final introduction to non

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CERTIFICATE

This is to certify that the project titled Study & Management of Non performing assets

Bank of Maharashtra (Kamothe Branch ) is successfully done by ROHIT

MAHADEV KOLI In partial fulfilment of the degree of Masters in Management Studies

Finance specialization for the academic year 2013-2014

The work has not been copied from anywhere else and has not been submitted to any

other University/Institute for an award of any degree/diploma.

Date:

Place: Rasayani

Project Guide Director


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DECLARATION

I am ROHIT MAHADEV KOLI, currently pursuing Master in Management Studies from

Pillais HOC Institute of Management Studies and Research, Rasayni Campus.

I hereby want to declare that I have completed the project on STUDY & MANAGEMENT

NON-PERFORMING ASSETS With Special Reference to Bank of

Maharashtra(KAMOTHE BRANCH) in the acadmic year 2012-2013. The information

submitted is genuine and practical to the best of our knowledge.

I also declare that this project report is the result of my own effort and has not been submitted

to

any other institute or University.

ROHIT M. KOLI

Roll no- (MMS Part 1)


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ACKNOWLEDGEMENT

I am going to make a modest attempt to thank everybody who helped me doing this project

directly or indirectly.

My sincere thanks to Mrs.Sangeeta Desai (Branch Manager ), Mrs.Dumani Maru

( Dy. Manager ) for guiding me and giving me a support in carrying this project. And also

my

project guide of PHIMSRMr. Mallya sir, for giving his support.

I would also like to give thanks to the whole organization as they gave me opportunity to

conduct this project and also extending hours in doing this project.

Lastly I would like to give thanks to all my friends who helped and took initiative in my

project.

Thanking You,

ROHIT M. KOLI


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EXECUTIVE SUMMARY

Report is prepared on the topic Study & Management of Non-performing Assets at Bank

of Maharashtra. The purpose behind preparing this report is to study the present situation of

NPAs and to provide suggestions to reduce it. Initially the information was collected about

the topic from the organization.

The concept of Non-Performing Assets was introduced for the first time in the Narasimham

Committee report that was tabled in parliament on Dec.17 1991.The Committee Studied the

prevailing financial system, identified its short comings and weakness and made various

recommendations with regard to non-performing assets, their identification, disclosure and

the extent of provisioning same. The need was felt because the prevalent accounting and

disclosure practices did not always reflect the true state of affairs of banks and Financial

Institutions.

NPA is an important concept in the Banking industry. The financially bank has less NPA.

The concept of NPA can be understood by the rules and regulations provided by the RBI

which are studied in while preparing this project. The banks have to follow RBI norms and

guidelines being published by RBI in this regard constantly.

In the theoretical aspects some of the General reasons of assets becoming NPAs, Causes of

NPAs, Some of the indicators suggesting slippages to NPAs and General methods of

management of NPAs has been given in the project.


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TABLE OF CONTENT

Chapter 1

I. IntroductionII. Objective of the study

III. Scope of the projectIV. Research MethodologyV. Limitation of the project

Chapter 2

I. Company ProfileII. Organisation Chart

III. Benefits given by companyChapter 3

I. Theoratical BackgroundII. Data Analysis and Interpretations

Chapter 4

I. FindingsII. Suggestions / Recommendations

III. Conclusion

BIBILIOGRAHY


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CHAPTER I

INTRODUCTION TO NON-PERFORMING ASSETS

A Man without money is like a bird without wings, the Rumanian proverb insists the

importance of the money. A bank is an establishment, which deals with money. The basic

functions of commercial banks are the accepting of all kinds of deposits and lending of

money. In general there are several challenges confronting the commercial banks in its day-

to-day operations. The main challenges facing the commercial banks is the disbursement of

funds in quality assets (Loans and Advances) or other wise it leads to Non-performing assets.

Since the dawn of independence, Indian financial sector in general and banking in

particular has leaped giant strides into a systematized growth environment. Indian Banks

have consolidated their growth year after year. Measures like setting up of Reserve Bank of

India as the regulator, bank nationalization and other reforms have worked as catalyst in the

development drive. There was always a need to have regulated, uniform and prudent

accounting policies for the banks with special reference to the credit risk involved in lending

activities so that the significant growth in the business volumes of banks was ably supported

by a well set regulatory norms.

As per the traditional frame of mind, banks tended to lean towards security-oriented

approach in assessment of credit proposal as also subsequent classification of the assets in

their books. Overemphasizing the security interest and other charges debited to a borrowers

account was taken into income on the basis of accrual irrespective of the fact whether such

interest and charges accrued earlier were actually realized or not. Such income was taken to

Profit & Loss Account and dividend was declared on the basis of profits so arrived at. Loans

were treated as realizable without actually looking into the record of recovery. All these

resulted in overstating of profit and distorted depiction of the state of affairs of the banks in

their books of accounts.


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The business of banking eventually is mobilization of low cost deposits and investment

and making loans, advances and investments at higher rates of interest to generate surplus.

Deposits are Liabilities and loans and advances are the assets of the bank. Interest on deposits

is required to be paid by bank in regular period; hence, the assets of the bank must also

generate a regular income by way of interest earnings. If an asset does not generate income at

fixed intervals quarterly or half yearly, it becomes a Non-Performing asset. The asset is

deemed to be performing only if it yields timely returns because time is essence in

maintaining the liquidity, which enables the bank to make timely payment of interest on

deposits. It is of poor consolation to know that the asset is fully secured as the availability of

security does not mitigates the liquidity risk. The imbalance is cash flows due to irregular

income may necessitate temporary market borrowings at high rate of interest cutting in to

business profits.

Non Performing Asset means an asset or account of borrower, which has been classified

by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with

the directions or guidelines relating to asset classification issued by The Reserve Bank of

India.

With a view to move towards internationally accepted norms for asset classification and

income recognition, RBI has been tightening the definition of NPAs in a phased manner.

Thus, from the norm of classifying only those assets as non-performing which are four

quarters past due, which was applicable until 1993, RBI moved to the norm of three quarters

past due in 1994 and then two quarters (90 days) past due in 1995. In 2001, RBI tightened

this further by removing the past due concept. As a result, NPAs are to be recognized 30

days earlier than they were before 2001. RBI has now advised banks to move to the 90 days

norm for recognizing loans as non-performing with the effect from March 31, 2004.This

tightening of norms, coupled with some years of economic recession, resulted in an increase

in the recognized stock of NPAs in the Indian Financial System over the last several years.

The same time, the ratio of gross NPAs in to gross advances has shown a declining trend.
http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_India


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The definition of NPAs is prescribed in the prudential norms on asset classification and

advances laid down by RBI. An advance is classified as NPAs where in case of:

An amount due under any credit facility is treated as "past due" when it has not been paid

within 30 days from the due date. Due to the improvement in the payment and settlement

systems, recovery climate, upgradation of technology in the banking system, etc., it was

decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as

from that date, a Non performing asset (NPA) shall be an advance where:

1. Interest and /or installment of principal remain overdue for a period of more than 180days in respect of a Term Loan.

2. The account remains 'out of order' for a period of more than 180 days, in respect of anoverdraft/ cash Credit(OD/CC).

3. The bill remains overdue for a period of more than 180 days in the case of billspurchased and discounted.

4. Interest and/ or installment of principal remains overdue for two harvest seasons butfor a period not exceeding two half years in the case of an advance granted for agricultural

purpose, and

5. Any amount to be received remains overdue for a period of more than 180 days inrespect of other accounts.

With a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt the '90 days overdue' norm for

identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect from

March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where:

1. Interest and /or installment of principal remain overdue for a period of more than 90days in respect of a Term Loan.

2. The account remains 'out of order' for a period of more than 90 days, inrespect of anoverdraft/ cash Credit(OD/CC).

3. The bill remains overdue for a period of more than 90 days in the case of billspurchased and discounted.


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4. Interest and/ or installment of principal remains overdue for two harvest seasons butfor a period not exceeding two half years in the case of an advance granted for agricultural

purpose, and

5. Any amount to be received remains overdue for a period of more than 90 days inrespect of other accounts.

An account should be treated as 'out of order' if the outstanding balance remains

continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding

balance in the principal operating account is less than the sanctioned limit/ drawing power,

but there are no credits continuously for six months as on the date of balance sheet or credits

are not enough to cover the interest debited during the same period, these account should be

treated as 'out of order.

