A Study Of Non-Performing asset Management of Central Bank of India Chapter 1 INTRODUCTION 1.1 What Is Bank Finance is the life blood of trade commerce & industry. Now a days banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking. The term bank id derived From the old Italian world BANCA from a French world BANQUE both mean a bench a money exchange table. In olden days, European money lenders or money changes used to display coins of different countries in big heaps on benches or table for the purpose of lending or exchanging a bank is financial institution which deals with de[posit & advances & other related services. It receives money from those who want to save in the from those who of deposit & it lends money to those who need it. Also In simple words we can say that bank is financial institution that undertakes the banking activity. It accept deposit &then lends the same to earn certain profit activities, either directed by loaning of indirectly through. CAPITALMARKET: - A banks links together customers that have capital deficits & customers with capital surplus. Due the their influential status and upon national economies, banks are highly regulated in most countries most nations have institutionalised a P. R. Patil College of Engineering & Technology, Amravati Page 1
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A Study Of Non-Performing asset Management of Central Bank of India
Chapter 1
INTRODUCTION
1.1 What Is Bank
Finance is the life blood of trade commerce & industry. Now a days banking
sector acts as the backbone of modern business. Development of any country
mainly depends upon the banking.
The term bank id derived From the old Italian world BANCA from a
French world BANQUE both mean a bench a money exchange table. In olden
days, European money lenders or money changes used to display coins of
different countries in big heaps on benches or table for the purpose of lending
or exchanging a bank is financial institution which deals with de[posit &
advances & other related services. It receives money from those who want to
save in the from those who of deposit & it lends money to those who need it.
Also In simple words we can say that bank is financial institution that
undertakes the banking activity. It accept deposit &then lends the same to earn
certain profit activities, either directed by loaning of indirectly through.
CAPITALMARKET: - A banks links together customers that have capital
deficits & customers with capital surplus.
Due the their influential status and upon national economies, banks are highly
regulated in most countries most nations have institutionalised a system known
as fractional reserve bankingin which banks hold only a small reserve of the
funds deposited & lend how the rest for profit. They are generally subject to
minimum capital requirements bujed on an international set of capital standards
known as the Basel accords banking in its modern sense evolved in the 14 th
century in rich
cities of renaissance Italy but in many ways was q constitution of ideas and
concept of credit and lending that had its rootless in the anciet histbanking
number of banking dynasties have played central role over many centuries.
History of banking the origins of modern banking early renaissance Italy,
to the rich cities in the north like Florence Lucca, Siena, Venice & genoas. The
Burdick & Peruzzi families dominated banking in 14TH century Florence
In essence a bank is designed to ba a safe place to keep your money. If you
keep it at home instead, there is a greater chance that it is going to be lost or
stolen. But that is just how banking begins. Once the bank has lots of money,
it can make loans to people & earn interest. I can also pay interest to deposits.
I can create new & more convenient ways to pay for things, such as by check
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money order, bank wire, withdrawal/deposit or credit card. It can exchange
one from of currency for onther, making international commerce or travel
easier banks are involved in various forms of investment such as the stock
market & have special retirement savings accounts.. With tax deferment
features banks therefore become a part of all aspects of fining planning &
management.
Definition of bank :-
Oxford dictionary definers a bank as “establishment for
custody of money. Which it pays out on customers order.
1.2 Features of bank
1) Dealing in money :- Bank is a financial institution which deals people’s
money i.e. money depositors.
2) Individual/Firms/Company :- A bank may be a person firms or a company.
A banking company means a company which is business of banking.
3) Acceptance of deposit :- A bank accepts money from the people in the form
of deposits which are usually repayable on demand or after the expiry of fixed
period. It gives safety to the depositors’ of its customers. It also act as a
custodian of funds of its customers.
4) Giving advances:-A bank lends out money in the form of loan to those who
require it for different purpose.
