under a separate agency, Board for Industrial and Financial Reconstruction (BIFR), whose first objective, as the name implies, is to see if the company can be rehabilitated.
This, it has become evident over the last few years, has created a problem of “morel hazard”; the owners and managers, who were largely responsible for making the company sick, are given fresh money for them to take further gambles with others funds. In cases where fresh funds are required, obviously an ARF, which cannot lend, is not the solution. The government has decaled that BIFR would be closed and a more expeditious legal structure set up. But this could take some time.
The main handicap under which banks suffer in recovering their dues is the legal frame work, which some feel, is debtor friendly. Many defaulting borrowers know that banks cannot force them to repay quickly, even if banks have security, due to the long time taken in courts to enforce the security. To alleviate the problems of banks, Debt Recovery Tribunals were set up for speedy enforcement of law against defaulting borrowers, whose dues exceed Rs. 10 lakh. There are loans given to state and central public sector units, which have failed to repay. The operations of Debt Recovery Tribunals are such that they have not so far made a dent in the NPA position of banks.
While on the subject, it is worth recording that even where advance is guaranteed by central or state governments and the primary borrower is unable to repay the guaranteeing government rarely, if ever, owners its legal obligations as guarantor, because the bureaucrats want to ensure that the government does not face a loss or the loss is largely reduced. The fact of the governments failing to honor financial obligations gives rise to a curious phenomenon. A guarantor would fail to pay, if he is either unwilling or unable to pay. The existence of bad loans is due to many causes, such as faulty initial scrutiny by banks, defective follow up of loans, economic slow down cheating by borrowers and the like; is causes require a separate study for the present discussion, the RBI report sums up succinctly “at the policy level, there is need for legislation which will make recovery process smoother and legal action quicker”.
Creation of ARF or even Debt Recovery Tribunals appears to the mere palliatives for chronic illness that has so far defied solution. So long as borrowers know that the long arm of law would take years, perhaps decades, to bring them to books, banks would be sufferers and uninformed public would tend to blame the banks for problems over which banks have little control.
CHAPTER – IV
COMMERCIAL BANKS AND NPAs
YEAR 2001-2002
The origin of commercial banking can be traceable in the early times of
human history. In ancient Rome and Greece, the practice of storing precious
mettles and coins at safe places and loaning out money for public and private
purposes on interest was prevalent. In England, banking had it origin with the
London gold smiths who in the 17th century began to accept deposits from the
merchants and others for safe keeping of money and other valuables. As public
enterprise, banking made it first appearance in Italy in 1157 when the Bank of
Venice was founded.
Commercial banking in India began in 1770 with the establishment of the
first joined stock bank, named Bank of Hindustan, by an English agency in
Calcutta. Bu this bank failed in 1832. In fact, the, real beginning of the modern
commercial banking in the country was made with the establishment of the Bank
of Bengal in 1806. Later on, the Bank of Bombay and Bank of Madras was also
set up in 1840 and 1843 respectively. All these banks were presidency banks:-
They were partly financed by East India Company.
In 1881, the first purely Indian bank that is Oudh commercial bank came in
to being. It was followed by the setting up of the Punjab National Bank in 1894
and Peoples bank in 1901. The Swadeshi movement of 1905 encouraged the
growth of the commercial bank in India.
Commercial bank in India can be divided in to two groups: -
a. Public Sector banks – All of them are scheduled; and
b. Private sector banks.
The public sector bank in India has developed in four phases.
a. The Imperial Bank of India was nationalized and renamed as the State Bank
of India in 1995.
b. Then, 8 former state associated banks were reconstituted into 7 subsidiary
banks of the SBI which are now called the associate banks of the SBI
c. On July 19th, 1969, 14 major commercial banks were nationalized. Again
on 15th April 1980, 6 more commercial banks were nationalized.
d. Regional Rural banks were established in 1974, which are 196 in number at
present.
Modern banks in India are joined stock banks. They are registered under the
Indian companies Act. They are classified by the RBI into two categories:-
Scheduled and non scheduled.
Scheduled banks are those banks, which are included in the second schedule
of the RBI Act, 1934 and have a paid up capital and reserves not less than Rs. 5
lakhs. The operations of these banks are controlled and regulated by the Reserve
bank.
A well-developed banking system is a necessary pre-condition for economic
development in a modern economy. Besides providing financial resources for the
growth of industrialization, banks can also influence the direction in which these
resources are to be utilized. Banks play an important role in the development of
country. It is the growth of commercial banking in the 18th and 19th centuries
that facilitated the occurrence of industrial revolution in Europe.