Indian Bank have, for a long time, treated all the sticky loan assets as Non-Performing

Assets (NPAs). The accrual concept of accounting convention has also been followed

without reckoning (counting) the amount actually realized. The word Realized is

noteworthy, which is distinct from the word Reliability. It means that if a loan given by a

bank fails to fetch a return in the form of interest realized from the borrower, it (the Bank)

has no right to debit the borrowal account with the interest chargeable following the accrual

principal. In that event, it then truly signifies that the asset is notperforming i.e; not yielding

any profit/income to the bank. This is the essence of income recognition norms, based on the

recommendation of the committee on financial sector reforms (popularly known as

Narsimhan Committee), adopted by Indian Banks.

An asset, which ceases to yield income for the bank, should be treated as NPA, and

any income from loan assets should not be booked as income until it is actually recovered.

So, banks, which charge interests to loan Accounts Park it in Interest Not Collected

Account (INCA) until recovery, and on recovery, reverse it from INCA and credit interest

account.

In liberalizing economy banking and financial sector get high priority. Indian banking

sector is having a serious problem due to non-performing assets. The earning capacity and

profitability of the bank are highly affected due to this; NPA is defined as an advance for

which interest or repayment of principal or both remain out standing for a period of more

than two quarters.

The level of NPA act as an indicator showing the bankers credit risks and efficiency of


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allocation of resources.

Reasons:

Various studies have been conducted to analyse the reasons for NPA. Whatever may

be the case, complete elimination of NPA is impossible. The reasons may be broadly

classified into two:-

1). Over hang component

Over hang component is due to the environment reasons, business cycle,

Wilful Defaulters, etc..

2). Incremental component.

Incremental component may be due to internal bank management, credit policy, terms of

credit, etc.

NPA Ratio:-

The net Non-Performing Assets to loan (advances) ratios are used as a measure of the

overall quality of the banks.Net NPAs are calculated by reducing cumulative balance of

provisions outstanding at a period end from gross NPAs. Higher ratio reflects rising bad

quality of loans.

NPAs Ratio= Net Non-Performing Assets

Total Loans Disbursed

RBI GUIDELINES ON CLASSIFICATION OF BANK ASSETS

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with

respect to bank advances. In terms of these guidelines, bank advances are mainly, classified

into:-

1). Standard Assets:-

Such an asset is not a non-performing asset. In other words, it carries not more than normalrisk attached to the business.


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2). Sub-Standard Assets:-

It is classified as non-performing assets for a period not exceeding 12 months.

3). Doubtful Assets:- An asset that has remained NPA for a period exceeding 12 months

is a doubtful asset.

4). Loss Assets:-

Here loss is indentified by the bank concerned or by the internal auditors or by the external

auditors or by Reserve Bank of India (RBI) inspection. In terms of RBI guidelines, as and

when an asset become a NPA, such advance would be first classified as a sub-standard one

for a period that should not exceed 12 months and subsequently as doubtful assets. It should

be noted that the above classification is only for the purpose of computing the amount of

provision that should be made with respect to banks advance and certainly not for the purpose

of presentation of advance in the Bank Balance Sheet.

TYPES OF LOANS PROVIDED BY BANK OF MAHARASHTRA

1). Cash Credits/Overdrafts:

When an account is not in order for any One quarter out of Four quarters of the year ending

31st March, the account will be treated as NPA / Out of Order:-

Out standings- exceeding the limit / drawing power for any One quarter. (continuousor otherwise)

Out standings- are well within the limit / drawing power, BUT(a) No credit in the account for the last 6 months.(b) Credits in the accounts are not sufficient to meet interest debits for any 1quarter.

2). Term loans:

If interest/instalments of principal remain unpaid for any One quarter of the year ending

31st March the account will be NPA.


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Past Due Grace period of 30 days is Not to be reckoned in your bank It means that

quarters interest / instalments up to 31st December should be recovered before 31st March , as

otherwise account will be treated as NPA.

3). Agricultural Term Loans/Cash Credits:

If interest/instalments of principal (after it has become due) has not been paid duringthe last two seasons of harvest (covering 2 half years), the account will be NPA.

Past Due- Grace period of 30 days is not applicable in our bank to agricultural loans. Date for reckoning interest/instalment due is the date as stipulated in the sanction.

4). Advanced secured by Term Deposits, National Savings Certificates Indira Vikas

Patras Surrender Values of LIC Policies:

Advance accounts against these securities need not be treated as NPAs and no provisions

made need be made even though interest there on as not been paid for One quarter or more on

a balance sheet date. Interest on such accounts may be taken to income account on due date

provided adequate margins is available in the accounts (i.e. the out standing, after interest

application, must be less than advance value of security). However, advance against gold

ornaments and government securities do not qualify for this relaxation.

5). Bills Purchased and Discount:

The bills purchased will become NPA if they remain overdue and unpaid for One quarter as

on 31st March.

OVERDUE INTEREST

Overdue interest should not be charged and taken to income account in respect of overdue

bills unless it is realized.

6). Other Accounts:

The account becomes NPA if the account remains unpaid for any One quarter or more as on

31st March.

7). Consortium Advance:

Each member bank will classify the account in accordance with the conduct in its books.

8). Government Guaranteed Advances:


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Though, credit facilities backed by the government guarantee may become past due with the

income not being booked, they need not be treated as NPAs. In some cases it is observed that

banks have to file suit against the borrower after invoking the government guarantees with a

view to overcome the limitation period. In such circumstances, the branches may treat the

advances guaranteed by the government as NPAs only when the government concerned when

invoked.

PROCEDURES FOR INDENTIFICATION OF NPA AND RESOLUTION

1).Internal Checks and Control:-

Since high level of NPAs dampens the performance of the bank identification of potential

problem accounts and their close monitoring assumes importance.

The EWS enable a bank to identify the borrower accounts, which show the signs of credit

deterioration and initiate remedial action. Many banks have evolved and adopted an elaborate

EWS, which allows them to identify potential distress signals and plan their options before

hand, accordingly. The major components/process of EWS followed by Banks of India as

brought out by study conducted by Reserve Bank of India at the instance of the Board of

Financial Supervision as follows:

a). Designing Relationship Manager/Credit Officer for Monitoring Account.

b). Preparation of Know Your Client Profile.

c). Credit Rating System.

d). Identification of Watch-List/Special Mention Category Accounts.

e). Monitoring of early Warning Signals.

2). Management/Resolution of NPAs:-

Re-education in the total gross and net NPAs in the Indian Financial System indicates a

significant improvement in management of NPAs. This is also on account of various

resolution mechanisms introduced in the recent past, which include the SARFESI Act,

One-time settlement schemes, setting of the CDR mechanism, strengthening of DRTs.

3). Credit Information Bureau:-


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Bank of Maharashtra, State Bank of India, HDFC Limited, M/s Dun incorporated Credit

Information Bureau (India) Limited (CIBIL) in Jan 2001 and Bradstreet Information Services

(India) Pvt. Information between banks and FIs for curbing the growth of NPAs. The CIBIL

is in the process of getting operationalised.

4). Wilful Defaulters:-

RBI has revised guidelines in respect of detection of wilful default and diversion and

siphoning of funds. As per these guidelines a wilful default occurs when a borrower defaults

in meeting its obligations to the leader when it has the capacity to honour the obligations or

when funds have been utilized for the purposes other than those for which finance was

granted. RBI has advised the lenders to initiate legal measures including criminal actions,

wherever required, and undertake a proactive approach in change in management, wherever

appropriate.

