1

A
SUMMER TRAINING REPORT
ON
‘NON PERFORMING ASSETS OF VARACHHA CO-OPERATIVE BANK’

Submitted In Partial Fulfillment of the Requirements of PGDM

Programmer

Prepared By:

Gajera Satish G PGDM (TRI–3)

SEAT NO: 1013

Under The Guidance Of

Prof. VIJAY AKHIHAL

Submitted To:

POST-GRADUATE CENTRE
BHAVAN’S S.A. INSTITUTE OF MANAGEMENT STUDIES (BSAIM)
DHARWAD

MAY/JUNE-2011
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DECLARATION

I hereby declare that the report on “NON PERFORMING ASSETS OF VARACHHA

CO-OPERATIVE BANK” that has been submitted to BSAIM BHAVAN’S S.A.

INSTITUTE OF MANAGEMENT STUDIES (DHARWAD) and The

Varachha co-Operative Bank, Surat. Towards Partial Fulfillment of my Master of

Business Administration is my original and bonafide work I also certify that to the best

of knowledge and beliefs this work has not been worried out another person or group of

person or an organization as a whole.

DATE: Gajera satish G

PLACE:
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ACKNOWLEDGEMENT

To acknowledge all the persons who had helped for the fulfillment of the project is
not possible for any researcher but in spite of all that it becomes the foremost
responsibility of the researcher and also the part of research ethics to acknowledge
those who had played a great role for the completion of the project.

So in the same sequence at very first, I would like to acknowledge my parents because
of whom I got the existence in the world for the inception of this project. Later on I
would like to confer the flower of acknowledgement to Shri Kanjibhai Bhalala and
other faculty members who taught me that how to do project through appropriate tools
and techniques. Because THE VARACHHA CO-OPERATIVE BANK LTD. has
trusted me and given me a chance to do my integrated research study, I would like to
give thanks to the organization and especially to Shri V.B. Dhanani from the depth of
my heart. Rest all bank’s employees who helped me are not only matter of
acknowledgment but also authorized for sharing my success. I also thank to Mr.Amit
Bhatachary who guided me about making the project report.

DATE: Satish G. Gajera

PLACE:
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CERTIFICATE

This is to certify that Mr. Gajera Satish G has satisfactory completed the project
work entitled, ‘NON PERFORMING ASSETS OF VARACHHA CO-OPERATIVE
BANK’ Based on the declaration made by the candidate and me association as a guide
for carrying out this project work, I recommended this project for evaluation as a part
of the PGDM programmer of BSAIM, DHARWAD

Place :

Date : (PROF.)
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CONTENTS PAGE NO.

Executive Summery 6
1.Introduction of Banking Industry 7
1.1 meaning of Bank 8
1.2 Banking Structure of India 10
1.3 Meaning of co-operative Bank 11
1.4 Principal of Co-operative Bank 12
1.5 Three tire Structure of Co-operative Bank 14
1.6 Co-operative Flag 15

2. About Varachha Co-operative Bank 17

2.1 Introduction 17
2.2 History of VCB 18
2.3 Mission Vision and Quality Policy 19
2.4 Milestone in the History 20
2.5 Board of Director of VCB 21
2.6 Function of VCB 22
2.7 Social Contribution of VCB 24
3. Research Methodology 26
4. About (NPAs) Non Performing Assets 29
4.1 meaning of NPAs 29
4.2 Norms for Assets classification 31
4.3 Factors Responsible for NPAs 35
4.4 Problem Due to NPAs 39
4.5 Indian Economy and NPAs 40
4.6 RBI Guideline for Assets classification 41
4.7 Income Recognition Norms 42
4.8 Reporting of NPAs 44
4.9 Provisioning Norms 46
4.10 Impact of NPAs 49
4.11 symptoms for NPAs 50
4.12 Preventive measurement for NPAs 51
4.13 tools for recovery of NPAs 54

5 Data Analysis 62
6 Finding 72
7 Suggestion 74
8 Conclusion 76
9 Limitation Of The Study 77
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The problem of NPA is not a problem which has been arisen in few years or which is
not very young to our economy. This problem can be traced since the origin of the
banking system. This problem is faced by the entire financial institute, all over the
world.

Like a cancer worm, it has been eating the banking system since long time. And like
great fear of AIDS, banks have not been able to find a reliable cure for this illness. It
has grown like a cancer and has infected every wing of the banking system. All these
institutes face this problem of these NPA is hugely spread over in Indian financial
system. The RBI also takes several measures to avoid and reduce these NPAs.

These NPA adversely affects the profitability of the entire financial institute as
according to the norms proper and equivalent provisions are to be made as per the age
wise classification of NPA. For the stability of any financial institution, it is very
important to minimize the level of NPA.

Considering this scenario of the financial institute in India I have chosen NPA as my
topic for the training in one of the respective bank in our area named The Varachha
Co-operative Bank Ltd., Surat.
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1.1 MEANING OF BANK: -

8

Bank is one type of Organization, which is related with financial activity. They collect
money from one class of economy and give to the other class of economy. It means
they collect deposit from people and give them to the needy people as advances.

In funny language you can say,

“Banking means my mind and other people’s money”
In short, Bank performs the function of Exchange of money.

TYPES OF BANK
Reserve Bank of India
Scheduled Bank
Non-Scheduled Bank
State Co-Operative Bank
Central Co-Operative Banks Primary Credit Societies
Commercial Banks
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1.2 STRUCTURE OF BANKING SYSTEM IN INDIA

Reserve Bank of
India

Non-Scheduled
Bank
Scheduled Bank

Central Co-Operative
State Co- Commercial Commercial
Banks Primary Credit
Operative Bank Banks Societies Banks

Foreign Banks Indian Banks

Private Sector Public Sector

Banks Banks

SBI & Subsidiaries

Other Nationalized
Banks

Regional Rural
Banks

1.3 MEANING OF CO-OPERATIVE BANK:-

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A co-operative is an autonomous association of persons united voluntarily to meet

their common economic, social and cultural needs and aspirations through jointly -
owned and democratically controlled enterprise. Co-operatives are based on the
values of self-responsibility, democracy, equality and solidarity. In the tradition of
their founders, co-operative members believe in the ethical values of honesty,
openness, social responsibility and carrying for others.

Unlike commercial banks, which are occupied in the helping, the industrial and
commercial sectors of the economy, the co-operative Banks on the other hand
provide credit and other associated facilities to the rural and agricultural sectors.

In World, Co-operative activity was stated in December 1844 in Britan. Social

development is the sole aim of co-operative activity. Co-operative societies came in to
begin when the co-operative societies Act-1904, was enacted. A co-operative society
is the society of voluntary and organized group of individuals. The movement was
started with the aim of providing farmer funds with low rate of interest.

Under the Banking Regulation Act of 1904, co-operative banks have been brought
under the control of Reserve Bank Of India (RBI).In India, co-operative activity was
started in 1889.the noble ideals like unity, similarity, honesty, loyalty and mutual co-
operation etc. are the base of Cooperative activity.

In India, co-operative society Act was enacted in 1904. In 1909, Jambusar Urban co-
operative Bank was first established under this act. Then in 1925, new co-operative
society Act was come. Before then there was seven cooperative Banks in the Gujarat.