Commercial banks contribute to a country’s economic development in the
following ways.
a. Capital formulation
b. Encouragement to entrepreneurial innovations
c. Monetization of economy
d. Influencing economic activity
e. Implementation of monitory policy
f. Promotion of trade and industry.
g. Encouragement to right type of industrious.
h. Regional development
i. Development of agricultural and other neglected sectors.
4.1. NPA in commercial banks
The NPA of 27 public sector banks shot up to Rs.56608 crores in September
2001. NPA not only reduces the yield on advances but also reduces the
profitability of banks. (Table 4.1) The gross non-performing assets (NPAs) of
scheduled commercial banks at Rs. 70,904 crore as on March 31st 2002 as
compared with Rs. 63,741 crore at the end of the previous year. The gross NPAs
for end March 2002 include an amount of Rs. 4,512 crore on account of merger.
During the same period, net NPAs increased by 9.5% to Rs. 35,546 crore from Rs.
32,461 crore at the end March 2001. For public sector banks, gross NPAs stood at
Rs. 56,507 crore as at the end of March 2002, comprising 79.7% of the sticky
loans of scheduled commercial banks. (Table 4.2). The movement in NPAs
across bank groups is provided in Table 4.3. The NPAs of PSBs increased
marginally during the year in spite of the substantial recoveries, whereas for
foreign banks, recoveries exceeded accretions to NPAs. New private banks,
however, had substantial addition to their NPAs, reflecting the impact of merger
during the year.
4.2. Incremental non-performing assets
The incremental gross NPAs, as percentage of incremental gross advances
for scheduled commercial banks increased from 4.0% in 2000 – 2001 to 5.9% in
2001-2002. In absolute terms, the quantum of incremental gross NPAs was Rs.
7,164 crore in 2001-2002 as compared with Rs. 3332 crore in 2000-2001.
Among banks groups, there was decline in incremental gross NPAs for the state
bank groups and foreign banks. New private sector banks, incremental gross
NPAs recorded a large increase from Rs. 671 crore in 2000 – 2001 to Rs. 5205
crore in 2001-2002 reflecting the addition on account of the merger. Incremental
net NPAs of commercial scheduled banks, over the same period increased from
Rs. 2,389 crore to Rs. 3,084 crore which was also largely due to substantial
increase in incremental net NPAs of new private banks (Table 4.4). As percent of
incremental net advances, incremental net NPAs of scheduled commercial banks
declined from 2.9% in 2000-2001 to 2.6% in 2001-2002. As percent to
incremental assets, while incremental gross NPAs of scheduled commercial banks
increased from 1.8% to 3.0% in 2001 to 2002, incremental net NPA to total assets
remained constant at 1.3% in both years (Table 4.5)
CHAPTER – V
A PROFILE
5.1.VISION
"A Customer-centric organization, with a strong national network,
leveraging its network in Kerala, capable of delivering multiple financial
products in a cost-effective manner, using state of the art technology,
engaging a pool of skilled personnel, and ensuring reasonable value addition
to the shareholders and other stakeholders"
5.2 Bank Profile
The Dhanalakshmi Bank Limited (DLB) headquartered at Thrissur in
Kerala, is a professionally managed Bank. Started seven decades back, at a time
when banking was less known to the people. In a high literate state of Kerala, the
bank grew in strength over the years. The DLB has today 153 branches spread
over Kerala, Tamil Nadu, Karnataka, Andhra, Maharashtra, Gujarat, West Bengal
(Kolkata) and New Delhi. The bank has ambitious plans for growth in branches,
total business and profits.
Even though started by traditional businessmen, the bank has achieved substantial
sophistication in the various banking services provided. Of the 153 branches, All
branches are classified as NRI branches, All branches are computerized and in the
process of implementing Wide Area Network, ATM's, Any Branch Banking and
Cash Management Services, Any Branch Banking, Telebanking, Internet
Banking..Etc. The bank is managed by a group of professionals, administrators
and businessmen. The bank has already achieved Capital Adequacy Norms
prescribed by the RBI by achieving 9.69% in March 2001.
MANAGEMENT OF THE BANK
Directors
Dr. P. Raja Mohan Rao
Shri. P.K Ananthanarayanan
Shri. V. K. Sarma
Shri. S. Varadachary IAS(Retd)
Shri. K. Govindan
Shri. A. P. Venkateshwaran.