5) Payment & withdrawal :- A bank provides early payment & withdrawal
facility to its customers in the form of cheques & deposit. It also brings bank
money in circulation. This money is in the form of cheques, drafts etc.
6) Agency & utility services :- A bank provides various banking facilities to its
customers. They include generally utility services & agency services.
7) Profit & service orientation :- A bank is a profit seeing institution having
service oriented approach.
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8) Ever increasing functions :- Banking is an evolutionary concept there is
continuous expansion & diversification as regards the functions, services &
activities of a bank.
9) Connecting bank :- a bank act as a connecting link between borrowers &
lenders of money. Banks collect money from those who have surplus money &
give the same to those who are in need of money’.
10) Banking business :- A banks main activity should be to do business of
banking which should not be subsidiary to any other business.
11) Name identify :- A bank should always add the world bank to do its mane to
enable people to know that it is at bank & that it is dealing in money.
1.3 FUNCTION OF BANK
The Main functions of bank are accepting depots from the public & advancing
them loan However besides these functions there are many other functions
which these banks perform . All these functions can be divider under the
following head
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1) Accepting deposit
2) Giving loans
3) Over-draft
4) Discounting bill of exchange
5) Investment of funds
6) Agency functions
7) Miscellaneous function.
1) Accepting deposit :- The most important functions of bank is to accept
deposits from the public, various section of society, according to their needs &
economic condition, deposit their savings with the banks.
For example :- fixed& low income group people deposit their savings in
small amounts from the point of view of security, income & saving promotion.
On the other hand, traders & businessmen deposit their savings in the banks for
the convince of payment.
Therefore keeping the needs & interest of various section of society. Banks
formulate various deposit schemes
I. Fixed deposit :- These are the deposit which are deposited for a define period
of time. This period is generally not less than one year and, therefore, these are
called as long term deposit. These deposit cannot be demanded or withdrawn
by the depositors at any time they want.
Such deposit accounts are highly useful for traders
& big business firms because they have to make payments and accept
payments many time in day.
Fixed deposit :-These are the deposit its which are deposited for a definite period
of time. This period is generally not less than oneyear& therefore, these
deposit cannot be stipulated time & therefore these are also called as time
deposits.
The se deposit generally carry a higher rate of interest because banks can use
these deposit for a definite time without having the fear of being withdrawn.
II. Saving deposit :- In such deposit money upto a certain limit can be deposited
&withdrawn once or twice in a week, on such deposit, the rate of interest in
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very less. As is evident from the name of such deposits their main objective is
to mobilise small savings in the form of deposits. These deposits are generally
done by salaried people & the people who have fixed & less income.
1) Giving Loans :-The second important functions of banks is to advance loans to
its customers. Banks charge intrest from the borrowers and this is the main
source of their income. Banks advance loans not only on the basic of the
deposit of the public rather they also advance loan on the basis of the
depositing the money in the accounts of borrowers. In other words. They
create loan out of deposit and deposit out of loan. These is called as credit
creation by commercial banks. Modern banks give mostly secured loans for
productive purpose. In other eords, at the time of advancing loans , they
demand proper security or collateral is equal to the amount of loan. This is
done mainly with a view to recover the loan money by selling the security in
the event of non-refund of the loan.
At times, banks give loan on the basis of personal security
also. Therfore such loan are called as unsecured loan. Banks generally give a
following types of loan & advances.
a) Cash credit ;- In this type of credit scheme, banks advance loans to its
customers on the basis of bonds, inventories & other approved securities.
Under this scheme, banks enter into an agreement which its customers to which
money can be withdrawn many times during year. Under this set up banks
open accounts of their customers & deposit the loan money. With these type of
loan, credit is created.
b) Demand loans :- These are such loans that can be recycled on demand by the
banks. The entire loan amount is paid in lump-sum by crediting is to the loan
account of the borrowers, & thus enter loan become chargeable to interest with
immediate effect.
c) Short term loan :- These loans may be given as personal loans, loans to
finance working capital or as priority sector advance. These are made again
some security and entire loan amount is transfer to the loan account of the
borrower.