5). Legal and Regulatory Regime:-

(1) Debt Recovery Tribunals

(2) Lokadalats

(3) Enactments of SARFESI Act

(4) Assets Reconstruction Companies

(5) Institution of CDR Mechanism

(6) Compromise Settlement Schemes

(7) Increased power to NCLTs and the proposed Repeal of BIFR

UNDERLYING REASONS FOR NPAs

An internal study conducted by RBI shows that in order of prominence, the following factorscontribute to NPAs:-

Internal Factors:-

1). Diversion of funds for expansion/diversification/modernization taking

up new projects, helping/promoting associate concerns.

2). Time/Cost overrun during the project implementation stage.

3). Business (product, marketing, etc) failure.


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4). Inefficiency in management.

5). Slackness in credit management and monitoring.

6). Inappropriate technology/technical problems.

7). Lack of co-ordination among leaders.

External Factors:-

1). Recession.

2). Input/Power shortage.

3). Price Escalation.

4). Exchange Rate Fluctuation.

5). Accidents and Natural Calamities, etc.

6). Changes in government policies in excise/import duties, pollution

control orders.

The above mentioned cause were reaffirmed, some other were also mentioned. A brief

discussion is provided below:

a). Liberalization of Economy/Removal of Restrictions/Reduction of Tariffs:

A large number of NPA borrowers were unable to compete in a competitive market in which

lower prices and greater choice were available to consumers. Further borrower operating in

specific industries has suffered due to political, fiscal and social compulsions, compounding

pressures from liberalization.

b). Lax Monitoring of Credit and Failure to Recognize Early Warning Signal:

It has been stated that the approval of loan proposals is generally through many levels beforeapproval is granted. However, the monitoring of some time complex credit files has not

received the attention it needed, which meant that early warning signals were not recognized

and standard assets slipped to NPA category without banks being able to take proactive

measures to prevent this. Partly due to these reasons, adverse trends in borrowers

performance were not noted and the position further deteriorated before action was taken.

c). Direct Lending:

Governments policies rather than commercial imperatives dictated loans to some segments.


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d). Over Optimistic Promoters:

Promoters were often optimistic in setting up large projects and in some cases they were not

fully above board in their intentions. Screening procedures did not always highlight these

issues. Often projects were set up with the expectation that part of funding would be arrange

from the Capital Market, which were booming at the time of project appraisal. When the

capital market subsequently crashed, the requisite funds could never be raised, promoters

often lost interest and lenders were left stranded (cut off) with incomplete/unviable projects.

e). Highly Leveraged Borrowers:

Some borrowers were under capitalized and over burdened with debt to absorb the changing

economic situation in the country. Operating within a protected market resulted in low

appreciation of commercial/market risk.

f). Funding Mismatch:

There are said to be many cases where loans granted for short term were used to fund long

term transactions.

g). High Cost of Funds:

Interest rates as high as 20% were not uncommon. Coupled with high leveraging and falling

demand, borrowers could not continue to service high cost debt.

h). Wilful Defaulters:

There are a number of borrowers who have strategically defaulted on their debt service

obligations realizing that the legal recourse available to creditors is slow in achieving results.

Analysis of Factors Contributing to NPAs

An analysis of the contributory factor resulting in the emergence of NPAs on stupendous

scale amongst Commercial Banks and Financial Institutions in the preceding decade and

particularly in the early Nineties would lead to the following conceptualization:-

PSBs performed creditably all through in respect of all parameters set for them. But inthe early Nineties the truth emerged that PSBs were suffering from acute capital inadequacy

and many of them were depicting negative profitability. This is because the parameters set for

they are functioning were deficient and they did not project the paramount needs for thesecorporate goals. Incorrect goals perception and identification led them to wrong destination.


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Pre-reform era witnessed PSBs functioning under the overall control and direction ofthe Finance Ministry. Along with Reserve Bank of India (RBI) it decided/directed all aspects

of working of the Bank. Banks were not free to price their products in competition with each

other. They could not freely cater their funds in the best interest as they considered. It was

thus a directed and the role of bank management was executory.

Since the 70s, the SCBs of India function totally as captive capsule units cut off frominternational banking and unable to participate in the structural transformations, the sweeping

changes, and the new type of leading products training and knowledge resources required to

compete with international industry had resulted in the accumulation of assets, which are

termed as non-unprecedented level 8.

Major policy decision was taken externally by the Finance Ministry/RBI. Thoughdirectors were to be appointed based on their possession of specialized knowledge in banking

and related discipline, the environment of receiving decisions from a political background as

distinguished from a professional outfit, prevented the best talents coming to occupy theposition as Directors of PSBs and taking part in an active role in the deliberation of the

Boards of these Banks.

Audit and Inspections remained as functions under the control of ExecutiveOfficers, which were not independent and were thus unable to correct the effects of serious

flaws in policies and directions of the higher level.

The quantum of credit extended by the PSBs increased by about 360 times in threedecades after nationalization (from around 3000 crores in 1970 to 475113 crores on 31-03-

2000). The bank was not developed in terms of skills and expertise to regulate such

stupendous growth in the volume and manage to diverse the risk that emerged in the process.

The need for organizing an effective mechanism to gather and disseminate credit information

amongst the commercial banks was never felt or implemented. The archaic laws of secrecy of


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customers-information that was binding banking India, disable bank to public names of

defaulters for common knowledge of the other bank in the system.

Effective recovery of defaulters and overdue of borrowers was hampered. But inIndia legal remedies were beset wilful defaulters and the banks were left helpless. Effective

corporate management was a concept alien to the corporate houses then. In respect of PSBs

the board were ineffective and the only/main shareholder was the government of India.

Government exercised multiple role and concerns, and the instinct to act as a watchful

shareholder and increase the shareholders value of these corporate bodies (banks and

financial institutions) was never felt/experienced by the government.

Credit management on the part of the leader to the borrower to secure their genuineand bonfire interests was not based on pragmatically calculated anticipated cash flows of the

borrower concern, while recovery of instalments of term loan was not out of profit and

surplus generated but through recourses to the corpus of working capital of the borrower

concerns. This eventually led to the failure of the project financed leaving idle assets.

Functional inefficiency was also caused due to over-staffing, manual processing of over-

expanded operations and failure to computerize banks in India, when elsewhere throughout

the world the system was to switch over to computerization of operations.

Action Plan for the Operating Functionaries:

a). Analyse the NPAs and Delineate them into sub-groups.

b). Do age-wise sub-grouping.

c). ABC-analysis of advances.

d). Targets for recovery of various categories.

e). Monthly reporting and monitoring in preview meetings.

PREVENTIVE MEASURES:-

1). Regular/Timely contact with the borrowers should be maintained on one-to-one basic inorder that the loans/advances are monitored effectively.


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2). The recovery work should be specifically entrusted to the identified loan officers/

clerks who will have regular contacts with the borrowers particularly at the time,which is

more suitable for recovery, like pre and post-harvest period in case of agricultural advance.

3). The high value advance should be specifically monitored and in case of advance,

which displays signals of slipping to sub-standard category, intensive follow-up is necessary.

4). The repayment programmes should be fixed up realistically keeping in view the

probability of cash accruals taking place as per the projections.

5). In case where units are facing genuine difficulty in adhering to the repayment

schedule fixed while sanctioning the loan, the loan can be rescheduled so that the advance

does not turn out of order or past due.

6). Borrower should be counselled to route the sales proceeds through the account which will

ensure that the account does not turn out of order merely on account of interest application.

7). A written communication be sent to all the borrowers advising them about the need to

ensure that their advance remain standard assets to enable the bank to consider favourably

their future request for financial assistance, if needs.

8). Pre-disbursement and post-disbursement inspection, beside the periodical inspections are

very important to ensure proper utilization of bank funds as also the assets acquired there

from.

9). A system for settlement of goals for recovery of periodical loan instalments and

quarterly interest and monitoring performance there against should be set up.

10).Timely renewal/review of advance will be very effective in monitoring the position of

advance and taking safeguarding steps before an advance turns sub- standard.