IFS.(Retd)
Prof. V. J. Pappoo
Shri. James Pothen (RBI)
Shri. P. M . Saseendranath(RBI)
Managing Director & CEO
Shri. Muthuswamy B.
Executive Director
Shri. K.A.Menon
Senior Management Team
General Manager
Shri. Thomas Mathew
Assistant General Managers
Shri.M.P.S.Sarma
Shri.A.RamMohan
Shri.P.S.Revikumar
Shri.R.Krishnan
Shri.A.K.Ramalingam
Shri.M.Vijayakumar
Shri.K.K.Ranganathan
Shri.P.R.Narayanan
Shri.P.K.Ganapathy
Shri.RavindranK.Warrier
(Company Secretary
Deputy General Managers
Shri.H.L.Sitaraman
Shri.P.G.Jayakumar
Shri.P.T.Thomas
Shri. A.K. Ramakrishnan
RETAIL
Deposit Products
Credit Products
Interest Rates
Agriculture Products
Relationship Banking
CORPORATE
Cash Management Services
Credit Products
Corporate Salary
Interest/Dividend/Warrant
OTHER SERVICES
RBI Bonds
Safe Deposit Lockers
Depository Service
Insurance Services
NRI Services
BUSINESS OPERATIONS
5.3 PERFORMANCE AND PROGRESSOF DHNALAKSHMI BANK
LIMITED
Performance and progress made by the Dhanalakshmi bank can be
measured by analyzing the various parameters like the deposits, advances, net
profit, cost of deposit, staff productivity etc. of the bank over past few years.
THE DEPOSITS OF DHANALAKSHMI BANK LIMITED
(FROM 1996-97 TO 2001-02)
Table 5.1
Amount in
Crores
YearDeposits of the bank
(Rs)
Increase / Decrease over the previous years figure
% Increase / decrease over the previous years figure
Index with year 1996-97 as base year
1996-97 840.58 --- ---100.00
1997-98 915.96 151.34 +18.0108.97
1998-99 1138.67 222.71 24.3 135.46
1999-00 1296.31 157.64 13.8 154.22
2000-01 1477.87 181.56 14.0 175.82
2001-02 1639.54 161.67 10.9 195.05
The aggregate deposits of the bank has increased from 840.58 crore to 1639.543
crores during the period 1996-97 to 2001-02. On analyzing the trend of such
increase in the deposits over the period we can clearly see that it is increasing at a
decreasing rate. The modest growth especially during the last three years is mainly
due to a conscious decision on to shed the highest cost deposits, more particularly
from institutions. 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.
ADVACES OF THE DHANALAKSHMI BANK LIMITED
(FROM 1992-93 TO 2001-02)
Table 5.2
Amount in Crores
YearAdvance of the Bank
(Rs)
Increase / Decrease over the previous years figure
% Increase / decrease over the previous years figure
Index with year 1992-93 as base year
1992-93 110.6 --- --- 100.00
1993-94 163.26 53.0 48.16 148.34
1994-95 285.89 122.63 75.11 259.76
1995-96 448.59 162.70 56.91 407.87
1996-97 562.41 114.00 25.37 512.07
1997-98 576.06 13.65 2.40 523.41
1998-99 605.23 29.17 5.10 549.91
1999-00 776.31 171.08 28.6 705.35
2000-01 965.22 188.91 24.0 876.99
2001-02 993.51 28.29 2.90 902.70
The aggregate advances of the bank has increased from 110.06 crores to 993.51
crores during the period 1992-93 to 2001-02.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 2001 to give a boost to
short term lending. Exposure to various sectors is strictly maintained within the
stipulated ceiling. The system and procedures were 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.
COST OF DEPOSIT OF DHANALAKSHMI BANK LIMITED
(FROM 97-98 TO 01-02)
Table 5.3
YearPercentage of
cost
Increase / Decrease over the
previous year
1997-98 10.28 ---
1998-99 10.35 0.07
1999-00 9.49 (-0.86)
2000-01 8.92 (-0.57)
2001-02 8.53 (-0.39)
The cost of deposit of Dhanalakshmi Bank shown a constant decrease during the
period 1998-99 to 2001-02 except for the year 1998-99 in which there was a slight
increase of .07%.
On analyzing the trend of decrease in the cost of deposit we can see that it is
decreasing at decreasing rate. Such a decreasing trend in the cost of deposit,
achieving 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
efforts.