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2) Over draft:- Banks advance loan to its customers up to a certain in amount
through overdraft, if there are knoe deposit in the current account for these
bank demand security from the customer & harge very high rate of interes
3) Discounting of bills of exchange: - This is the most prevent & important
method of advancing loans to the traders for short term purpose. Under this
system, banks advance loan to the traders & business firms by discounting their
bills. In these way. Businessmen get loans on the basis of their bills of
exchange before the time their maturity.
4) Investment of funds: - The bank invests their surplus fund in the three type of
security.
Government securities other approved securities, other securities. Government
securities include both , central & state government such as treasury bills
national saving certificate etc.
Other securities include security of state associated bodies like electricity
bords, housing boards, debenture of land development banks units of UTI,
shares of Regional rural bonds etc.
5) Agency functions :- Bank function in the form of agents and representative of
their customers. Customers give their consent for performance such a
functions. The important functions of these type are as follow.
Bank collect cheques , drafts bills of exchange and give a dividends of the
shares for their customers.
Banks make a payment for their clients and at a time accept the bills of
exchange. Of their customers for which payment is made at the fixed time.
Banks pay insurance premium of their customers. Besides this , they also
deposit instalment, income-tax –interest .
Bank purchase & sale securities, shares and debenture on behalf of their
customers.
Bank arrange to send money from one place to another for the convince of their
customer
1.4 Meaning of NPA
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The three letter NPA strike terror in banking sector and business circle today
NPA
Of Non-Performing Asset. The dreaded NPA rule says that, when
interest or other due to bank. Remain unpaid for more than 90 days the entire
bank loan automatically turn as a non-performing Asset the recovery of loan
always a problem for bank and financial institution to overcome these first We
need to think is it possible to avoid NPA.
NPAs are an inevitable on the banking industry. Banks need to monitor
standards asset. To arrest any Account becoming an NPA. Today the success of
bank depends upon the methods of managing NPAs and keeping them with in a
to lance level.
NPA is non-performing asset is defined as a credit facility in respect of which
the interest or installment of Principal has remained past due for specified.
Non-Performing Assets, also called NON-Performing loans, are loans made by
a bank or finance company.
On which repayment or interest payments are not being made on time. A loan
is an asset for a bank as the interest payments and the repayment of the
principal create stream of each flows. It is form the interest payments than a
bank makes its profits. A high level of Non-Performing Assets compared to
similar lenders may be a sign of problems, as may a sudden increase. How ever
this needs to be looked at in the context of the type of lending being done
needs to be looked at in the context of the and type of lending being done.
Some banks lend to higher risk customers than others and therefore tend to
have a higher risk customers than others and therefore tend to have a higher
interest rates, increasing spreads.
A mortgage lenders will almost certainly have lower non-performing assets
than a credit card sealift but the latter will have higher spreads and may well
make a bigger profit on the same assets,even if it eventually has to write off
Non-performing loans
Definition:-
An asset is classified as non-performing asset (NPAs) if dues in the form of
principal and interest are not paid by the borrower for a period of 180 days.
However with effects from March 2004 , default status would be given to a
borrower if dues are not paid for 90 days. If any advance or credit facilities
granted by bank to a borrower become non-performing, then the bank will have
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to treat all the advance/credit facilities granted to that borrower as non-
performing without having any granted to the fact that there still exist certain
advances/credit facilities having performing status.
For a bank or a lending institution, an NPA or bad debt is usually a loan
that is not producing income. Earlier it was largely applicable to businesses.
But things have changed with banks widely extending consumer loans (home ,
car, personal and education, among others) and strict asset classification norms.
If a borrower misses paying his equated monthly installment (EMI) for 90
days, the loan is considered bad, or an NPA are a sign of bad financial health.