The activity of urban co-operative Banking was to extraordinary developed in the

latter half 20th century. There is two reason of this. Banking regulation Act 1949 was
applied to the co-operative Bank in 1966. At that time there was only 400 urban co-

operative Bank in the whole country. Then in 1969, nationalization of 14 large

business banks was become in the country. Today in our country, there are about 1400
 11

urban co-operative Bank providing service in area of villages and cities.

1.4 PRINCIPAL OF CO-OPERATIVE BANK: -

The basic principles of co-operation are as follows:

 Voluntary and open Membership: -

Co-operatives Banks are voluntary organizations, open to all persons able to use their
services and willing to accept the responsibilities of membership, without gender,
social, racial, political or religious discrimination.

 Democratic Member Control: -

Co-operative Banks are democratic organizations controlled by their members, who
actively participate in setting their policies and making decision, men and women
serving as elected. Member representatives are accountable to the membership. In
primary co-operatives members have equal voting right (one member, one vote) and
co-operative at other levels are organized in a democratic manner.

 Member Economic Participation: -

Members Contribute equitably to and democratically control the capital of their co-
operative. At least part of the capital is usually the common properly of the co-
operative.

Members usually receive limited compensation, if any, on capital subscribed as

condition of membership. Members allocated surpluses for any of the following
purposes develop in their co-operative, possibly by setting up reserves, part of which
at least would be indivisible, benefiting members in proportions to their
transactions with the co- operative, and supporting other activities approved by the
membership.

 Autonomy and Independence: -

Co-operatives Banks are autonomous, self-help organizations controlled by their
12

members. If they either into agreements with other organizations, includes

governments to raise capital from external sources, they do so in terms that ensure
democratic control by their members and maintain their co-operative autonomy.

 Education, Training and Information: -

Co-operatives Banks provide Education and Training for their members, elected
representatives, managers and employees so that they can contribute e4ffectively to
the development of their Co-operatives. They inform the general public-- particularly
young people and opinion leaders-- about the nature and benefit of Co-operation.

 Co-operation among Co-operatives: -

Co-operatives Banks serve their members most effectively and strengthen the Co-
operative movement by working together through local, national, regional and
international structures.

 Concern for community: -

Co-operative work for the sustainable development of their communities through
policies approved by their members.

State co-operative bank

Centralized Co-operative Bank

1.5 THREE TIRE STRUCTURE OF CO-OPERATIVE BANK IN

INDIA: -
Primary co-operative bank
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(1) Primary Co-operative credit society: -

Primary credit society is at the bottom of three-tier structure of co-operative Banks.
The society normally associates farmers. So only few people living within the area of
society are admitted as members, here individual of a precise area meet together
stimulated by sentiment, feeling, emotion of co-operation. Every member has to pay
his share in a share capital.

(2) District Co-operative Bank: -

This bank is a link joining state co-operative bank with the primary credit society. The
Bank amasses deposits from rural area from the farmer and supplies opportunity for
secure investment of the money of primary credit society.

(3) State Co-operative Bank: -

These bank especially co-ordinates the activities of district central cooperative banks
and give them required direction. State co-operative bank is a chain between co-
operative activity and country’s money market.

1.6 CO-OPERATIVE FLAG: -

The international co-operative alliance has in 1925 adopted the beautiful seven-
colored pattern of the rainbow horizontal strips as its international flag, the flag of co-
operation, progress and peace. The flag has seven colors. They are violet, indigo, blue,
green, yellow, orange and red.

Rainbow is regarded as an auspicious omen,

Farmers see the rainbow and start ploughing their fields,
they read in it the message about rains to come,
It is thus a symbol of hope a harbinger peace.

Men see co-operation in its multi-colored patterned, each color blending with the
other to make one harmonious. Whole an ultimately all-pervading harmony - unity in
diversity.
14

The seven hues of the rainbow when blended together reunite to present pure
unstained white effulgence. Thus it stands for purity truth and righteousness.

It symbolizes the aims and ideals of the co-operative movement like the rainbow co-
operation brings hope to the depressed achieve harmony among diverse interest and
offer the promise of an ultimate and universe peace.

Co-operative by their own efforts inspired by a sense of fraternity, equity and love of
the past and creates a new economic system, a system in which capital plays the role
of servant instead of master, the object of production is organized self-help instead of
profit and human dignity is given the pride of place for achieving a more equitable
and efficient economy better social adjustment and a more balanced system of
democracy.
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2.1 INTRODUCTION

Name of the Bank : Varachha Co-operative Bank

Type of Bank : Co-operative Bank

Established : 1995

Founder : Shri P.B.Dhakecha

Chairman : Shri Kanjibhai R Bhalala

Head Office : Aefil tower,

L.H Road,

Surat-6

Ph: 0261-4008000

Total Employees : 131

Total Branches : 9

SCENARIO OF ORGANIZATION
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CHAIRMEN

P.B. Dhakecha

VICE CHAIRMEN

Bhupendrabhai K. Ribadiya

MANAGING DIRECTOR

Bhavanbhai B. Navapara

BOARD OF DIRECTOR

GENERAL MANAGER

A.D.Bhalani

Ring Road Katargam Sachin

Kapodra Branch Branch Branch
Branch N.M. Lad M. Malaviya S.L.
B. C. Sorathia bhut

Kamrej Branch Kadodara Branch Punagam

A.V. Patel D.S. Bhuva Branch
P.D. Kelavala
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2.2 HISTORY OF THE VARACHHA CO-OPERATIVE BANK LTD.

The people in Saurashtra, located in western part of Gujarat, are always depending
upon the rain-fed cultivation. As a search for income generation in an alternate way
for their survival, they have chosen Surat city.

where there is a good scope for trade in Diamond and Textile sector. Well off people
have entered into the trading sector and the others on labour front. In a phased
manner, the population of the people, involved in diamond trade, belonging to
Saurashtra increased to a sizeable extent in Surat and in particular in the area of
Varachha.

It was become obvious for a necessity of a Bank for their own people; the efforts were
taken by a well known philanthropist, story writer and columnist in local dailies, Mr.
P. B. Dhakecha, founder chairman of our Bank. As such, The Varachha Cooperative
Bank Ltd., came into existence on 16th October 1995 and Inauguration ceremony was
done on the hands of Shree Swami Sacchidanand.

Some of VCB directors are belonging to diamond trade, who are official site holders
of getting rough block diamonds from foreign countries. At the end of the first
financial year the number of shareholders was 4484, Share Capital 57.44 lacs,
Deposits Rs.2.70 cr Advance Rs.2.07 cr. and profit stood at 4.77 lacs.

VCB has gradually developed the Banking activities and at the end of 5th year, with a
network of 5 branches, the share capital and reserves raised to more than 8 cr. and the
deposits have crossed 100 cr. mark, which is a rare phenomenon in Cooperative
Banking Sector in all over India and the number of depositors have increased 58222.

The Bank has been awarded with First Prize for the best performance among all
Cooperative banks in Surat District during the FY.2000 - 01. At present the share
capital and reserves raised to nearly 40 cr. The deposit is Rs.160.70 cr. Advances
78.21 cr. Total 7 branches and 130 staff members. In spite of run in a cooperative
19

sector in the year 2001, due to Madhavpura episode, the Bank has not only survived
but also developed the base without any difficulty due to confidence reposed upon by
the public with VCB.

2.3 MISSION

Varachha co-operative bank is committed to satisfy its banking customers, share

holders, employees and regulators through continually improving banking services,
innovation in products, technology up gradation, knowledge of team work and
strengthening customer relationship.