NET PROFIT OF DHANALAKSHMI BANK LIMITED
(FROM 1994-95 TO 2001-02)
Table 5.4
Amount in crores
YearNet Profit of
the Bank
Increase / Decrease over the previous years figure
% Increase / decrease over the previous years figure
Index with year 94-95 as
base year
1994-95 442 --- --- 100.00
1995-96 472 30 6.78 106.78
1996-97 791 319 67.6 178.96
1997-98 840 49 6.2 190.05
1998-99 387 -453 54.2 87.56
1999-00 1128 741 191.5 255.20
2000-01 677 -451 39.9 153.20
2001-02 1007 330 48.7 277.83
The profitability of the bank has increased from 4.42 crores to 10.07 crores
during the period 1995-96 to 2001-02.this increase was not steady. The banks
profitability was severely affected during the years 1998-99 and 2000-01.One of
the reasons was the continuous fall in the interest and the adverse market
conditions due to which the profit n trading in investment was reduced by 3.18
crores
Voluntary Retirement Scheme (VRS) also added to the burden by an amount
of 2.48 crores. 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 2001-02, but the treasury market contributed appreciably to
the profitability.
STAFF PRODUCTIVITY OF DHANALAKSHMI BANK LIMITED
(FROM 95-96 TO 01-02)
Table 5.5
YearProductivity / Business per
employee
Increase / Decrease over the previous years figure
% Increase / decrease over the previous years figure
Index with year 1994-95 as base year
1994-95 63.0 --- --- 100.00
1995-96 96.6 36.0 54.14 152.38
1996-97 115.00 19.0 19.79 182.54
1997-98 121.00 6.9 3.90 192.06
1998-99 131.17 10.17 8.26 208.21
1999-00 153.66 22.49 17.56 243.90
2000-01 184.28 30.62 19.50 292.51
2001-02 199.24 14.96 5.40 316.25
The staff productivity of the banks has increased from 63 lakhs to 199.24 lakhs
over the period 1994-95 to 2001-02.The bank has recognized that up gradation of
employee skills at all levels is essential to meet competitive challenges.
Accordingly, the Dhanalakshmi bank’s 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 and to offer
professional service to clients well experienced and qualified youngsters were
recruited both from the market and the campus.
CHAPTER VI
ANALYSIS OF NPAs OF
DHANALAKSHMI BANK LMITED
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 loan to its customers it does not lend cash but open an account
in the borrower’s 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 it’s 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 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.
FIGURES RELATING TO NON-PERFORMING ASSETS (GROSS
&NET)AND THEI PERCENTAGE WITH PROVISIONS MADE TOWARDS
THEM.
Table 6.1
Particular
In this study an attempt is made to analyze the non-performing asset level of
Dhanalakshmi bank limited by analyzing the various figures relating to the bank
in the terms of gross non performing asset, net non performing asset, net
advances, provision made towards non performing assets each year which have
been complied from the various years annual report of the bank.
Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Gross NPA N.A. N.A. 9635.89 11756.70 13489.00 14586.00
Net NPA N.A. N.A. 7531.26 8582.33 10167.00 10955.00
Net Advances N.A. N.A. 61080.78 77457.85 89656.08 93953.09
Net NPA to Net Advances
4.51 11.01 12.31 11.08 11.34 11.66
Provision towards NPA
225.00 661.00 629.00 1070.00 3322.00 3631.00
Net profit during the year
791.00 840.00 387.00 1128.00 677.00 1007.00
NET NPA FIGURES OF DHANALAKSHMI BANK LIMITED
(FROM 1998-99 TO 2001-02)
Table-6.2
Particulars:
Chart 6.1
Gross NPA N.A. N.A. 9635.89 11756.70 13489.00 14586.00
Net NPA N.A. N.A. 7531.26 8582.33 10167.00 10955.00
Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
ANALYSIS
The aggregate net non-performing asset of the bank is on an upward trend. But
taking on a yearly basis, not much trend could be identified out of the four years of
data considered for analysis, net non-performing asset, increased at an increasing
rate registering an increase of 14% and 18.5% respectively. But in the third year
there was a decline in the rate of increase, say, and the net non performing assets
increased only by 7%. This can be seen from the chart above.
INTEPRETATION
The movement of NPA seems to have increased at an increasing rate, even though
slight decrease is observed in the rate of growth in some years. So from data
analyzed above, it can be assumed that the bank has taken either stringent steps to
reduce the NPA or it might not have given more advances during that year.