This has wide-ranging ramification for a bank, especially in the stock market
and money market. So, as soon as a debt goes bad, the banks want it either
made better or taken out of their books.
To begin with it seems appropriate to define Non-performing advances,
popularly called ”NPA”
A Non Performing advances is defined as
“An advance where payment of interst or repayment of interest or
repayment of installment of principal (in case of term loans) or both remains
unpaid for of two quarters or more. An amount under any of the credit
facilities is to be treated as ‘past due’ when it is remains unpaid for 30 days
beyond due date.”
As per recommendation of narasimhan committee, it has been decided that
credit facilities granted by banks will be classified in to ‘performing’ and ‘Non
performing asset’.
“NPA is a loan (whether term loan, cash credit, overdraft, or bills discounted)
which is in default for more than threemonths.In case of such
assets, the income should be shown only on receipt and not shown in the banks
book on a due basis.”
.NPAs have become an issue for banks and financial institutions in India:
To Start with, Performance in terms of profitability is a benchmark for any
business enterprise including the banking industry. However, increasing NPAs
have a direct impact on banks profitability as legally banks are not allowed to
book income on such assets as per the Reserve bank of India (RBI) guidelines.
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Also, with increasing deposits made by the public in the banking system, the
banking industry cannot afford defaults by borrower since NPAs affects the
repayment capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates excess liquidity
in the system through various rate cuts and banks fail to utilize this benefit to
its advantage due to the fear of burgeoning non-performing assets.
The ratio of Non-performing assets to advantage reflects the quality of a
bank’s loan portfolio.
A distinction is often made between ‘Gross NPA’ and ‘NET NPA’. NET
NPA, which is obtained by deducting from gross NPA items like interest due
but not recovered, part payment received and kept in suspense account, etc, is
internationally accepted as the more relevant indicator of financial health of the
banks.
It is the level of non-performing assets which, to a grant extent, different
between a good and bad banks. The subject of high NPA levels in banks has
also been frequently raised in various areas.
1.5 IMPORTANCE OF NON PERFORMING ASSETS:
The one major cause for the current weakened state of banking sector is the
level and volume of NPAs. The problem has not been looked at in its proper
perspective. Description such as decreased portfolio and figures running into
thousands of cores have all led to treating the problem as a major one-time
aberration requiring emergency treatment. The casual explanation - politica
interface, willful defaults, targeted lending and even fraudulent behavior by
banks – allowed them selves to be pressurized into lowering their guard in the
one area of business that is their bread and butter of existence-risk assessment.
Lending to priority medium and small companies is likely to be the bank’s
main activity in the time to come. The bigger, established corporations would
have the wide world to choose from and to meet their requirement. The shift to
medium-sized borrowers and slightly riskier lending will form prime activity of
all banks. The problem will then, be to ensure that such lending is justified on
a commercial criterion.
The high level of NPAs in Indian banking sector is the result of
application of prudential norms of accounting from 1992 onwards. The
introduction of CAC is subject to the NPA level being brought down to less
than 5% from the present level if around 16%. The government of India
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already initiated several steps to help banks in reducing their NPAs. Several of
these NPAs are still outstanding in the books of accounts because they are not
supported by adequate provisions.
Introduction of prudential norms on income, recognition, asset
classification and provisions during 1992-93 and other steps initiated apart
from bringing in transparency in the loan portfolio of banking industry have
significantly contributed towards improvement of the pre-sanction appraised
and post sanction supervision which is reflected in lowering of the level of
fresh accretion of NPAs of banks after 1992.
The researcher has undertaken the study of the fast developing
CENTRAL bank with reference to it’s and review, it is necessary to understand
financial position of bank. It presents a picture of movement of NPA
Chapter: 2
CONCEPT OF THE STUDY
2.1 Introduction
The concept of non-performing asset refers to which ceases to generate
income. In case of bank, all loan and advances are its assets, which can be
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classified into performing and non-performing assets, which can be classified
into performing and non-performing assets. Rbi has advises the banks not to
charge interest on those loans and advance classified as non-performing asset.