VISION

 Satisfying customer through faster services and latest technology and services.
 Satisfying Share holder through regular and highest dividend.
 To be No.1 urban co-operative bank among all co-operative bank.

QUALITY POLICY

 Security: bank paid di & cgci premium regularly for the safety of customer’s
deposit up to 1,00,0000
 Innovation: recognizing the different needs of customers, the bank offers
range of innovative services and latest technology to meet these needs.
 Integrity
 Customer centric
 people care “one for all and all for one”
 Team work
 Joy and simplicity
 Transparent
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 Success
 Trust:

2.4 MILESTONES IN THE HISTORY

Varachha Co-Operative Bank began its operations in 1995 with a simple

mission: “To satisfy the necessity of their own people ".

Today, they are proud to say that they are well on their way towards that goal. It is
extremely gratifying that their efforts towards providing customer convenience have
been appreciated.

 Jilla Sahkari Sangh Best Co-op. Bank in Surat Dist. for the year 2000-2001:
Shield from Surat Jilla Sahkari Sangh
 Surat Jilla Sahkari Sangh: Shield Award received by Shri P. B. Dhakecha
(Founder Chairman)
 Rashtriya Viakas Ratan Gold Award Rashtriya Vikas Ratan Gold Award from
International Integration & Growth Society, New Delhi
 The South Guj. Co-op. Bank's Association Ltd., Surat Award received from
The South Guj. Co-op. Bank's Association Ltd., Surat for the year 2007-08
 Best Co-op. Bank in Surat Dist. for the year 2007-2008 Best Co-op. Bank in
Surat Dist. for the year 2007-2008: Shield from Surat Jilla Sahkari Sangh
 Highest Blood Donation Collection Award-2008 Award received from Lok
Samrpan Blood Bank, Surat for Highest Blood Collection during the year -2008 in
one Camp
21

2.5 BOARD OF DIRECTORS:

NAME POST

Shri P.B.Dhakecha Founder Chairman

Shri Kanjibhai R. Bhalala Chairman

Shri Prabhudas T. Patel Vice- Chairman

Shri Bhavanbhai B. Navapara Managing Director

Shri Lavjibhai P. Savani Director

Shri G.R.Asodariya Director

Shri Jivrajbhai K Patel Director

Shri Kanjibhai R. Vadariya Director

Shri Babubhai V. Magukiya Director

Mrs. Vimlaben R. Vaghani Director

Mrs. Smrutiben L. Dobariya Director

Shri A. D. Balani GM

Shri Vidhalbhai B. Dhanani AGM

2.6 FUNCTION OF THE VARACHHA CO-OPERATIVE BANK

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Function of the Bank

Providing Loan and Providing Other

Taking Deposit
Advances Services

Loan and Advances

 Vehicle Loan

 Loan against gold ornaments

 Loan on personal guarantees (Surety Loan)

 Retail trade business

 Professional and Self employed

 Loan against Bank’s own deposits/NSC

 Cash credit – hypothecation on stocks on trade

 Technology Up gradation Finance (TUF) loan with subsidy

Besides the banking activity,VCB is also having tie-up arrangements with insurance
companies on referral basis, as per RBI guidelines.VCB have covered with accident
insurance cover for the shareholders, depositors and borrowers of the Bank and have
received settlement to the tune of Rs.1 crore from the insurance companies.
 23

The data pertaining to Bank is being sent to Reserve Bank of India, banking regulator
of the country, through e-Mail under offsite surveillance system (OSS).

 OTHER VITAL FACTORS OF VCB

 One of the leading cooperative Banks in South Gujarat

 Audit grade, continuously at ‘A’, from the beginning

 Any Branch Banking (ABB)

 CCTV system is being installed to monitor the alertness of the entire banking
activity, fitted with cameras at the vital points.
 Bank has started E-payment facility for the customers of the Bank for the
purpose of payment of Income-Tax.
 Personalized Cheque Book are being issued to all the customers of the Bank. -
RTGS/NEFT facility is also available.
 Mobile Banking system to customers for getting various details about their
accounts like Current Balance, Cheque Return Status, FD Rates, Loan Rates,
Various Loan Schemes etc. by way of SMS.
 Display/provision of VAT machine in Banking hall, for customers’ approach

 Strong working capital, Deposit base and our investment assets are profit
oriented
 Net NPA continuously at zero percent

 No default in CRR/SLR

 Concurrent audit system

 Implementation of Know Your Customer (KYC) policy

 Teller system for payment up to Rs.20000 in CA and Rs.10000 in SB

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 Franking of adhesive stamp duty – arranged by Revenue Dept. of Gujarat

State.

2.7 SOCIAL CONTRIBUTION

Arrange blood donation camps at regular interval time to time

 On 2nd October 2008 Bank has arranged Mega Blood Donation Camp and
collected 2222 bottles of blood. Bank gives Rs.50000/- accident insurance cover
to all the blood donors.

 Again on 2nd October 2009 Bank has arranged Mega Blood Donation Camp and
collected 3456 bottles of blood. Bank gives Rs.50000/- accident insurance cover
to all the blood donors.

Accident Insurance
Bank has taken Group Insurance Policy every year for its valued Share Holders and
Customers for Rs.50000/- to Rs.300000/- [Depending upon various accounts]. Under
this service, insurance company paid approximately Rs.1.25 Crore to its Share olders
and Customers through bank.

Active Role in Samuh Lagna [Mass Marriage System]

Bank employees had actively participated and helpful in Mass Marriage System
organized by Saurashtra Patel Seva Samaj from time to time in various way.
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3.1 OBJECTIVES OF THE STUDY

Primary Objective:
The basic idea behind undertaking the Grand Project on NPA was to:
 To evaluate NPAs (Gross and Net) of VCB.
 To calculate the weight of NPA in risk management of VCB.
 To analyze financial performance of VCB bank.at different level of NPA

Secondary Objective
 To Know the Concept of Non Performing Asset
 To evaluate profitability positions of bank.
 To Know the Impact of NPAs
 To Know the Reasons for NPAs
 To learn Preventive Measures

3.2 LITERATURE REVIEW

I have referred Co-operative Banker’s Hand Book-2009-10 written by John D shilva
and come to know basic concept of NPAs, provisioning norms, income recognition
norms, and recovery policy etc.

I also read Story of NPAs written by Anil Chawla that gives me some ideas of NPAs
problems face by bank. The securitization and reconstruction of financial Assests and
enforcement of security interest act, 2002
(http___www.drat.tn.nic.in_Docu_Securitisation-Act) give idea about basic
presentation norms in balance sheet and annual report of bank.

3.3 RESEARCH DESIGN

Type of research: In this project Descriptive research methodologies were use.
27

 At the first stage theoretical study is attempted.

 The second stage Historical study is attempted.

 At the Third stage Comparative study of NPA is undertaken.

Time period: 6-weeks

Sample Size: I have taken 5 years annual report data and NPA data of Varachha co-
operative bank.

3.4 SOURCES OF DATA:

For the purpose of project data is very much required which works as a food for
process which will ultimately give output in the form of information. So before
mentioning the source of data for the project I would like to mention that what type of
data I have collected for the purpose of project and what it is exactly.