NET ADVANCES OF DHANALAKSHMI BANK LIMITED
(FROM 1998-99 TO 2001-02)
Table-6.3
Particulars:
Chart 6.2
Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Net Advances N.A. N.A. 61080.78 77457.85 89656.08 93953.09
ANALYSIS
The advances of the bank show an upward trend through the period 1998-99 to
2001-02. This can be seen from the data regarding the advances of the bank
during this period. Net advances of the bank increased by 26.8% in the first year,
15.8% in the second year 4.8% in the third year. From this it could be seen that
such increase in net advances is increasing at a decreasing rate over the period
under study.
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 non-performing 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 DHANALAKSHMI BANK
LIMITED AS A PERCENTAG OF NET ADVANCES
(FROM 1996-97 TO 2001-02)
Table-6.4
Particular
Chart 6.3
Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Net NPA to Net Advances
4.51 11.01 12.31 11.08 11.34 11.66
ANALYSIS
To understand the real impact of non-performing assets, the chart is drawn taking
the net non-performing 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) was constantly increasing for the
first three years and showed a sudden decline in 1999-2000 before increasing
again.
INTERPRETATION
Even though there was a sharp increase in the advances given by the bank in the year
1999-2000, it can be seen that Net NPA decreased to a great extent in that year. From
this we can assume that bank must have taken up fruitful efforts to recover money
from the willful defaulters. On the other hand, borrowers may have become incapable
to pay back, possibly because their business did not take off as expected. In this case,
Project evaluation department may have not evaluated the prospects of the project
properly. Alternatively, the entrepreneur / the borrower may not have encashed
potential market opportunities. These aspects may have increased the NPA of the
bank. However, some stringent measures may have played a role in controlling the
NPA in the said period.
NET PROFIT AND PROVISION TOWARDS NON-PERFORMING
ASSETS OF DHANALAKSHMI BANK
LIMITED
(FROM 1996-97 TO 2001-02)
Table-6.5
Particular
Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Provision towards NPA
225.00 661.00 629.00 1070.00 3322.00 3631.00
Net profit during the year
791.00 840.00 387.00 1128.00 677.00 1007.00
Chart 6.4
ANALYSIS
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 Dhanalakshmi Bank Limited relating to
net profit and provision made towards non performing assets, a sharp increase can
be seen in the provision made towards non performing assets in the year 1999-
2000, 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
also from 31-3-2000.
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 Dhanalakshmi bank
limited, 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
MOVEMENT OF NON-PERFORMING ASSETS OF DHANALAKSHMI
BANK
LIMITED FROM
(1998-99 TO 2001-02)
Table-6.6
Particular
Description of the above table:
From the table above it could be seen that even though there is a substantial
increase in the reductions in non-performing assets over the years, the additions are
also on the increasing at a higher rate. As a result, the net result, the recovery is
affected, showing a decline a decline in the trend which is clearly shown in the chart
below, with net recovery during the year taken as a percentage of gross non
performing assets
Year 1998-99 1999-00 2000-01 2001-02
Gross NPA 9635.89 11756.70 13489.00 14586.00
Additions during the year
--- 3970.81 4654.0 5546.0
Reductions during the year
--- 1850.00 2922.0 4449.0
Net recovery during the year
--- 2120.81 1732.00 1097.00
Recovery as a % of gross NPAs
--- 18.04 12.84 7.52
NET RECOVERY OFDHANALAKSHMI BANK LIMITED AS A
PERCENTAGE OF THEIR GROSS NPA
(FROM 1999-00 TO 2001-02)
Table-6.7
Particulars
Chart 6.5
Year 1998-99 1999-00 2000-01 2001-02
Recovery as a % of gross NPAs
--- 18.04 12.84 7.52
ANALYSIS
The net recovery during the year 1999-2000 was 18.04% of gross non performing
assets, while it was 12.84% and 7.52% in the following two years i.e., in 2000-01
and 2001-02 respectively, i.e., the net recovery is declining not only by amount
but also with respect to its contribution as a percentage of gross non performing
assets. This is an alarming situation.
INTERPRETATION
The above analysis reflects that the Bank’s recovery strategy may not be
effective., So we can conclude that bank’s NPA is increased perhaps because of
inefficient recovery strategy. While the strategy for recovery may have been good,
the bank’s recovery in-charge officials may not have taken the necessary
Herculean efforts towards the same in order to save the bank from the current
pathetic situation. Lethargy, or complacency of previous year’s good recovery
may have crept in.
Chapter –VII
RECOVERY PROCEDURE OF DHANALAKSHMI
BANK LIMITED
7.1. 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
7.2. 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
7.2.1 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.
7.2.2 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.
7.3. 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 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.