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11). The unit displaying disquieting features may be studied by experts/consultants for

suggesting steps to prevent deterioration of their condition and to revitalize their

operations.

CONCLUSION:-

The situation calls for an urgent action by all concerned for improvement. Based on our

experience we consider that the branches will have to constantly work to prevent the NPA

virus from contaminating the new credit portfolio. Also concurrently they will have to

reinforce effective strategies to remove the virus from the existing NPA portfolio. The task

although difficult is achievable. Monitoring and follow-up are the key watchwords in the task

of managing and reducing NPAs.

REMEDIAL MEASURES:

1) Regular meetings with the borrowers and interaction with them on their businessprospects and their position of their accounts should take place.

2) Periodical meetings with group of borrowers particularly those finance undergovernment-sponsored schemes and in rural areas should be held in which the need for

prompt payments of dues should be explained. It needs to be made clear to these borrowers

that there will not be any further debt relief scheme in future and that they will benefit in the

long run by paying the banks dues.Recovery camps/recovery workshops can be organized in

co-ordination with the government authorities in rural areas or in respect of SBI advance

under government sponsored schemes.

3) In case of sick units, viability studies need to be conducted promptly and quickdispensation of rehabilitation packages is essential so that the advance to them can be

upgraded.


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4) Close monitoring of sick units, which are under nursing is important to ensurethat they abide by the stipulation made under the nursing program and thereby there borrowal

account are upgraded.

5) Target for recovery should be fixed for individual functionaries and theirperformance should be closely monitored.

6) Periodical inspection of the units financed and follow-up for recovery of theoverdue amount should be closely monitored.

7) Village level workers be instructed to maintain register for details of variousborrowers under the government sponsored schemes to ensure regular follow-up.

8) For smaller advance, Lok Adalat is an effective avenue for on the spot settlementof bank loan case and this mechanism should be used effectively.

9) As regards cases involving debt for over Rs.10 lakhs, the forum of DebtRecovery Tribunal should be effectively used.

10) Periodical meetings should be held with the lawyers handling Banks cases todiscuss various issue connected with the ending loans case with a view to reducing the delays

in settlement of the cases.

11) Settling the cases out of court and entering into compromises, whereverconsidered appropriate, may rove to be quicker and more effective than legal action.

However, any tendency to get undue advantage from the bank should be guarded against.

12) Realization of securities in cases of advances under litigation needs greaterattention. It should be our endeavour to obtain permission of the court for attachments and

disposal of securities charged to the bank before judgement. where such permission is granted

or where suit is decreed in banks favours, the securities covered by the suit should promptly

realize.

13) The portfolio of the loss assets has to be critically examined to weed out all suchassets where there is no hope of any recovery. In such cases, the ultimate step of

writing off the advance needs to be taken and any delay in matter is of no benefit.

14) The services of Non-Government Organization (NGOs) may also be utilized inarea where these are active, for counselling the small borrowers. These borrowers may be

organized in group and financed, if considered appropriate and prudent, through the NGOsconcerned.


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TACKLING NPAs

The major tools for tackling assets, which have already turned into non-performing assets, are

the following:-

1). Recovery through legal action including the forum of debt recovery tribunals and

lokadalats.

2). Utilizing the machinery of state government for recovery of rural death.

3). Entering into compromises through negotiations.

4). Rescheduling/rephrasing of dues in case of irregular advances of viable units.

5). Rehabilitation packages for potentially viable sick units.

6). Recovery of over due amount through persistent follow-up and by

Counselling/educating the borrower

FOCUSED STRATEGIES

1) Constant follow-up and periodically dialogue with the borrower to know the prospectsof his business and difficulties, if any, faced. Case to case review of NPAs and replacementof loan to suit the revised income generation pattern so that he is able to repay dues of the

bank as per his generation capacity.

2) Branch recovery team consisting of 2/3 resourceful staff members/officials, should beformed (if not so) at each critical branch. The team member should be exhorted to set up

recovery endeavours and produce quick tangible results.

3) Establishment of District Recovery Team at each District Headquarter with thehelp of District Headquarters, with the help of District Co-ordinates/Lead Bank

Officers/Nodal Officers of the concerned district to liaise (link) with the Local Government

functionaries/Lok Adalats/Certificate Officers, etc. This team may co-ordinate the activities

of the Branch Recovery Team within the District.

4) Lawyer Meet may be organized at all district headquarters by the concerned Asst.General Manager and AGM (law) where other officials from local head Office may also

participate. Suit field case of high value loan amount should be reviewed individually to


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expedite the recovery process. Involvement of the law officers in follow-up recovery efforts

through debt recovery tribunals is necessary.

5) To ensure that Target of Recovery have been allotted to all the critical branches forreducing NPAs/INC/AUC by their respective controlling authorities and the controllers

concerned monitor their performance. The Dy. General Manager should oversee the position

on monthly basis.

6) One time settlement (OTS) has been found to be another method whereby thebank would finally recover its due depending upon the repayment capacity of the borrower

from all sources.

7) To consider, in consultation with controllers, on selective basis in decreed cases, theneed for biding in Banks name for sale of mortgaged properties (secured for our loans) in

auction with the permission of court for expediting the recovery


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OBJECTIVE OF THE STUDY

(1)To know the working of Bank of Maharashtra.

(2)To know the types of loans offered by Bank of Maharashtra.

(3)To know about the Non-Performing Assets management of Bank of Maharashtra.

(4)To find out the category of advances which has the highest degree of NPA and thereasons undertaken to tackle it.

(5)To make the suggestions to overcome the problems of NPA in Bank of Maharashtrain kamothe branch


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SCOPE OF THE PROJECT

The study has the following scope:

The study could suggest measures for the banks to avoid future NPAs & to reduceexisting NPAs.

The study may help the government in creating & implementing new strategies tocontrol NPAs.

The study will help to select appropriate techniques suited to manage the NPAs anddevelop a time bound action plan to arrest the growth of NPAs.


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LITERATURE SURVEY :-

The concept of Non-Performing Assets was introduced for the first time in the Narasimham

Committee report that was tabled in parliament on Dec.17 1991.The Committee Studied the

prevailing financial system, identified its short comings and weakness and made various

recommendations with regard to non-performing assets, their identification, disclosure and

the extent of provisioning same. The need was felt because the prevalent accounting and

disclosure practices did not always reflect the true state of affairs of banks and Financial

Institutions. Based on the Narasimham Committee recommendations, RBI has implemented

the prudential norms for improving the financial heath of commercial banks and the quality

of their loan portfolio.


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RESEARCH METHODOLOGY

Exploratory / Formulative Research:-Exploratory research is a preliminary study of the subject matter. It aims to delve into the

nuances of the problem. It is usually a preliminary study and is followed by descriptive,

experimental research. It does not have a formal and rigid design as the researcher may have

to change his focus or direction, depending on the availability of new ideas and relationships

among variables. It attempts to see what is there, rather than trying to predict the underlying

relationships. An exploratory study usually involves three steps- a review of pertinent

literature, an experience survey, and an analysis of insight stimulating cases.

Data Collection

The secondary data has been used during the project for collection of data (information) the

companies internal records were explored as well as the external sources like electronic

media (web sites) were used. The Exploratory Type of Research has used in this project.

Interpreting the Data:-The data which was analyzed with various Graphs thereafter it have been Interpreted with

various techniques by taking into consideration the ups & downs of the Graphs.

Mapping potential of the Company:-The data which was interpreted with various techniques, thereafter it has been given

various suggestions for mapping the potential of the company.

Data Analysis

With the help of Annual Report of the Bank of Maharashtra & figures made available for

kamothe branch of the bank of Maharshatra in navi mumbai present NPA of the kamothe

branch of the bank of Maharshatra in navi mumbai are studied and analysis has been made in


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the project. On the basis of that analysis some Findings and Suggestions are given at the end

of the project.