Primary Data:

Primary data is basically the live data which I collected on field while talking with the
employees and I asked them list of question for which I had required for my project
and sometimes filled myself on the basis of discussion with the employees.
Secondary Data:

Secondary data for the base of the project I collected from intranet of the Bank and
from internet. Hand Book of co-operative Bank, Annual report of bank And news
papers.
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4.1 NON PERFORMING ASSETS (NPA)

Non-performing asset means an asset or account of borrower, which has been

classified by bank or financial institution as sub -standard, doubtful or loss asset, in
accordance with the direction or guidelines relating to assets classification
 29

issued by RBI.
An asset becomes nonperforming when it ceases to generate income for the bank.
Earlier an asset was considered as non-performing asset (NPA) based on the concept
of ‘Past Due’.

“A ‘non performing asset ‘(NPA) was defined as credit in respect of which interest
and installment of principal has remained ‘past Due’ for a specific period of time ”.

The specific period was reduced in a phased manner as under. Year Ended March, 31
specific period
1993 4 quarter
1994 3 quarters
1995 2 quarters
Due to the improvement in the payment and settlement system, recovery climate up
radiation of technology in the banking system etc, it was decided to dispense with
“past due “concept, with effect from March 31, 2001.
With effect from March 31, 2004 a non-performing asset shall be a loan or an advance
where

I. interest and/or installment of principal remain overdue for a period of more than
90 days in respect of a term loan.

II. The account remains ‘out of order ‘ for a period of more than 90 days ,in respect of
an overdraft/cash credit (OD/CC).

III. The bill over due for a period of more than 90 days, in case of bills purchased and
discounted.

IV. Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts
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Out of order
An account should be treated as out of order if the outstanding balance remains
continuously in excess of sanctioned limit /drawing power.

in case where the outstanding balance in the principal operating account is less than
the sanctioned amount /drawing power, but there are no credits continuously for six
months as on the date of balance sheet or credit are not enough to cover the interest
debited during the same period ,these account should be treated as ‘out of order’.

Overdue
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on
due date fixed by the bank.

Identification of asset as NAPs should done on an ongoing basis

The system should ensure that identification of NPAs is done on going basis and
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 prescribed norms.

Bank should also make provisions for NPAs as at the end of each calendar quarter i.e.
as at the end of March/June/September/December, so that the income and expenditure
account for the respective quarter i.e. as well as the P& L account and balance sheet
for the year end reflects the provision made for NPAs.
31

4.2 NORMS FOR ASSET CLASSIFICATION

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ASSET

PERFORMING ASSETS NON-PERFORMING

OR STANDARD ASSET ASSETS

SUB STANDARD
DOUBTFUL ASSETS LOSS ASSETS
ASSETS

LESS THAN 1 YEAR

1 TO 3 YEARS

ABOVE 3 YEARS
33

DEFINATION AS PER THE CLASSIFICATION OF 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
classification in to following categories:

1. STANDARD ASSETS:
Standard assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here, it is also very
important that in this case the arrears of interest and the principal amount of loan do
not exceed 90 days at the end of financial year.

If asset fails to be in category of standard asset that is amount due more than 90 days
then it is NPA and NPAs are further need to classify in sub categories. Banks are
required to classify non-performing assets further into the following three categories
based on the period for which the asset has remained non-performing:

1. Sub-standard Assets
2. Doubtful Assets
3. Loss Assets

Sub-standard Assets:--
With effect from 31 March 2005, a sub standard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following features are
exhibited by sub standard assets:

the current net worth of the borrowers / guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the banks in full; and
the asset has well-defined credit weaknesses that jeopardize the liquidation of the debt
34

and are characterized by the distinct possibility that the banks will sustain some loss,
if deficiencies are not corrected.

Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets that were
classified as sub-standard, with the added characteristic that the weaknesses make
collection or liquidation in full, - on the basis of currently known facts, conditions and
values - highly questionable and improbable.

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

a) less than 1 year

b) 1 to 3 years
c) 3 years and above

Loss Assets:--
A loss asset is one where loss has been identified by the bank or internal or external
auditors or by the co-operation Department or by the Reserve Bank of India
inspection but the amount has not been written off, wholly or partly.

In other words, such an asset is considered un-collectible and of such little value that
its continuance as a bankable asset is not warranted although there may be some
salvage or recovery value

4.3 FACTORS REPONSIBLE FOR RISE IN NPA

35

The banking sector has been facing the serious problems of the rising NPAs.The
NAPs in Any bank are growing due to external as well as internal factors.

EXTERNAL FACTORS:-

Ineffective Recovery Tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans
and advances. Due to their negligence and ineffectiveness in their work the bank
suffers the consequence of non-recover, their by reducing their profitability and
liquidity.

Willful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing
it. These groups of people should be identified and proper measures should be taken
in order to get back the money extended to them as advances and loans.

Natural Calamities
This is the measure factor, which is creating alarming rise in NPAs of. 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 govt. Policies give birth to
industrial sickness.

Hence the banks that finance those industries ultimately end up with a low recovery
36

of their loans reducing their profit and liquidity.

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 they borrow to operate these activities. The banks recover the amount by
selling of their assets, which covers a minimum label. Thus the bank records the
non-recovered part as NPAs and has to make provision for it.

Change on Govt. 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.

The fallout of handloom sector is continuing as most of the weavers Co-operative

societies have become defunct largely due to withdrawal of state patronage. The
rehabilitation plan worked out by the Central government to revive the handloom
sector has not yet been implemented. So the over dues due to the handloom sectors
are becoming NPAs.

INTERNAL FACTORS:-
37

Defective Lending process

There are three cardinal principles of bank lending that have been followed by the
commercial banks since long.

1. Principles of safety
2. Principle of liquidity
3. Principles of profitability

Principles of safety:-
By safety it means that the borrower is in a position to repay the loan both principal
and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets
2. Success in business

Willingness to pay depends on: 1. Character

2. Honest
3. Reputation of borrower

The banker should, there fore take utmost 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.

Inappropriate Technology
Due to inappropriate technology and management information system, market riven
decisions on real time basis can not be taken. Proper MIS and financial accounting

system is not implemented in the banks, which leads to poor credit collection, thus
38

NPA.
All the branches of the bank should be computerized.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs.

Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible
assets as security to safe guard its interests. When accepting securities banks should
consider the

 Marketability

 Acceptability

 Safety

 Transferability.

The banker should follow the principle of diversification of risk based on the famous
maxim “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 them in few industries or in a
few cities.

If a new big customer meets misfortune or certain traders

or industries affected adversely, the overall position of the bank will
not be affected.

Absence of regular industrial visit

39

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of
bank officials to the customer point decreases the collection of interest and principals
on the loan.
The NPAs due to willful defaulters can be collected by regular visits.

4.4 PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, if the
banks fails, owners loose their assets. In modern times this may affect a broad
pool of shareholders.

2. Depositors do not receive a market return on saving. In the worst case if the bank
fails, depositors loose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates,

lower deposit rates and higher lending rates repress saving and financial market,
which hamper economic growth.

4. Non performing loans epitomize bad investment. They misallocate credit from
good projects, which do not receive funding, to failed projects. Bad investment
ends up in misallocation of capital, and by extension, labour and natural
resources.

5. Non performing asset may spill over the banking system and contract the money
stock, which may lead to economic contraction. This spill over effect can canalize
through liquidity or bank insolvency:

a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country.
40

b) Illiquidity constraints bank in paying depositors.

c) An undercapitalized bank exceeds the bank’s capital asset.