7.4. 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.
7.4.1 Legal process (advice 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 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.
CHAPTER VIII
FINDINGS AND SUGGESTIONS
8.1. FINDINGS
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 also increasing but at decreasing rate over the period
under study.
• The aggregate net NPAs of the bank are on an upward trend.
• Staff productivity of the bank is increasing. Which indicates efficient
recovery measures but is not reflected in the recovery trend.
• Provision made towards NPAs were on a sharp increase affecting the net
profit adversely.
• The net result, the recovery is affected, showing a decline in the 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.
8.2. SUGGESTION FOR MANAGEMENT OF NPAs
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.
8.2.1. 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 updation 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.
8.2.2.FOLLOW-UP OF DEBT RECOVERY TRIBUNAL (DRT)
CASES .
In order to expedite disposal of high value claims of bank Debt Recovery
Tribunal were set up. The performance of ten DRT’s currently working may also
not be considered satisfactory. Out of Rs.8900 crore transferred to DRT’s by
March 1997,only a sum of Rs.178 crore has been recovered. The report submitted
by the study group set up by the R.B.I. to streamline the functioning of DRT’s is
under consideration by government.
Banks may create special cells at their head offices/zonal offices to monitor
progress in regard to cases filed with/ transferred to DRT’s. Similar cells, assisted
by law officers may be created for follow up of high value suits and execution of
decrees obtained.
8.2.3. COMPROMISE AND ONE TIME SETTLEMENT
Recalcitrant borrowers are coming forward, especially from the areas where
functioning of DRT’s 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.
8.2.4. 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.
8.2.5. 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.
8.2.6. IDENTIFICATION OF PROBLEM LOAN
Tackling NPAs through non legal measures like quick review of potential
NPA account, compromise/OT’s, write offs, rehabilitation, rephasement etc.
would go long way in guiding bank functionaries to effectively deal with problem
loan account.
8.2.7. RECOVERY CAMP
By holding recovery camps and Lok Adalat, counseling the borrowers could
be done.
8.2.8. REHABILITATION
There should be normally no case for rehabilitation and bank’s 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.
8.2.9. 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.
8.2.10. 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.
8.2.11 . 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 innovative products and not through higher service
changes that the public sector banks charges to the customer.
8.2.12. 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.
8.2.13. GENERAL STRAGIES
1. Effective recovery
2. Compromise to improve recovery status of account.
3. Partial write off.
4. Adjustment of collateral security.
5. Pressure on guarantors.
6. Special recovery drive
7. Help from revenue authority.
8. Settlement of claims with DIGGC/ECGC.
9. Officials from controlling offices should visit branches frequently and
should check for any incipient irregularities\sickness.
BIBLIOGRAPHY
a. Analysis of NPAs of commercial banks – Analyst July
2000.
b. V. Venugopal – ‘Prudential norms for banks and NBFC’s
– Revised 5th Edition.
c. Annual reports of Dhanalakshmi Bank Limited.
d. www.rbi.com
e. www.dhanbank.com
f. www.research.com (Personal website of R. Kannan)
g. Report on trend and progress of banking in India 2001-
2002 – RBI
h. Professional Banker
November 2002
September 2002
April 2002
NAME:SIBICHAN.C.J
ADDRESS:
01BUCM:2050 IV SEM
MBA
R.V.I.M
BANGA
LORE
DECLARATION
I, Sibichan .C.J., here by declare that this project work is the
outcome of my efforts and not a replica of any other report/work submitted to any
university or boards.
I also declare the same report has not been submitted to any other
University or Board for the award of any other degree or diploma.
PLACE:
SIBICHAN.C.J
DATE:
ACKNOWLEDGEMENTS
Exchanges of ideas generates a new object to work in a better way. Apart from
the ability labor and time devotion, guidance and co-operation are two pillars for
the success of a project. Whenever a person is helped or co-operated by others,
his heart is bound to pay gratitude to others.
In this chain, I am immensely thankful and convey my sincere gratitude to my
project guide,K.Sethunath. Mgr.Fin,DBL , for his enlightening guidance,
constant inspiration and keen interest shown on me during making of this
project. I deliberate my profound sense of gratitude to him.
I wish to express my gratitude and affectionate respect to my project guide of
R.V.I.M.,Prof.S.Remesh for his counsel and incessant inspiration and for all his
advice and guidance in the completion of the project work.
My special heartful gratitude is due to my director Dr T.V. RAJUand R.Krishna.
for all his encouragement and extended co-operation, which I needed to
complete this report.