Conclusion

However, the conclusion behind the project is, Bank has to keep tab on fresh additions by

increasing quality advances and monitoring them. Critical care has to be taken of stressed

accounts to keep control on fresh additions. Bank has to gear up efforts for upgrading S.S.A

and recovery in D.A & Loss Assets. Staff in Bank of Maharashtra has gained good

experience to fight the menace of NPAs.

Finally with the help of some Reference Books and Secondary Datathe report is finalized.


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LIMITATION OF THE STUDY

The study is limited to the functions of Bank of Maharashtra kamothe branch navi Mumbai

pertaining to its management of NPAs and profitability. Thus, the important limitations are as

follows;

The study on management of non-performing assets is limited to the Bank ofMaharashtra kamothe branch navi Mumbai.

The data are collected from Indian Bank till the end of March, 2013.

The basis for identifying non-performing assets is taken from the Reserve Bank ofIndia circulars.

Since non-performing assets are critical, bank officials are not willing to part with allthe information with them.

Reasons for NPAs and Management of NPAs are changing with the time. The study isdone in the present environment without foreseeing future developments.


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CHAPTER II

BANK OF MAHARASHTRA

PhilosophyTECHNOLOGY WITH PERSONAL TOUCH

It is this philosophy that enables Bank of Maharashtra to reach out to its customers and cater

to the needs of the classes and masses.

EMBLEM

The Deepmal- With its many lights rising to greater heights.

The Pillar- Our institution- symbolizing strength.

The Diyas- Our branches-Symbolizing services.

3Ms

MOBILISATION OF MONEY

MOTIVATION

MODERNISATION

AIM

The bank wishes to cater all types of needs of the entire family, in the whole country. Its

motto is One Family, One Bank, Maha Bank.


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CENTRAL BOARD MEMBERS LIST

DESIGNATION NAME

Chairman & managing director ShriNarendra singh

Executive director ShriCVR Rajendran

Director Ms. Kamgal Rajan

Director Dr. D.S. Patel

Director Dr. S.V. Deshpande

Director ShriS.D.Dhamak

Director Dr. Naresh Kumar

Director ShriRamesh C. Agrwal

Director ShriAteesh Singh

Director Dr-Rajkumar Agrawal


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Bank of Maharashtra, established on 16th September, 1935. It is a Public Sector Bank. It came

into commencement on 8th February 1936. First branch was opened at Bajirao Road, Pune, on

6th February, 1936. Thereafter it was shifted to new corporate office at LOKMANGAL,

ShivajiNagar, Pune in 1978. At todays date Bank of Maharashtra has 1345 Branches and 13

extension counter spread over 22 States and 2 Union territories. The Bank of Maharashtra has

a network of 302 ATMs with VISA connectivity.

Bank of Maharashtra provides facilities in area like Agriculture High Tech, Overseas,

Industrial financing, V Sat facility, Remote access, Query terminal, Tele banking facility and

ATM, etc. Bank of Maharashtra also provides banking and other financial services to

corporate and private customers. The Bank offers personal banking, cash management, retail

loans and other financial services. These services include deposits, savings/current bank

account, vehicle loans, personal loans, retail trade finance, global banking, lending to priority

sector and small scale sector, foreign exchange and export finance, corporate loans and

equipment loans. Bank of Maharashtra has full-fledged Training College, Information

Technology Training Institute and Staff Training Centers.

The objectives behind establishing Bank of Maharashtra were to mobilize the savings of

household and extend financial support to persons of small means who were then not

considered for credit facilities by banks. In a nutshell, the philosophy of founder fathers of

the Bank was something more than what has been emphasized about the role of Public Sector

Banks in the economic upliftment of rural poor and neglected segments of the society.

The bank has fine tuned its services to cater to the needs of the common man and

incorporated the latest technology in banking offering a variety of customized services. The

Aim for Bank is to cater to all types of needs of the entire family, in the whole country. Its


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dream is "One Family, One Bank, Maharashtra Bank". The 3 Ms of the Bank are,

Mobilization of Money, Modernization of Methods and Motivation of Staff.

Company Profile: Bank Of Maharashtra

Exchanges: BOM

Total Deposits: Above Rs.1,00,000/- Cr.

Total Advances: Above Rs.67,000/- Lack

Major Industry: Financial Sector

Sub Industry: Commercial Banks

Country: INDIAEmployees: Above 30000

BENEFITS GIVEN BY BANK OF MAHARSHATRA :-

All India help line numbers are 1800-222-340 & 1800-220-888.

Credit card and Visa Debit Card facilities, keeping the pace with the marketconditions. Maharashtra Bank has tied up with Master card International and Visa Card to

impart plastic money facility to the customers.

The Maharashtra executor trustees company (METCO) performs business rangingfrom investment management to consultancy and managing various trusts efficiently.

ATM facility, Tele banking, Depository services, Touch screen facility and MobileVan information center facility for rural areas.


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Bank has established its own corporate Networking MAHANET connecting 562locations i.e. more than 1700 branches, 32 regional offices, 5 circle offices, training colleges,

training centers and central offices.

Bank is establishing its own Data Center at IT Park, Kharadi, and Pune.

1000 Rural and semi urban branches are to be computerized with small TBA solutionsup to march 2013.

Bank has implemented Real Time Gross Settlement (RTGS) system for customertransactions and inters bank payments in 368 branches.

Maharashtra Bank has full-fledged Training College, Information TechnologyTraining Institute and 3 Staff Training Centers.

Cheque Truncation System is run on pilot basis and will be implementing as RBI timeschedule.

Bank of Maharashtra is now working as corporate agent for life and non life insuranceproducts of LIC of India and United India Insurance Company.

Bank has entered in to agreement with Mrs. TCS for providing Core Banking Solution"BANCS" and has appointed Mrs. Ernst & Young as consultants for implementation of CBS

in 600 branches.


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The Bank has established Rural Development Centers at Hadpsar & Bhigwan. It hasalso established MESETI at Pune, Aurangabad and Nagpur Centers for training the new

entrepreneurs. Gramin Mahila VA BAL Vikas Mandal is established at Pune for the

development of the women and children in rural areas and forming Self Help Groups.

Bank of Maharashtra acts as Lead Banker in 6 Districts and works as State Levelconvener of Banker's committee for Maharashtra State.

Bank of Maharashtra has sponsored 3 regional rural Banks, Marathwada GraminBank, Aurangabad-Jalna Gramin Bank, and Thane Gramin Bank.

Future Plans: -

Systematic approach for reducing Net NPA level to below .05%. Consolidation of Regional Rural Banks sponsored by Bank of Maharashtra. Establishing ATM network of more than 745 ATMs with on-line connectivity acrossthe country.

Extensive use of Wide Area Network-MAHANET inter-connectivity of branches byproviding more customer-centric applications like Any Branch Banking Service, Demat etc.

Extending RTGS facility to 368 branches. Moving towards Core Banking Solution (CBS) by implementing in 1200 branches.


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SHGs with special reference to agriculture to be promoted and financing beimplemented so as to increase financing to small and marginal farmers.


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CHPTER III

Data Collection

Primary Data: -Primary Data is one, which is collected by the investigator himself for the purpose of a

specific inquiry or study. Such data is original in character and is generated by surveys

conducted by individuals or research institution. In this research there is no need of primary

data.

Secondary Data:-When an investigator uses the data, which has been already collected by others, such data is

called secondary data. Secondary sources of data provide wealth of information to the

researcher.

Collecting the Data:-

Collecting sources of data is of two types, i.e. Primary Data & Secondary Data. Data used in

this project is Secondary Data, which is collected from Pune City Region of Bank of

Maharashtra. Various articles like Annual Report, Reference Books have been collected.

During this project for the collection of data (information) the companies internal

records were explored as well as the external sources like electronic media (web sites)

were used.


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Data Classification & Tabulation

The Narasimham Committee gave a thought that income recognition should be done on

scientific basis. The screening should be done to expose the bad and doubtful assets. This

would help in preventing further deterioration in the value of asset. The Recommendations of

Narasimham Committee were divided in to Three parts which are as follows:-

(1) INCOME RECOGNITION:-

The policy of Income Recognition should be objective and based on record of recovery rather

than any subjective considerations like availability of security, net worth of borrower /

guarantor etc.