NPA is short form of “Non-Performing Asset”. The dreated NPA rule say
simply this: when Intrest or other due to a bank remains unpaid for than 90
days. The entire bank loan automatically turns non performing assets. The
recovery of the loan has always been problem for the bank and financial
institutes to come out to this first we need problem for the bank and financial
institutes
To come out of this first we need to things is it possible to avoid NPA no
cannot be then is to look back after the factor responsible for it and managing
those factors.
Over a long period of time the performance of urban co-operative banks
(UCBS) has been deteriorating due to non-recovery of interest and installment
on loan portfolio.
After the deregulation of Indian economy the government has announced
a number of reform measures on the basis of recommendations of Narsimham
committee to make banking sector economically viable and competitively
strong.
The RBI introduced the concept of NPA and certain norms with effect
from 1st April 1992.
These norms were introduced not only to know the true financial picture
in the financial statements but also to take corrective action for improving the
performing in the recent years.
Mounting NPAs are adversely affecting the profitability, liquidity and solvency
position of banking sector. Hence in the context of global competition it is a
paramount task for the banks to manage their NPAs more efficiently so that
they can change their character from non performing assets to performing
assets.
With a view to moving towards international best practices and to ensure
grater transparency, it has been decided to adopt the ’90 days overdue’ norm
for identification of NPAs’ from the year ending March 31, 2004, a non-
performing asset (NPA) shell be a loan or an advance where;
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1. Interest and/or installment of principal remain overdue for a period of more
than 90 days in respect of a Term Loan
2. The account remains ‘out of order’ for a period of more than 90 days, in
respect of an overdraft / cash credit(OD/CC),
3. The bill remains overdue for due harvest season but for a period not exceeding
two half years in the case of an advance granted for agriculture purpose, and
4. Interest and/or installment of principal remains overdue for two harvest season
but for a period not exceeding two half years in the case of an advances granted
purpose,
.2.2Classification Of Assets:
Assets can be classified as-
1. Standard Assets :-
A standard asset is an asset, which is not a non-performing asset.
A standard asset is one, which does not carry more that normal risk attached to
the business. Such an asset is not a non-performing asset and is performing
advance or a standard asset.
2. sub Standard asset:-
A sub standard asset is one which has remained a NPA for a
period less than or equal to 18 months.
3. Doubtful assets:-
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Assets
Standard assets Sub-standard assets Doubtful assets Loss assets
A Study Of Non-Performing asset Management of Central Bank of India
An asset is classified as doubtful asset if it has remained an
NPA for a period exceeding 18 months.
4. Loss Assets
A loss asset is one where loss has been identified by the bank
or the internal or the external auditor or the RBI inspection but the amount has
not been written off wholly.
2.3 Provisions Of Norms
In order to narrow down the divergences and ensure adequate provisioning by
bank’s it suggested that a bank’s statutory auditors, if they so desire, could
have a dialogue with RBI’s Regional Office/ inspectors who carried out the
bank’s inspection during the previous year with regard to the accounts
contributing to the difference.
Pursuant to this, offices were advised to forward a list of individual advances,
where the variance in the provisioning between the RBI and the bank is above
cut off levels so that the bank and the statutory auditors take into account
assessment of the RBI while making provisions for loan loss, etc
The primary responsibility for making adequate provision for any diminution
in the value of loan assets, investment or other assets is that of the bank
managements and the statuary auditors. assessment made by the statutory
auditors in taking a decision In regard to making adequate and necessary
provisions in terms of prudential guidelines.
In conformity with the prudential norms, provision should be made on the non-
performing asset on the basis of classification of assets into prescribed an
account becoming doubtful of recovery its recognition as such the realization
of the security and the erosion over time in the value of security charged to the
bank, the banks should make provision against sub-standard assets, doubtful
assets and loss assets as below:
Loss assets:
A) The entire assets should written off after necessary from the competent
authority and as per the provision of the co-operative societies Act/Rules. If
the assets are permitted to remain in the books for any reason, 100 % of the
outstanding should be provided for.