My acknowledgement would be incomplete without expressing my sincere
thanks to all the employee who actively helped me in every respect by
providing relevant data and information placing to my project.
THANK YOU ALL
SIBICHAN.C.J.
R.V.I.M
CHAPTERS CONTENTS PAGES
1. EXECUTIVE SUMMARY
2. INTRODUCTION
3. NPA AND PROVISIONING: A CONCEPTUAL
REVIEW
4. NPA AND COMMERCIAL BANKS(2001-2002)
5. DHANALAKSHMI BANK LIMITED:A PROFILE
6. ANALYSIS OF NPA IN DHANALAKSHMI
BANK LIMITED
7 RECOVERYPROCEDUREOF
DHANALAKSHMI BANK LIMITED
8 FIDINGS AND SUGGESTIONS
LIST OF CHARTS
LISTS OF TABLES TABLE TITLE PAGE
NO.3.1 PERIOD FOR WHICH THE ADVANCE HAS BEEN CONSIDERED AS
DOUBTFUL AND PROVISION REQUIREMENT FOR EACH PERIOD
3.2 NATIONALISED BANKS OPERATIONAL STATISTICS
4.1 TRENDS IN NPAs OF PSBs DURING THE POST REFORM PERIOD.
4.2 GROSS AND NET NPA OF SCHEDULED COMMERCIAL BANKS- BANK GROUP WISE
4.3 BANK WISE MOVEMENTS IN NPA
4.4 BANK GROP WISE INCREMENTAL GROSS AND NET NPA
4.5 BANK GROUP WISE INCREMENTAL RATIO OF GROSS AND NET NPA
5.1 THE DEPOSIT OF DHANALAKSHMI BANK LIMITED
5.2 ADVANCES OF DHANALAKSHMI BANK LIMITED
5.3 COST OF DEPOSIT OF DHANALAKSHMI BANK LIMITED
5.4 NET PROFIT OF DHANALLAKSHMI BANK LIMITED
5.5 STAFF PRODUCTIVITY OF DHANALAKSHMI BANK LIMITED
6.1 FIGURES RELATING TO THE NPA AN THEIR PERCENTAGE WITH PROVISION MADE TOWARDSTHEM
6.2 NPA NET FIGURES OF DHANALAKSHMI BANK LIMITED
6.3 NET ADVANCES OF DHANALAKSHMI BANK LIMITED
6.4 NET NPA OF DHANALAKSHMI BANK LIMITED AS A PERCENTAGE OD NET ADVANCES
6.5 NET PROFIT AND PROVISION MADE TOWARDS NPA OF DHANALAKSHMI BANK LIMITED
6.6 MOVEMENT OF NPA OF DHANALAKSHMI BANK LIMITED
6.7 NET RECOVERY OF DHANALAKSHMI BANK LIMITED AS A PERCENTAGE OF THEIR GROSS NPA
Prof. S.REMESH Consultant & MBA Faculty
R.V.I.M S.S.M.R.V. COLLEGE
4th ‘T’ block, Jayanagar, Bangalore - 41
GRAPH NO.
TITLE PAGE NO.
6.1 NET NPA FIGURES OF DHANALAKSHMI LIMITED(FROM 1998-99 TO 2001-02)
6.2 NET ADVANCES OF DHANALAKSHMI LIMITED(FROM 1998-99 TO 2001-02)
6.3 NPA OF DHANALAKSHMI BANK LIMITED AS A
PERCENTAGE OF NET ADVANCES(FROM 1996-97 TO 2001-02)
6.4 NET PROFIT AND PROVISION TOWARDS NPA OF DHANALAKSHMI BANK LIMITED(FROM 1996-97 TO 2001-02)
6.5 NET RECOVERY OF DHANALAKSHMI BANK LIMITED AS A PERCENTAGE OF THEIR GROSS NPA(1999-00 TO 2001-02)
CERTIFICATE OF THE GUIDE
This is to certify that the project work titled ‘AN ANALYSIS OF NPA IN
COMMERCIAL BANKS WITH SPECIAL REFERENECE TO DHANAL;AKSHMI
BANK LIMITED’ is the outcome of bonafide research work carried out personally by
Mr.SIBICHAN.C.J.
Reg.No. 01 BUCM 2050
under my supervision and guidance This has not formed a part of any degree or
diploma of any University / Institution / Board prior to this submission to Bangalore
University as a partial fulfillment of the requirements for the award of MBA degree to
him.