Income accounting in case of NPA is, therefore, based on actual realization.

Government Guaranteed Advances:-If any income with respect to advances guaranteed by Governments remain overdue for

specified period and thereby advance becomes NPA, interest on such advances should not be

taken to income account, unless the same is realized.

Renegotiated / Rescheduled Advances:-Fees and Commission earned by the banks due to renegotiation or rescheduling of

outstanding advances should be recognized on accrual basis over the period of time covered

by the renegotiated or rescheduled extension of credit.

Appropriation of recovery in NPAs:-


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Interest realized on NPAs may be taken to income account provided the credits in the

accounts towards interest are not out of fresh / additional credit facilities sanctioned to the

borrower concerned.

In the absence of a clear agreement between the bank and the borrower for the purpose of

appropriation of recoveries in NPAs, banks should adopt an accounting principle and exercise

the right of appropriation of recoveries in a uniform and consistent manner.

Reporting of NPAs:-

Banks are required to furnish a report on NPAs as on 31 st March each year after completion

of audit. The NPAs would relate to the banks global portfolio, including the advances at the

foreign branches.

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

shown as a deduction from gross NPAs as well as gross advances while arriving at the net

NPAs. Banks which do not maintain Interest Suspense Account for parking interest due on

non-performing advance accounts, may furnish the amount of interest receivable on NPAs as

a foot note to the Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be

reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in

the quantum of NPAs being reported.

(2) ASSETS CLASSIFICATION:-


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Classification of Assets should be done on the basis of objective criteria with uniform and

consistent application of norms duly ensured. There are generally three ways of classification

of assets, which are given as under:

Assets classification under Health Code System:-Under the Health Code system, bank are required to classify the advances under any one of

the heads depending upon the status of the account, dealings, availability of security cover,

etc.

Asset Classification for Final Accounts:-Banks are required to prepare their final accounts as per Third Schedule to the Banking

Regulation act, 1949 which bankers / auditors are well conversant with.

Assets Classification under Prudential Norms:-Under the prudential norms of asset classification, banks are now required to classify their

advances in the following four broad groups:-

(a) Standard Assets:-

These are assets which are Performing and do not disclose any weakness and do not carry

more than normal business risk.

(b) Sub-Standard Assets:-

These are assets which have ceased to Perform but which have not completed a period of 18

months (now 12 Months) after getting classified as Non-performing and there is no threat to

recovery on account of erosion in the realizable value of security or due to non-availability of

security or due to other factors, to the extent that the account is to be classified either as


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Doubtful Assets or as Loss Assets. With effect from 31st March, 2005, a sub-standard

asset would be one, which has remained NPA for a period less than or equal to 12

months.

(c) Doubtful Asset:-

These are accounts which have completed a period of 18months (now 12 Months) after

getting classified as Sub-standard Assets. A loan classified as doubtful has all the weakness

inherent in assets that were classified as sub-standard, with the added characteristic that the

weakness make collection or liquidation in full on the basis of currently known facts,

conditions and values-highly questionable and improbable. With effect from March 31st,

2005, an asset would be classified as doubtful if remained in the sub-standard category

12 months.

(d) Loss Assets:-

A Borrower account in which a loss has been identified by the internal or external auditors or

by the RBI inspectors. The releasable value of security in the accounts is very little.

Guidelines for Classification of Assets:-

Classification of Assets in to above categories should be done taking into account the degree

of well-defined credit weakness and the extent of dependence on collateral security for

realization of dues.


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Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value accounts. The banks

may fix a minimum cut off point to decide what would constitute a high value account

depending upon their respective business level. The cut of point should be valid for the entire

accounting year. Responsibility and validation levels for ensuring proper asset classification

may be fixed by the banks. The system should ensure that doubts in asset classification due to

any reason are settled through specified internal channels within one month from the date on

which the account would have been classified as NPA as per extant guidelines.

Upgradation of Loan Accounts classified as NPAs:-.If arrears of interest and principal are paid by the borrower in the case of loan accounts

classified as NPAs, the account should no longer be treated as non-performing and may be

classified as standard accounts.

Accounts regularized near about the balance date:-The asset classification of borrowal account where a solitary or a few credits are recorded

before the balance sheet date should be handled with care and without scope for subjectivity.

Where the account indicates inherent weakness on the basis of the data available, the account

should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory

evidence to the Statutory Auditors / Inspecting Officers about the manner of regularization of

the account to eliminate doubts on their performing status.

Asset Classification to be borrower-wise and not facility-wise:-


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It is difficult to envisage a situation when only one facility to a borrower becomes a problem

credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to

be treated as NPA and not the particular facility or part thereof which has become irregular.

If the debits arising out of devolvement 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

norms on income recognition, asset classification and provisioning.

Government guaranteed Advances:-The credit facilities backed by guarantee of the Central Government though overdue may be

treated as NPA only when the Government repudiates its guarantee when invoked. This

exemption from classification of Government guaranteed advances as NPA is not for the

purpose of recognition of income. With effect from 1st, April, 2000, advances sanctioned

against State Government Guarantees should be classified as NPA in the normal course, if the

guarantee is invoked and remains in default for more than two quarters. With effect from

March 31st, 2001 the period of default is revised as more than 180 days and with effect from

March 31st, 2004 the period of default would be revised as more than 90 days.

Advances under rehabilitation approved by BIFR / TLI:-Banks are not permitted to upgrade the classification of any advance in respect of which the

terms have been renegotiated unless the package of re-negotiated terms has worked

satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit

under rehabilitation packages approved by BIFR / Term Lending Institutions will continue to

be classified as sub-standard or doubtful as the case may be, in respect of additional facilities


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sanctioned under the rehabilitation packages, the Income Recognition, Asset Classification

norms will become applicable after a period of one year from the date of disbursement.

(3) PROVISIONING NORMS:-

In order to narrow down the divergences and adequate provisioning by banks, it was

suggested that banks statutory auditors, if they so desire, could have a dialogue with RBIs

Regional Office / Inspectors who arrived out for banks inspection during the previous year

with regard to the accounts contributing to the difference.

Pursuant to this, regional offices were advised to forward a list of individual advances, where

the variance in the provisioning requirements between the RBI and the bank is above certain

cut off levels so that the bank and the statutory auditors take into account the 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 of other assets is that of the bank managements and the statutory

auditors The assessment made by the inspecting officer of the RBI is furnished to the bank to

assist the bank management and 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, provisions should be made on the non-performing

assets on the basis of classification of assets into prescribed categories as detailed above.

Taking into account the time lag between an account becoming doubtful of recovery, its

recognition as such, the realization of the security and the erosion over time in the value of


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security charged to the bank, the banks should make provision against loss assets, doubtful

assets and sub-standard assets as below:

(a) Loss Assets:-

The entire assets should be written off after obtaining necessary approval from the competent

authority. If the assets are permitted to remain in the books for any reason, 100 per cent of

the outstanding should be provided.

In respect of an asset identified as a loss asset, full provision at 100 per cent should be made

if the expected salvage value of the security is negligible.

(b) Sub-standard Assets:-

A general provision of 10 per cent on Total Outstanding should be made without making any

allowance for DICGC / ECGC guarantee cover and securities available.

20% provision in case of advances where there was no security/clean form at the time of

sanction.

(c) Standard Assets:-

Banks are providing for Standard Assets @ 0.25% till 2012. Now the provisions are as under

with effect from 2013-14.

(1) Direct Advances to agriculture & SME sectors: 0.25%

(2) Residential housing loans beyond 20 Lakhs: 0.40%

(3) Personal Loans, Advances qualifying as capital market 2.00%

Exposures & Commercial real estate loans:

(4) Other standard advances: 0.40%


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(d) Doubtful Assets:-

100 per cent 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 should be made and the realizable value is

estimated on a realistic basis.