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B) In repent of an asset identified as a loss asset, full provision at 100 % should be
made if the expected salvage value of the security is negliable.
Doubtful assets:
100% of the extent to which the advance is not covered by the realizable value
of the security to which the bank has a valid recourse and the realizable value
estimated on a realistic basis.
2.4 Provisioning Norms against NPAs:-
In order to improve the quality of assets and robust resilience of
banks to handle the future event of downturn and crisis, the provision norms
have been further tightened. Accordingly, in additional to the existing
prudential guidleines to segregate the surplus provisions into a pool known as
‘counter cyclical buffer’ under the provision coverage ratio (PCR) to be
reached to 70% for non performing assets(NPAs) as per on dated sep 30, 2010,
RBI has now proposed to enhance the provisioning requirement on certain
categories of NPAs. As a result it can be observed that there is substantial rise
in the quantum of provision to be made against the NPAs. The total amount of
additional provision will have a bearing on the profit ability the banks. As such
any enhancement in the provision gives rise to different outcomes.
It will improve the quality of assets because logically banks will strengthen the
surveillance and monitoring mechanism to keep their provision levels low to
insure that their profit ability is not hurt. At the same time it will improve the
capacity of banks to avoid volatility therefore need to look at in crisis lending
to better stability ob banking sector banks therefore need to look at in form the
long term sustainability, threw in the short term, it make cut profit pie.
A broader angle of interpretation and a proactive measure to
streamline credit appraisal and stronger monitoring. Mechanism can improve a
sit quality to eventually cut provision. Banks may have to closely follower
health of their borrowers and keep a watch on the movement of their credit
ratings. The measure speaks high of RBI concern to groom banks to take on
higher volume with better credit discipline as banks move toward higher
growth trajectory.
2.5 Income Recognition –Policy
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The policy of income recognition has to be objective and based on the record
of recovery. Income from non-performing assets (NPA) is not recognized on
accrual bases but is booked as income only when it is actually received.
Therefore, banks should not take to income account interest on non-performing
assets on accrual basis.
However, interest on advance against term deposit, NSCs, IVPs, KVPs and life
policies may be taken to income account on the due date, provided adequate
margin is available in the accounts.
Fees and commission earned by the banks as a result of re-negotiation or
rescheduling of outstanding debts should be recognized on the accrual basis
over the period of time covered by the re-negotiation or rescheduled extension
of credit.
If government guaranteed advanced become ‘over due’ and thereby NPA the
entrust on such advances should not be taken to income account unless the
interest has been realized.
Reversal of income on accounts becoming NPAs:
If any advanced including bills purchased and discounted become NPA as at
the close of any year, interest accrued and credited to income account in the
corresponding pervious year, should be reversed or provided for if the same is
not realized. This will apply to government. Guaranteed accounts also.
If interest income from asset in respect of a borrower becomes subject to non
accrual, fees, commission and similar income with respect to sane borrower
that have been accrued should ceased to accrue in the current period and should
be reversed or provided for if the same is not realizes. This will apply to govt.
guaranteed accounts also.
Banks undertaking equipment lasing should follow prudential accounting
standards. Lease rentals comprise two elements-a finance charge (i.e. interest
charge) and towards recovery of the cost of the asset.
The interest component alone should be taken to income account, before the
asset become NPA, and remained unrealized should be reversed or provided in
the current accounting period.
2.6 Effect on profitability
The NPA problem is on of the foremost formidable problem that have
shaken the entire banking industry. “The high level of NPA’ in banks and
financial institution has been a matter of grave concern to the public as bank
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credit is the catalyst to the economic growth of the country and any bottleneck
in the smooth flow of credit, one cause for which is the mounting NPA’s is
bound to create adverse repercussions in the economy.