4.5 INDIAN ECONOMYAND NPA

 Gross NPAs in Indian banking sector have declined sharply to close to 3% in

2006 (15.7 % at end march 1997) Net NPAs of the banking sector are now at
close to one percent and the gap between the gross and net NPAs has narrowed
over the years. Recovery of dues is more than the fresh slippages.

 The decline in NPAs is particularly significant as income recognition asset

classification and provisioning norms were tightened over the years. For
instance bank now follow 90 days delinquency norms as against 180 day
earlier, Banks are also required to make general provisioning (0.40 %) for
standard advances.

 According to Reserve Bank of India, improved profitability, underpinned by

robust macroeconomic environment and upturn in interest rate cycle, has
enabled banks to reduce the backlog of NPAs
41

4.6 RBI GUIDELINES FOR CLASSIFICATION OF ASSETS

1. Basic Consideration
In simple terms the classification of assets should be done by considering the well
defined credit weaknesses & extent of dependency on collateral security for
realization of dues.

In account where there is a potential threat to recovery on account and existence of

other factor such as fraud committed by borrowers it will not be prudent for bank to
classify that account first as sub-standard and then as doubtful. Such account should
be straight away classified as doubtful asset or loss asset as appropriate, irrespective
of the period for which it has remained as NPA.

2. Advances Granted Under Rehabilitation

 Bank are not permitted to do classification of any advances in respect of which
the term have been re-negotiated unless the package of re –negotiated terms
has worked satisfactory for a period of one year.

 A similar relaxation is also made in respect of SSI units which are identified as
sick by banks themselves and where rehabilitation packages programs have
been drawn by the banks themselves or under consortium arrangements.

3. Internal System for Classification of Asset as NPA

 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.
42

 The banks may fix a minimum cut-off point to decide what would constitute a
high value account depending upon their respective business levels. The cut-off
point should be valid for the entire accounting year.
 Responsibility and validation level for proper assets classification may be fixed
by bank

 The system should ensure that doubt 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.

4.7 INCOME RECOGNITION NORMS

 Income recognition – Policy

According to the act of 1st April, 1992 the income recognition policy is as
follows.
 The policy of income recognition has to be objective and based on the record
of recovery. Internationally income from non-performing assets (NPA) is not
recognized on accrual basis but is booked as income only when it is actually
received. Therefore, the banks should not charge and take to income account
interest on any NPA.

 However, interest on advances against term deposits, NSCs, IVPs, KVPs and
Life policies may be taken to income account on the due date, provided
adequate margin is available in the accounts.

 Fees and commissions earned by the banks as a result of re-negotiations or

rescheduling of outstanding debts should be recognized on an accrual basis

over the period of time covered by the re-negotiated or rescheduled extension

of credit.

 If Government guaranteed advances become NPA, the interest on such

43

advances should not be taken to income account unless the interest has been
realized.

 Reversal of income:

 If any advance, including bills purchased and discounted, becomes NPA as at

the close of any year, interest accrued and credited to income account in the
corresponding previous year, should be reversed or provided for if the same is
not realized. This will apply to Government guaranteed accounts also.

 In respect of NPAs, fees, commission and similar income that have accrued
should cease to accrue in the current period and should be provided for with
respect to past periods, if uncollected

 Leased Assets:
 The net lease rentals (finance charge) on the leased asset accrued and credited
to income account before the asset became non-performing, and remaining
unrealized, should be reversed or provided for in the current accounting
period.

 The term 'net lease rentals' would mean the amount of finance charge taken to
the credit of Profit & Loss Account and would be worked out as gross lease
rentals adjusted by amount of statutory depreciation and lease equalization
account.

 As per the 'Guidance Note on Accounting for Leases' issued by the

Council of the Institute of Chartered Accountants of India (ICAI), a separate
Lease Equalization Account should be opened by the banks with a
corresponding debit or credit to Lease Adjustment Account, as the case may
44

be.

 Further, Lease Equalization Account should be transferred every year to the

Profit & Loss Account and disclosed separately as a deduction
from/addition to gross value of lease rentals shown under the head 'Gross

4.8 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. The Report should
be furnished as per the prescribed format given in the Annexure I.

 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.

 REPORTING FORMAT FOR NPA - GROSS AND NET NPA

Name of the Bank:
Position as on………

PARTICULARS
1) Gross Advanced *
 45

2) Gross NPA *

3) Gross NPA as %age of Gross Advanced

4) Total deduction( a+b+c+d )

( a ) Balance in interest suspense a/c **

( b ) DICGC/ECGC claims received and held pending adjustment

( c ) part payment received and kept in suspense a/c

( d ) Total provision held ***

5) Net advanced ( 1-4 )

6) Net NPA ( 2-4 )

7) Net NPA as a %age of Net Advance

*excluding Technical write-off of Rs._____crore.

**Banks which do not maintain an interest suspense a/c to park the

accrued interest on NPAs may furnish the amount of interest receivable on
NPAs.

***Excluding amount of Technical write-off (Rs.____crore) and provision on

standard assets. (Rs.____crore).

4.9 PROVISIONING NORMS

According to the norms the provisions should be made on the nonperforming assets
on the basis of classification of asset as we have already discussed. Taking in to
account these provisioning norms the banks have to make provision on different
assets like loss assets, Doubtful Assets and Standard Assets as below:
46

 Loss assets:
 The entire asset should be written off after obtaining necessary approval from the
competent authority and as per provisions act of co-operative society Act. If the
asset are permitted to remain in the books for any reason. 100% of the outstanding
should be provided for.

 If respect of an asset identified as asset, full provision at 100 per cent should be
made if the expected salvage value of the security is negligible.

 Sub standard Asset:

A general provision of 10% on the total outstanding should be made without making
any allowance for DICGC/ECGC guaranteed cover and securities available.

 Floating provisions:
Some of the banks make a 'floating provision’ over and above the specific provisions
made in respect of accounts identified as NPAs.

The floating provisions, wherever available, could be set-off against provisions

required to be made as per above stated provisioning guidelines. Considering that
higher loan loss provisioning adds to the overall financial strength of the banks and
the stability of the financial sector, banks are urged to voluntarily set apart
provisions much above the minimum prudential levels as a desirable practice.

 Provisions on Leased Assets:

Leases are peculiar transactions where the assets are not recorded in the books of the
user of such assets as Assets, whereas they are recorded in the books of the owner
even though the physical existence of the asset is with the user (lessee)--(AS19 ICAI)
47

 Doubtful assets
PERIOD FOR WHICH THE ADVANCE HAS PROVISION
REMAINED ‘DOUBTFUL’ CATEGORY REQUIREMENT

Up to one year 20 per cent

One to three years 30 per cent

More than three years  60% three years on or

(1) Outstanding Stock Of Npas As afterapril1, 2007 with effect
On March 31, 2007 from March 31, 2008
 75% with effect from march
31,2009
 100 per cent with effect from
March 31,2010
(2)Advances Classified As 100 per cent
‘Doubtful For More Than Three
Year’
48

4.10 IMPACT OF NPA

Profitability:-
NPA means booking of money in terms of bad asset, which occurred due to wrong
choice of client. Because of the money getting blocked the prodigality of bank
decreases not only by the amount of NPA but NPA lead to opportunity cost also as that
much of profit invested in some return earning project/asset. So NPA doesn’t affect
current profit but also future stream of profit, which may lead to loss of some long-
term beneficial opportunity. Another impact of reduction in profitability is low ROI
(return on investment), which adversely affect current earning of bank.

Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for short period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to
lack of money. Routine payments and dues.

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

Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in terms of
market credit. It will lose it’s goodwill and brand image and credit which have
negative impact to the people who are putting their money in the banks.
49

4.11 EARLY SYMPTOMS BY WHICH ONE CAN RECOGNIZE A

PERFORMING ASSET TURNING IN TO NON-PERFORMING
ASSET
Four categories of early symptoms:-

1. Financial:
 Non-payment of the very first installment in case of term loan.
 Bouncing of Cheque due to insufficient balance in the accounts,
 Irregularity in installment,
 Irregularity of operations in the accounts,
 Unpaid over due bills,
 Declining Current Ratio,
 Payment which does not cover the interest and principal amount of that
installment.
 While monitoring the accounts it is found that partial amount is diverted to
sister concern or parent company.

2. Operational and Physical:

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

3. Attitudinal Changes:
 Use for personal comfort,
 stocks and shares by borrower,
 Avoidance of contact with bank,
50

 Problem between partners

4. Others:
 Changes in Government policies,
 Death of borrower,
 Competition in the market.

4.12 PREVENTIVE MEASUREMENT FOR NPA

Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it’s
too late to retrieve the situation- both in terms of rehabilitation of the project and
recovery of bank’s dues.

Identification of weakness in the very beginning that is: When the account starts
showing first signs of weakness regardless of the fact that it may not have become
NPA, is imperative. Assessment of the potential of revival may be done on the basis of
a techno-economic viability study.

Restructuring should be attempted where, after an objective assessment of the

promoter’s intention, banks are convinced of a turnaround within a scheduled
timeframe.

In respect of totally unviable units as decided by the bank, it is better to facilitate

winding up selling of the unit earlier, so as to recover whatever is possible through
legal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent:-

Identifying borrowers with genuine intent from those who are non-serious with no
commitment or stake in revival is a challenge confronting bankers.
51

Here the role of frontline officials at the branch level is paramount as they are the
ones who have intelligent inputs with regard to promoters’ sincerity, and capability to
achieve turnaround. Base of this objective assessment, banks should decide as quickly
as possible whether it would be worthwhile to commit additional finance.

In this regard banks may consider having “Special Investigation” of all financial
transaction or business transaction, books of account in order to ascertain real factors
that contributed to sickness of the borrower. Banks may have penal of technical
experts with proven expertise and track record of preparing techno-economic study of
the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or

sudden requirement of additional fund may be entertained at branch level, and for this
purpose a special limit to such type of cases should be decided. This will obviate the
need to route the additional funding through the controlling offices in deserving cases,
and help avert many accounts slipping into NPA category.

Timeliness and Adequacy of response:-

Longer the delay in response, grater the injury to the account and the asset. Time is a
crucial element in any restructuring or rehabilitation activity. The response decided on
the basis of techno-economic study and promoter’s commitment, has to be
adequate in terms of extend of additional funding and relaxations etc.

under the restructuring exercise. The package of assistance may be flexible and bank
may look at the exit option.
52

Focus on Cash Flows:-

While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading

Appraisal for fresh credit requirements may be done by analyzing funds flow in
conjunction with the Cash Flow rather than only on the basis of Funds Flow.

Management Effectiveness:-
The general perception among borrower is that it is lack of finance that leads to
sickness and NPAs. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect that
affects a borrowing unit’s fortunes.

A bank may commit additional finance to an aling unit only after basic viability of the
enterprise also in the context of quality of management is examined and confirmed.
Where the default is due to deeper malady, viability study or investigative audit
should be done.

it will be useful to have consultant appointed as early as possible to examine this

aspect. A proper techno-economic viability study must thus become the basis on
which any future action can be considered.
 53

4.13 TOOLS FOR RECOVERY OF NPAS

Credit

Default

Inability Willful

To Pay Defaut

Lok Adalat Asset

Debt Securitization
Unviable Viable Recovery Reconstruction

Act
Tribunals

Compro- Rehabili- Sole

mise tation Banker

Convern Fresh

Corporate Into Issue of

Debt
Restructuri WCTL term
ng loan

Fresh Rephasement

WC of
limit
Repayment
54

Once NPA occurred, one must come out of it or it should be managed in most efficient
manner. Legal ways and means are there to overcome and manage NPAs. We will
look into each one of it.

 Willful Default:-
A] Lok Adalat and Debt Recovery Tribunal
B] Securitization Act
C] Asset Reconstruction

Lok Adalat: institutions help banks to settle disputes involving account in "doubtful"
and "loss" category, with outstanding balance of Rs.5 lakh for compromise settlement
under Lok Adalat.

Debt recovery tribunals have been empowered to organize Lok Adalat to decide on
cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite
effective for speedy justice and recovery of small loans. The progress through this
channel is expected to pick up in the coming years.

Debt Recovery Tribunals (DRT):-

The recovery of debts due to banks and financial institution passed in March 2000 has
helped in strengthening the function of DRTs. Provision for placement of more than
one recovery officer, power to attach defendant’s property/assets before judgment,
penal provision for disobedience of tribunal’s order or for breach of any terms of
order and appointment of receiver .

power of realization, management, protection and preservation of property are

expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs
in the times to come. DRTs which have been set up by the Government to facilitate
speedy recovery by banks/DFIs, have not been able make much impact on loan
55

recovery due to variety of reasons like inadequate number, lack of

infrastructure, under staffing and frequent adjournment of cases.

It is essential that DRT mechanism is strengthened and vested with a proper

enforcement mechanism to enforce their orders. Non observation of any order passed
by the tribunal should amount to contempt of court, the DRT should have right to
initiate contempt proceedings. The DRT should empowered to sell asset of the debtor
companies and forward to the winding - up court for distribution among the lenders.

 Inability to Pay
Consortium arrangements:
Asset classification of accounts under consortium should be based on the record of
recovery of the individual member banks and other aspects having a bearing
on the recoverability of the advances.

Where the remittances by the borrower under consortium lending arrangements are
pooled with one bank and/or where the bank receiving remittances is not parting with
the share of other member banks, the account will be treated as not serviced in the
books of the other member banks and therefore, be treated as NPA.

The banks participating in the consortium should, therefore, arrange to get their share
of recovery transferred from the lead bank or get an express consent from the lead
bank for the transfer of their share of recovery, to ensure proper asset classification in
their respective books.

 Restructuring / Rescheduling of Loans

A standard asset where the terms of the loan agreement regarding Interest and
principal have been renegotiated or rescheduled after commencement of
production should be classified as sub-standard and should remain in such category
56

for at least one year of satisfactory performance under the renegotiated or rescheduled

In the case of sub-standard and doubtful assets also, rescheduling does not entitle a
bank to upgrade the quality of advance automatically unless there is satisfactory
performance under the rescheduled / renegotiated terms.

Following representations from banks that the foregoing stipulations deter the banks
from restructuring of standard and sub-standard loan assets even though the
modification of terms might not jeopardize the assurance of repayment of dues from
the borrower, the norms relating to restructuring of standard and sub-standard assets
were reviewed in March 2001.

In the context of restructuring of the accounts, the following stages at which the
restructuring / rescheduling / renegotiation of the terms of loan agreement could take
place can be identified:

1. Before commencement of commercial production;

2. After commencement of commercial production but before the asset has been
classified as substandard,
3. After commencement of commercial production and after the asset has been
classified as substandard.