In regard to the secured portion, provision may be made on the following basis, at the rates

ranging from 20 per cent to 100 per cent of the secured portion depending upon the period for

which the asset has remained doubtful:

Floating Provisions:-

Some of the banks made a floating provision over and above the specific provisions made

in respect of accounts identified as NPAs. The floating provisions, wherever available, could

be set off against provisions required to be made as per above stated provisioning guidelines.

Considering that higher loan loss provisioning adds to the overall financial strength of the

banks and the stability of the financial sector, banks are urged to voluntarily set apart

provisions much above the minimum prudential levels as a desirable practice.

Provisions on Leased Assets:-

Sub-Standard Assets:-(1) 10 percent of net book value.

(2) As per the Guidance Note on Accounting for Leases issued by the

ICAI, Gross book value of a fixed asset is its historical cost or other amount substituted for

historical cost in the books of account of financial statements. Statutory depreciation should

be shown separately in the profit and loss Account. Accumulated depreciation should be

deducted from the Gross Book Value of the leased asset in the balance sheet of the lessor to

arrive at the net book value.


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(3) Also, balance standing in Lease Adjustment Account should be adjusted in the net

book value of the leased assets. The amount of adjustment in respect of each class of fixed

assets may be shown either in the main balance sheet or in the Fixed Assets Schedule as a

separate column in the section related to leased assets.

Doubtful Assets:-100 percent of the extent to which the finance is not secured by the realizable value of the

leased assets. Realizable value to be estimated on a realistic basis. In addition to the above

provision, the following provision on the net book value of the secured portion should be

made, depending upon the period for which the asset has been doubtful.

Loss Assets:-The entire asset should be written off. If for any reasons, an asset is allowed to remain in

books, 100 percent of the net book value should be provided for.

Write Off of NPAs:-

In terms of Section 43(D) of the Income Tax Act, 1961, income by way of u\interest in

relation to such categories of bad and doubtful debts as may be prescribed having regard to

the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the

previous year in which it is credited to the banks profit and loss account or received,

whichever is earlier. This stipulation is not applicable to provisioning required to be made as

indicated above. In other words, amounts set aside for making provision for NPAs as above

are not eligible for tax deductions. Therefore, the banks should either make full provision as

per the guidelines or write off such advances and claim such tax benefits as are applicable, by


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evolving appropriate methodology in consultation with their auditors/ tax consultant.

Recoveries made in such accounts should be offered for tax purposes as per the rules.

GENERAL REASONS FOR ASSETS BECOMING NPAs:-

A multiplicity of factor is responsible forever increasing size of NPAs in banks. A few

prominent reasons for assets becoming NPAs are as under.

Poor credit appraisal system.

Lack of proper monitoring.

Reckless advances to achieve the budgetary targets.

Change in economic policies/ environment.

No transparent accounting policy and poor auditing practices.

Lack of coordination between banks.

Directed lending to certain sectors.

There is no or lack of corporate culture in the Bank. In adequate legal provisions onforeclosure and bankruptcy.


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CAUSES OF NPA:-

There are many causes for performing assets becoming Non-performing. The following are

some of the general causes which Contribute to creation of NPAs and the same can be

categorized under three Classes:-

(1) Causes attributable to the Promoter / Borrower:-

Bad intention of securing wrongful gains from banks by availing advances bymisrepresentation of facts.

Financial indisciplinediversion of funds for unapproved purposes. Mismanagement of Units / Projects will full or otherwise.

Lack of professional management.

Death / disability of the chief promoter / person behind the show. Inability to tie up the funds required as margin (promoters contribution) as per the

projection furnished.

Problems due to adverse exchange fluctuations faced by exporters/ importers. Inadequate control / supervision resulting in time and cost overrun. Low priority to technology upgradation and inadequate attention to research anddevelopment, quality control etc.

Differences / disputes amongst promoters---family splits, lack of co-ordination amongpartners, groupings among the directors of the company etc.

Huge deviation in the demand


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(2) Causes attributable to the Bank:-

Delay in decision making and sanction of credit facilities. Defective / deficient monitoring and supervision of advance accounts. Improper /poor credit appraisal due to lack of expertise and scales required for critical

pre-sanction scrutiny of loan proposals.

Non-availability of reliable market and industry relevant data on demand / supplyscenario.

Compromise on project viability with overemphasis on security while assessing theloan proposals.

Disbursement of advance facilities before compliance of terms ad condition ofsanction and incomplete / defective documentation.

Delayed and / or non detection / diagnosis of warning signals and inaction in theinitiation of the remedial measures.

Long pending judicial proceedings and protracted legal battles in courts act more as acover to the defaulting borrowers.

Lack of government support and apathy of public to banks recovery efforts. Non observance of banks well laid down norms and systems and of preventive /

precautionary measures facilitating perpetration of frauds by insiders / outsiders.

(3) Causes beyond the control of banks and borrowers:-


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Political uncertainties. Frauds committed by outsiders, with or without the collusion of outsiders. Inadequate infrastructure facilities such as supply of power and other essential inputs. Debt Relief Schemes introduced by some states for political mileage have vitiated therepayment culture and has resulted in a large number of willful defaulters.

Inconsistency in judicial verdicts as a result of improper presentation of facts. Outdated laws, labour unrest / lockouts / strikes, riots etc. Law and order problems affecting commercial and industrial activity in certain partsof the country.

Natural calamities like earthquakes, draughts and floods, etc., resulting in large-scaledestruction of properties and life.

SOME OF THE INDICATORS SUGGESTING SLIPPAGES TO NPA:-

A borrower account will not become NPA overnight. Like a major disease to human body, it

does give symptoms beforehand. It is only up to the banker to take sight of these symptoms

and initiate timely remedial measures to prevent the account from actually slipping in to

NPA.

On the basis of auditors experience of banks, the following notable indications would be

available in different types of borrowers accounts:-

(1) Cash Credit / Overdraft:-

Increasing number of goods returned by the clients. Increasing number of un reconcilied book debts. Increasing number of incidences of debit / credit notes in the books of accounts.


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Self Cheques presented through some other bank. Huge cash withdrawals without proper explanation. Frequent requests for temporary overdrawing. Frequent requests for release / exchange of securities. Increase in transactions in personal accounts of proprietor / partner / directors. Unexplained delay in submission of financial statements and tax returns.

(2) Bills Discounted / Purchased:-

Incidences of accommodation bills. Gradual increase in realization period. Frequent incidences of partial realization of bills. Gradual increase in dishour of bills discounted and return of bills purchased. Asguidance, dishonor / return of bills in excess of 5% of bills may be taken as the danger signal.

Frequent requests for discount / purchase of bills draw on parties outside the list ofdrawers approved by the bank.

Requests for meeting the amount of dishonored / returned bills from out of discount /purchase of fresh bills.

(3) Letter of Credits / Bank Guarantees:-

Invocation of Bank Guarantees / development of Letter of Credit. Non receipt of original LC / BGs bonds after expiry and several reminders.

(4) Term Loans:-

Misconception of the project. Undue and unreported delay in project implementation.


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Non-introduction of margin from time to time and mis-utilisation of loan proceeds. Default in payment of installments / interest. Frequent breakdowns in plant and machinery. Drastic fluctuations in operational efficiency and capacity utilization. Labour unrest in the plant. Disposal / replacement of vital plant and machineries without the consent of the bankand without putting an effective alternative arrangement in place.

(5) Foreign Exchange Finance:-

Incidences of accommodation and kite flying. Frequent overdue in PCL without genuine reasons. Frequent cancellation of orders by the overseas buyers. Increasing delay in realization of export bills. Huge uncovered Foreign Exchange position. Frequent return of goods. Drastic changes in the economic / political atmosphere in the importers country. Serious violation of FEMA / RBI Guidelines by the exporters attracting penal action.