“The efficiency of a bank is not always reflected only by the size of its balance
sheet but by the level of return on its assets. NPAs do not generate interests
provisions for such for such NPAs from their current profits.
1. Effects on profitability
a) They erode current profits through provisioning requirement.
b) They result in reduced interest income. They require higher provisioning.
c) Requirement affecting profits and capacity to increase good quality risk assets
in future.
d) They limit recycling of funds.
e) Bank has to spend for making efforts for recovery such as expenses on notice;
follw-up and filing of civil suit & because of this expenses profit get reduced.
f) This decline in profit has a bearings on variable like the capital to risk-
weighted asset ratio (CRAR) with of civil suit& because of this expenses profit
get reduced.
g) Bank to raise Tier-I capital This is because Tier-I capital consist of statutory
and capital reserve that are essential built from profit.
h) In the face of declining profit, in order to maintain the stipulated CRAR, the
bank may have to raise Tier-2 capitals through bond issue the interest cost then
will be higher.
2. Narrow banking
a) Narrow banking means only operation with the existing assets base & not
expanding
b) The business. If NPs are high RBI may ask a bank to do only narrow banking.
c) RBI may impose adverse restriction on business of bank if NPA percentage is
very
d) high. For Example-Restriction on opening new branches, Expansion of
international operation may be curtain
3. Effects on efficiency
a) When NPAs are very high all productivity ration of the bank such as ROI
(Return On Investment) Productivity per employee and profitability ration are
adversely affected.
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b) The most important business implication of the NPAs is that it lead to the
credit risk management assuming priority over other aspects of bank’s
functioning. The bank’s whole machinery would thus be pre-occupied with
recovery procedure rather that concentrating on expanding business.
c) Implication can be psychological like ‘play safe’ attitude and risk aversion,
lower moral and disinclination to take decision at all level of staff in the bank.
Factors affecting rise in NPAs:
The banking sector has been facing the serious problem of
the rising NPAs. But the problem of NPAs is more in public sector banks
when compared to private sector banks and foreign banks. The NPAs in PSB
are growing due to external as well as internal factors.
1. External factor
The government has set of number of recovery tribunals,
which works for recovery of loan and advances. Due to their negligence and
ineffectiveness in their profitability and liquidity.
Willful Defaults
There are borrowers who are able to payback loans but intentionally
withdrawing it. These groups of people should be identified and proper
measure.
Should be taken in order to get back the money extended to them as advances
and laons.
Natural Calamities
This is the measure factor, which is creating alarming rise in NPAs of
the PSBs. Every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank has to
make large amount of provisions in order to compensate those loans, hence end
up the fiscal with a reduced profit.
Mainly ours farmers depends on rain fall for cropping. Due to irregularities of
rain fall the farmers are not to achieve the production level thus they are not
repaying the loans.
Industrial sickness
Improper project handling, ineffective management, lack of adequate
resources, lack of advance technology, day to day changing government
policies give birth to industrial sickness. Hence the banks that finance those
industries ultimately end up with a low recovery of their profit and liquidity.
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A Study Of Non-Performing asset Management of Central Bank of India
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts
production which ultimately piles up their product thus making them unable to
pay back the money borrow to operate these activities. The banks recover the
amount by selling of their assets, which covers a minimum label. Thus.
INTERNAL FACTORS the banks record the non recovered part as NPAs and
has to make provision for it.
Change on Government policies
With every new govt. Banking sector gets new policies for its operation thus
it has to cope with the changing principles and policies for the regulation of the
rising of NPAs
4. Internal factor
Defective lending process
There are three cardinal principles of bank lending that have been followed by
commercial banks since long.