In each of the foregoing three stages, the rescheduling, etc., of principal and/or of
interest could take place, with or without sacrifice, as part of the restructuring package
evolved.

 Treatment of Restructured Standard Accounts:

A rescheduling of the installments of principal alone, at any of the aforesaid first two
57

stages would not cause a standard asset to be classified in the substandard category
provided the loan/credit facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages would not
cause an asset to be downgraded to substandard category subject to the condition that
the amount of sacrifice, if any, in the element of interest, measured in present value
terms, is either written off or provision is made to the extent of the sacrifice involved.

For the purpose, the future interest due as per the original loan agreement in respect of
an account should be discounted to the present value at a rate appropriate to the risk
category of the borrower (i.e., current PLR+ the appropriate credit risk premium for
the borrower-category) and compared with the present value of the dues expected to
be received under the restructuring package.

discounted on the same basis. In case there is a sacrifice involved in the amount of
interest in present value terms, as at (b) above, the amount of sacrifice should either
be written off or provision made to the extent of the sacrifice involved.

 Treatment of restructured sub-standard accounts:

A rescheduling of the installments of principal alone would render a sub-standard
asset eligible to be continued in the sub-standard category for the specified
period, provided the loan/credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to be

continued to be classified in substandard category for the specified period subject to

the condition that the amount of sacrifice.

if any, in the element of interest, measured in present value terms, is either written off
or provision is made to the extent of the sacrifice involved.For the purpose, the future
58

interest due as per the original loan agreement in respect of an account should be
discounted to the present value at a rate appropriate to the risk category of the
borrower (i.e., current PLR + the appropriate credit risk premium for the borrower
category) and compared with the present value of the dues expected to be received
under the restructuring package, discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value terms, as
at (b) above, the amount of sacrifice should either be written off or provision made to
the extent of the sacrifice involved.

Even in cases where the sacrifice is by way of write off of the past interest dues, the
asset should continue to be treated as sub-standard.

 Up gradation of restructured accounts :

The sub-standard accounts which have been subjected to restructuring etc.,
whether in respect of principal installment or interest amount, by whatever modality,
would be eligible to be upgraded to the standard category only after the specified
period

i.e., a period of one year after the date when first payment of interest or of
principal, whichever is earlier, falls due, subject to satisfactory performance during
the period. The amount of provision made earlier, net of the amount provided for the
sacrifice in the interest amount in present value terms as aforesaid, could also be
reversed after the one year period.

During this one-year period, the substandard asset will not deteriorate in its
classification if satisfactory performance of the account is demonstrated during the
period. In case, however, the satisfactory performance during the one-year period
is not evidenced, the asset classification of the
restructured account would be governed as per the applicable prudential norms with
59

reference to the pre restructuring payment schedule.

 General:
These instructions would be applicable to all type of credit facilities including
working capital limits, extended to industrial units, provided they are fully covered by
tangible securities.

As trading involves only buying and selling of commodities and the problems
associated with manufacturing units such as bottleneck in commercial production,
time and cost escalation etc are not applicable to them, these guidelines should not
be applied to restructuring/ rescheduling of credit facilities extended to traders.

While assessing the extent of security cover available to the credit facilities,
which are being restructured/ rescheduled, collateral security would also be
reckoned, provided such collateral is a tangible security properly charged to the bank
and is not in the intangible form like guarantee etc. of the promoter/ others.
60

5.1FINANCIAL STRENGTHS OF VARACHHA CO-OPERATIVE

BANK
 61

(Amt in Lacs)

CONTENT 2006- 2007- 2008- 2009- 2010-

07 08 09 10 11
SHARE 10717 11569 12669 13566 17,192
HOLDER
CAPITAL 431 463 524 591 729

DEPOSIT 16297 16827 17157 22416 27295

ADVANCES 7326 8023 9203 9489 11588

NET PROFIT 151 281 302 315 405

WORKING 208.38 221.15 226.96 279.11 34709

CAPITAL
NO.OF A/C 102317 108906 105674 115528 121922

AUDIT A A A A A
CLASS

DIV.RATE 12.00% 12.00% 12.00% 12.00% 15%

COMPARATIVE FINANCIAL STATEMENT

(Amt in Lacs)
 62

PERTICULARS 2007-08 2008- 2009-10 2010-11

09
Gross NPA 221.02 212.93 222.63 55.48

Standard Asset 7801.84 8990.24 9266.04 11532

Sub-standard Asset 9.27 0 24.81 0

Doubtful Asset 192.48 190.13 0 0

Less than 1 year 0.14 0 0 0

1 to 3 years 91.82 0 0 0

More than 3 years 100.52 190.13 0 0

Loss Asset 19.27 22.80 197.82 55

Total Provision 454.88 498.54 587.00 649.00

Gross Advances 8022.86 9203.17 9488.67 11587

Interest Earned 1653.54 1807.32 1997.93 2187.94

Interest paid 735.66 784.47 944.99 1105

Total Assets 21773.65 22690 28835.48 30980

5.3 RATIO ANALYSIS

 Gross NPA ratio of Varachha Co-Operative Bank

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

Gross NPA Ratio= (Gross NPA/Gross advances)*100

(Amt in Lacs)
Particulars 2005-06 2006-7 2007-08 2008-09 2009-10 2010-11
Gross NPA 284.65 245.84 221.02 212.93 222.63 55.84
Gross 5966.51 9325.57 8022.86 9203.17 9488.67 11578.98
Advances
Gross NPA 4.77% 3.36% 2.75% 2.31% 2.35% 0.48%
Ratio

Interpretation
 Above table and chart indicates the quality of credit portfolio of the bank.
High gross NPA ratio indicates low quality credit portfolio of the bank and
vice-versa.

 We can see from the above five years gross NPA ratio (continuously
decreasing) of Varachha Co-Operative Bank that indicates positive trend for
bank and we can say that bank have good appraisal system.
 Though all banks will make provision for NPA so, Net NPA will become Zero
but we must consider Gross NPA of bank to know the true and fair situation of
bank.

 Net NPA Ratio of Varachha Co-Operative Bank

Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank
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balance sheets contain a huge amount of NPAs and the process of recovery and write
off of loans is very time consuming, the provisions the banks have to make against the
NPAs according to the central bank guidelines, are quite significant.

That is why the difference between gross and net NPA is quite high. The provision is
to be made for NPA account. Formula for that is as follow:

Net NPAs = (Gross NPAs – Provisions/Gross Advances

(Amt-in Lacs)
Provisions)*100

(Amt in Lacs)
Particulars 2005- 2006- 2007- 2008- 2009- 2010-11
06 07 08 09 10
Gross NPA 284.65 245.84 221.02 212.93 222.63 55.84

Gross Adv. 5966.51 7325.57 8022.86 9203.17 9488.67 11587.98

Provisions 401.25 421.70 454.88 498.54 587.00 649.11

Net NPA 0% 0% 0% 0% 0% 0%
Ratio
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Interpretation

 Above table indicates the degree of risk in the portfolio of the bank. High NPA
ratio indicates high quality of the risky asset in the bank for which no provision
was made.

 Above table of Net NPA Ratio of Varachha Co-Operative Bank is 0.00% which
shows that bank has enough provision capacity. So, here the degree of risk is less.

 Varachha co-operative Bank has done provision every year which is good at one
side but at other side it also reduces the net profit of the bank. And share holder
will get fewer dividends.