Place : BANGALORE
Prof.R.KrishnaDate : - 08 – ’03
An analysis of NPA
in Commercial Banks
with special reference to Dhanalakshmi Bank Limited
Submitted
in
Partial fulfillment of the requirements
for the award of
“Master of Business Administration”
of
Bangalore University
By
Mr.SIBICHAN.C.J.
Reg.No. 01 BUCM 2050
Under the guidance of
S. REMESH
. Consultant & MBA Faculty R.V.I.M BANGALORE.
2001 – 2003
R.V.INSTITUTE OF MANAGEMENT
S.S.M.R.V. COLLEGE
CA – 17, 36th Cross, 26th Main, 4th ‘T’ block, Jayanagar, Bangalore - 41
IMPLICATIONS OF NARASIMHAM COMMITTEE REPORT
The Narasimhan Committee, as part of the second phase of the banking sector
reforms, has recommended a tightening of the asset classification and provisioning
norms with an objective of moving towards the international norms. It has
recommended that an asset should be classified as doubtful when the borrowers fail to
clear the interest payment in one quarter (90 days) instead of the current practice of
two quarters (180 days) and government guaranteed advances, which have turned
sticky, should be treated as NPAs.
Tightening of these norms will force banks to make additional provisioning. However,
an internal State Bank of India estimate says the impact of the tightening of the NPA
norms on its balance-sheet will be only one percentage point increase in NPAs. SBI's
current NPA level is pegged at about six per cent. SBI along with the Calcutta-based
Allahabad Bank has for the first time made the provisioning (.25 percentage points)
for their standard assets in fiscal 1998.
One significant point to note is that the banking industry traditionally shows
underestimation of NPAs as there is always a difference in perception between the
auditors and the RBI inspectors. For instance, in fiscal 1997, the industry
underestimated its NPAs to Rs 38.62 billion and underprovided to the extent of Rs
14.12 billion.
The Board for Financial Supervision of the RBI has cited the following reasons for
the lower recognition of NPAs and subsequent under-provisioning:
1. Failure to identity an NPA in terms of stipulated guidelines: There have been
instances of 'substandard' assets being classified as 'standard';
2. Wrong classification of an NPA: classifying a 'loss asset' as 'doubtful' or
'substandard' asset; classifying a 'doubtful' asset as a 'substandard' asset.
The BFS has also detected instances where a bank has classified an account of a
borrower as 'substandard' and other accounts of the same borrower as 'standard',
throwing prudential norms to the winds.
"Essentially arising from the wrong classification of NPAs, there was a variation in
the level of loan loss provisioning actually held by the bank and the level required to
be made as per the assessment of the RBI inspectors," the internal document said.
The worst "offender" is the public sector banking industry. Nineteen nationalised
banks along with State Bank of India and its seven associate banks have
underestimated their NPAs by Rs 30.29 billion. While the RBI estimates the PSU
banks' NPAs at Rs 469.07 billion, the actual NPAs acknowledged by these banks are
much lower at Rs 438.77 billion. The difference between the RBI estimates and actual
provisioning in PSU banks is pegged at Rs 10.74 billion in March 1997.
In percentage terms, however, nine new generation private sector banks showed the
maximum amount of ''NPA amouflaging" and under provisioning. While the RBI
estimated the NPAs of new private banks at Rs 3.28 billion, the actual figure shown
by these banks is only Rs 2.05 billion.
Similarly, the difference between the RBI estimate and the actual provisioning is Rs
968.5 million. While the RBI inspection teams put the right provisioning requirement
at Rs 1.20 billion, the new private banks made provision of only Rs 234.5 million.
In contrast, the old private sector banks underestimate their NPAs by a meagre Rs
6.52 billion. Nearly 26 old private sector banks registered NPAs to the tune of Rs
21.38 billion in March 1997 while the RBI felt the actual NPAs should have been
pegged at Rs 27.90 billion.
The difference between the RBI estimates and actual provisioning is a paltry Rs 1.61
billion. Old private sector banks provided for Rs 4.93 billion in March 1996 while the
RBI inspection teams opined the provisioning needed to be at Rs 6.55 billion.
As a group, 37 foreign banks underestimated their NPAs by Rs 875.5 million and
provisioning by Rs 797.6 million. The RBI estimated NPAs of foreign banks at Rs
13.55 billion while the actual NPAs shown by these banks were to the tune of Rs
12.68 billion. Similarly, foreign banks provided for Rs 4.02 billion while the RBI
inspection teams estimated the right amount of provisioning at Rs 4.82 billion.