(6) Other General Warning Signals:-

Opening of bank accounts with other banks without the consent of the lending banker. Unrecoccilied branch accounts where borrowers have branches elsewhere. Unexplained swing in the behavioral pattern of the borrower. Noticeable reduction in ancillary business like DDs, TTs, etc. Notice by partner / director of the borrowing firm / company of irregularities. Death of key person in the conduct of business of the borrowers.


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Suits filed against the borrowers other than in normal course of business. Issuance of notices to the borrowers from the respective body for not meetingstatutory dues like Income Tax, Sales tax, Excise, ESIC etc

Receipt of attachment orders as a result of non payment of any of the above duties. Material changes in the demand / supply scenario and supply of raw material potentenough to pose serious threat to the economic viability of the project / business.

The above list is not exhaustive and each case of advance may require special attention

depending on each case. As the saying goes, a stitch in time saves nine. It is the alertness

and constant vigil exercised at the operational levels along with quality monitoring and

timely follow-up of borrower accounts that will prevent fresh slippages from performing to

non-performing. The practical banker should develop necessary skill to take note of the

warning signals and initiate necessary corrective action.

In order to build-up and maintain a portfolio of quality advances, it is essential to

meticulously follow the good and time-tested systems and procedures. The best way to

tackle NPA menace is to prevent fresh additions to this undesirable club and, at the

same time, putting vigorous efforts to reduce the size of existing NPA segment.


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GENERAL METHODS OF MANAGEMENT OF NPAs:-

The management of NPA is the difficult task in practice. Management of NPAs means, how

to settle the NPAs account in the books. In simple it focuses on the methods of settlement of

NPAs account. The methods are differs from bank to bank. The following paragraph explains

some general methods of Management of NPAs by the bank. The same information is given

in the chart.

(1) Compromise:-

The dictionary meaning of the term compromise is settlement of dispute reached by mutual

concessions. The following are the detailed guidelines for compromise/negotiated settlements

of NPAs.

Compromise

Legal remedies

Regular Training Program

Recovery Camps

Write offs

Spot Visit

Rehabilitation of potentially viable

Other Methods

General Methods of Management of NPAs


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The compromise should be a negotiated settlement under which the bank shouldensure recovery of its dues to the maximum extent possible of minimum expenses.

Proper distinction should be made between willful defaulters and borrowersdefaulting in repayments due to circumstances beyond their control.

Where security is available for assessing the realizable value, proper weight ageshould be given to the location, condition and marketable title and possession of such

security.

An advantage in settlement cases is that banks can promptly recycle the funds insteadof resorting to expensive recovery proceedings spread over a long period.

All compromise proposals approved by any functionary should be promptly reportedto the next higher authority for post facto scrutiny.

Proposal for write off/ compromise should be first by a committee of seniorexecutives of the bank.

(2) Legal remedies:-

The legal remedies are one of the methods of management of NPAs. The banks observed that

the borrower is making willful default; no more time should be lost instituting appropriate

recovery proceedings. The legal remedies are:

Filing civil suits. Filing criminal suits under sec.138. Filing suits in DRT.


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Use of SARFAESI Act for quick recovery. Putting cases to Lokadalat.

(3) Regular Training Program:-

The all levels of Staff, Officers should undergo the regular training program on credit and

NPA management. It is very useful and helpful to the Staff, Officers & Executives for

dealing with proper appraisal of advances & using correct techniques for NPA recovery &

reduction.

(4) Recovery Camps:-

The banks should conduct the regular or periodical recovery camps in the bank premises or

some other common places; such type of recovery camps reduces the level of NPAs in the

Banks.

(5) Write offs:-

Write offs is also one of the common management techniques of NPAs. The assets are treated

as loss assets, when the bank writes off the balances. The ultimate aim of the write off is to

clean the Balance sheet.

(6) Spot Visit:-

The bank officials should visit to the borrowers business place or borrowers field regularly

or periodically & should have continuous meaningful dialogue, it will help in proper


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diagnosis of reasons and deciding correct course of action for recovery. It is also help full to

the bank to control or reduce the NPAs limit.

(7) Rehabilitation of potentially viable units:-

Technically feasible & economically viable NPA units can be rehabilated through

rescheduling, rephrasing, additional financial support, interest rebate, etc. This will help the

units to come back on the track & start generating income to banks overdue & come out of

NPA status.

(8) Other Methods:-

Persistent phone calls. Media announcement. Help of recovery agents. Help of advocates for speedy disposals. Upgradation of account through recovery of overdue amount.


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SECURITIZATION AND RECONSTRUCTION OF FINANCIAL

ASSETS ANDENFORCEMENT OF SECURITY INTEREST

ACT 2002 (SARFESI)

SARFESI- The Security Interest Legislation

SARFESI provides for the enforcement of security interests in movable/tangible or

intervention of court, by way of a simplistic, expeditious and a cost effective process. Where

any borrower makes any default in repayment of secured debt or nay instalment there of, and

his account in respect of such debt has been classified by the secured creditor as non-

performing asset, then, the secured creditor may call upon the borrower by way of a written

legal notice to discharge in full his liabilities within 60 days from the date of notice failing

which the secured creditor would be entitled to exercise all or any of the rights set out under

the SARFESI Act. The notice must contai details of debt and secured assets.

Any bank or public financial institution or any other institution or non-banking financial

company as specified by central government or international finance corporation or a

consortium there of, and his account in resects of such debt has been classified by the secured

creditor as non-performing assets, then the secured creditor may call upon the borrower by

the way of a written legal notice to discharge in full, his liabilities within 60 days from the

date of the notice failing which the secured creditor would be entitled to exercise all or any of

the rights set out under SARFESI. The provision of SARFESI relating to security of interest

can be invoked by any bank or public financial institution under section 4A of the Companies

Act, 1956 or any institution specified by the central government under sub clause (2) of

clause (h) of section 2 of recovery of debt due to banks and Financial Institutions Act, 1993

or any other institution or non-banking financial company as specified by central

government or international finance corporation or a consortium there of.


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NPA REDUCTION TECHNIQUES:-

Slotting NPAs of various size and type can be made as follows at branches for

working out specific/appropriate strategies individual cases. Besides it will also help us in

taking stock of the situation at given point of time.

CATEGORY TECHNIQUES

1). Small NPA Loans

(Agricultural Loans, Priority

sector Loans, Government

sponsored Loans upto Rs. 1

lakhs.)

a) Asset created out of bank loan may beascertained.

b) Asset created out of bank loan may beascertained.

c) Repaying capacity can be easily gauged.d) Mobilizing liquid cash for meeting thedebt is not difficult.

e) Written reminder and repeat personal callhelp mostly; written reminder is a powerful

weapon.

f) Legal action is time consuming.

g) Influence of other local persons contactshelpful especially in rural/semi urban areas.


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2). NPAs-Larger than small but

medium. (Above Rs. 1 lakhs

upto Rs. 5 lakhs)

a) Branch team can talk to the borrower andwork out the repayment programme.

b) In Non-Agricultural NPAs, quick solutionshould be worked out through long draw work out

sessions with borrowers, because the value of

assets may get eroded fast or the borrower may

decamp or shift his activity.

c) In Non-Agricultural NPAs, quick solutionshould be worked out through long draw work out

sessions with borrowers, because the value ofassets may get eroded fast or the borrower may

decamp or shift his activity.

d) Debts can be settled through Lok Adalats.

e) Influence of trade professional circles,associates useful.

3). Medium sized NPAs

(Over Rs. 5 lakhs upto

Rs. 25 lakhs)

a) As the size of NPAs grows, the branchexperiences levels of incapacity to take a view

regarding the ability/recover rabidity of the loans.

b) SWOT analysis and of security, will behelpful.

c) Whether to waive legal action to go for


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compromise.

d) Call for intervention at all the stages by amulti-tier team workout specialists.

e) Recovery is effort-inelastic to a lesserdegree.

f) Call for legal/technical advice.

g) If default is wilful, watch on borrowers

business growth plans and using leverage at

appropriate.

4). Large NPAs

(over Rs. 25 lakhs)

a) It is highly effort-inelastic.

b) Calls for intervention abilities not

final introduction to non

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