I. Principles of safety
II. Principles of liquidity
III. Principles of profit ability
II.7 Principles of safety
By safety means that the borrower is in a position to repay the loan
both principles an interest. The repay of loan depends upon the
borrowers.
a. Capacity to pay
b. Willingness to pay
a) Capacity to pay depend upon:
1) Tangible assets
2) Success in business
Willingness to pay depend on:
1) Character
2) Honest
3) Reputation of borrower
The banker should, therefore take out must care in ensuring that the enterprise
or business for which a loan is sought is a sound one and the borrower is
capable of carrying it out successfully he should be a person of integrity and
good character.
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A Study Of Non-Performing asset Management of Central Bank of India
Inappropriate Technology
Due to in appropriate technology and management information system,
market driven decision real time can’t be taken. MIS and financial accounting
system is not implemented in the bank which leads to poor credit collection,
thus NPA all the branches of the bank should be computerized.
Analyze the balance sheet:
True picture of business will be revealed on analysis of profit/loss/a/c and
balance sheet.
Purpose of the loan
When bankers give loan, the should analyze the purpose to the loan. To
ensure safety and liquidity, banks should grant loan for productive purpose
only should analyses the profitability, viability, long term ace tabooed of the
project while financing.
Poor credit appraisal system:
Poor credit appraisal is another factor for the fire in NPAs. Due to poor
credit appraisal; the bank gives advances to those who are not able to repay
back. They should use good credit appraisal to decrease the NPAs.
Managerial defectiveness:
The banker should always select the borrower very carefully and should
take tangible assets as security to safe guard its interest. When accepting
securities banks should consider the
1. Marketability
2. Accepting
3. Safety
4. Transferability
The Banker should follow the principal of diversification of risk based on
the famous maxim 2 “do not keep all the eggs in one basket” it means that the
banker should not grant advances to a few big farms only or to concentrate then
in few industries or in a few cities.
If a few big customer meets misfortune or certain traders or industries affected
adversely, the overall position of the bank will not be affected.
Re-loaning process
Non remittance of recoveries to higher financing agencies and re loaning of
the same have already affected the smooth operation of the credit cycle. Due to
re-loaning to the defaulters the NPA is increasing day by day.
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A Study Of Non-Performing asset Management of Central Bank of India
2.8 Implication of NPA
1. The most important of the NPA is that a bank neither credit the income nor
debit to loss, unless either recovered or identified as loss.
2. If a borrower has multiple accounts, all accounts would be considered NPA if
one account becomes NPA.
3. The securitization and Reconstruction of financial Assets and Enforcement of
Security Interest Ordinance, 2002 (“the ordinance) was promulgated on
21.06.2002 and became effective immediately. The far-reaching consequences
can be one hand, the Banks and Financial Institutions will find the said
Ordinance quite handy. On the other hand, the opportunity to defend will come
to defaulters at very high cost. The purpose of the Ordinance is to check the
menace of Non-performing Assets (“the NPAs) that have been increasing by
leaps and bounds. The Ordinance was badly needed to Project the interest of
the Banks and Financial Institutions.
Process of NPA Recovery:-
Every bank in order to recover the dues has a recovery process set for them.
The usual legal recovery process adopted by the bank in the following nature.
Legal Process of Recovery
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Personal visit to the Borrower
Notice to Guarantors
Authority Letter to lawyer
Demanding amount through notice
Receiving amount from client
Debit note for expenses
Not receiving amount
File case in court
A Study Of Non-Performing asset Management of Central Bank of India
During the project work I came across with cases of compromising proposals.
Thus these cases are taken in order to the practice feel of the Banks
compromises offer and recovery process adopted thereaft
Chapter3
BANK PROFILE
3.1 Introduction of central bank of India
Central Bank of India
Typ
e
BS
E&NSE:CEN
TRALBK
Ind
ustr
y
Financial
Commercial
banks
Fou
nde
d
21 December
1911; 102
years ago
Hea
dqu
arte
rs
Mumbai,
India
Key
peo
Shri. Rajeev
Rishi,
P. R. Patil College of Engineering & Technology, Amravati Page 21