 Problem Asset Ratio of Varachha Co-Operative Bank

It has directly affected to the Return on Asset as well as Liquidity Risk Management
of the bank. It can be calculated by following formula:

Problem Asset Ratio= (Gross NPAs/Total Assets)*100

(Amt in Lacs)
Particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Gross NPA 245.84 221.02 212.93 222.63 55.84

Total Asset 20904.20 21773.65 22690.56 28835.47 30980

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Problem 1.18% 1.02% 0.93% 0.77% 0.18%

Asset
Ratio

Interpretation
 High Problem Asset Ratio indicates low liquidity of the firm’s asset.

 Here, we can see that Problem Asset Ratio of Varachha Co-Operative Bank is
gradually decreasing which show efficient management of NPA.

 So, Problem Asset Ratio of Varachha Co-Operative Bank shows sound financial
position of bank.

 Sub Standard Asset Ratio of Varachha Co-Operative Bank.

This ratio indicates scope of up gradation or improvement in NPA of bank. It can be
calculated as follow:

Sub standard Asset Ratio= (Total substandard asset/Gross

NPAs)*100

(Amt in Lacs)
2007-08 2008-09 2009-10 2010-11
Particulars
Total Sub- 9.27 0.00 24.81 0
Standard Asset
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Gross NPAs 221.02 212.93 222.63 55.84

Sub-Standard 4.19% 0% 11.14% 0%

Asset Ratio

Interpretation
 Sub-standard Asset Ratio indicates scope of up gradation in NPA. Above
mentioned Sub-standard Ratio of Varachha Co-operative Bank is 4.19% in 2007-
08 and It become 0% in 2008-09 that shows that Bank may recover all sub-
standard Assets or may written off that much of amount.

 Sub-standard Ratio is 24.81 % in 2009-10, Bank has to create 10% provision for
better future and also effective management of sub-standard assets to minimize
loss. Here, bank has wide scope of up gradation.

 Loss Asset Ratio of Varachha Co-operative Bank

It indicates the proportion of bad loan in the bank. However if the ratio increases in
the recent year, which is detrimental to the bank. The bank must take necessary steps
to control this ratio, as it indicates that there is increasing incidence of erosion of
securities and frauds in loan account in the bank. It can be calculated by following
formula:

Loss Asset Ratio= (Total Loss Assets/Gross NPAs)*100

(Amt in Lacs)
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Particulars 2007-08 2008-09 2009-10 2010-11

Total Loss Asset 19.27 22.80 197.82 55

Gross NPAs 221.02 212.93 222.63 55.84

Loss Asset Ratio 8.72% 10.71% 88.86% 98.49%

Interpretation
 This ratio shows the percentage of loss assets in the Gross NPA of the bank.
High Loss Asset Ratio means more proportion of loss asset in the Gross NPA.
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 High ratio indicates that bank has more fraudulent account and it is bad for bank.
Bank must take necessary action to reduce the level of loss assets.

 Here, Loss Assets Ratio of Varachha co-operative Bank is continuously increasing

which is not good for Bank. Bank has to take some steps to minimize this Loss for
better future of the Bank.

Doubtful Asset Ratio of Varachha Co-Operative bank

It indicates the scope of compromise for NPA reduction. It can be calculated by
following formula:

Doubtful Asset Ratio= (Total Doubtful Assets/Gross NPAs)*100

(Amt in Lacs)

Particulars 2007-08 2008-09 2009-10 2010-11

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Total Doubtful 192.48 190.13 0 0

Asset
Gross NPAs 221.02 212.93 222.63 55.84

Doubtful Asset 87.09% 89.29% 0% 0%

Ratio

Interpretation
 This ratio shows the percentage of doubtful assets in the Gross NPA of bank. High
Doubtful Assets ratio means more proportion of Doubtful Asset in the Gross NPA
i.e. more Doubtful Assets; Bank should take action through recovery policy to
reduce the level of doubtful assets.

 In Varachha co-operative Bank this Ratio is 87.09% in 2007-08 and 89.29% in

2008-09 but it become nill in 2009-10 that shows that:

 Bank efficiently managed its Doubtful Asset in 2009-10.

 Bank may create sufficient provision for loss Asset in previous years.

 Bank may successfully recovered doubtful Assets till 2009-10

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FINDINGS:

Non-performing Assets of a bank create a great impact on the performance and

overall function of the bank. The strength and financial position of the Bank can be
determined after assessing the non-performing assets of the Bank. In recent time
every bank have been facing a major problem of Non-performing Assets which has
cause several problem and even resulted in their shut down.

 As I have already calculated and analyzed various Ratio to know NPA position
and thereby financial position of bank. Gross NPA of Varachha Bank is
continuously decreasing from 4.77% to 2.35% (2005-06 to 2009-10) so we can
say that Bank effectively manage its NPAs. This is good for bank’s growth.

 Varachha Bank’s Net NPA Ratio is 0.00% from last five years that shows that
bank effectively follow provision norms and make sufficient provision against
NPAs.
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 Problem Assets Ratio of Varachha Co-operative Bank is also continuously

decreasing from 1.18% to 0.77% which indicates that proportion of NPAs to total
Assets is continuously decreasing that shows sound liquidity position of bank.

 Sub-standard Assets Ratio of VCB is highly fluctuated i.e. in 4.17% (2007-08)

and in 0.00% (2008-09) that shows that bank has effectively managed Sub-
standard Assets in 2008-09. In 2009-10 this ratio is 11.12% so; again bank
required to take necessary steps to recover it and has to make 10% provision for
sub-standard assets in this year.



 Doubtful Assets Ratio of VCB was 87.08% in 2007-08, 89.30% in 2008-09 but
0.00% in 2009-10 that shows that bank successfully managed its Doubtful Assets
and recovered it.

 VCB’s Loss Assets ratio is increasing continuously but on the other hand Bank’s
NPAs is decreasing continuously i.e. Gross NPAs which shows that Bank is
effectively manage its NPAs.
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SUGGESTIONS

 The Varachha Co-operative Bank’s Gross NPA is decreasing continuously

which good for the bank but then also bank should not take this point lightly
and should follow recovery policy strictly.

 As we shows from Ratio analysis that Bank’s Gross NPAs is between 200 to
250 Lacs and Net NPAs is 0.00 that means Bank creates sufficient provision to
bear the Loss but on the other hand that much amount is deducted from net
profit resulted low dividend to shareholder so, Bank has make continuous
affords to minimize NPAs as much as possible.

 The banks before providing the credit facilities to the borrower company
should analyze the major heads of the income and expenditure based on the
financial performance of the comparable companies in the industry to identify
significant variances and seek explanation for the same from the company
management. They should also analyze the current financial position of the
major assets and liabilities.
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 Banks should evaluate the SWOT analysis of the borrowing companies i.e.
how they would face the environmental threats and opportunities with the use
of their strength and weakness, and what will be their possible future growth
in concerned to financial and operational performance.

 Proper training is important to the staff of the banks at the appropriate level
with on going process. That how they should deal the problem of NPAs, and
what continues steps they should take to reduce the NPAs.

 Bank should clearly specify its Mission, Vision, and Quality Policy on the
website of bank and bank building so that employee and can read that daily
and motivated. Bank has to establish more Branches in various locations and
also establish separate marketing department in each branches for steady and
high growth of bank.
 Bank has to provide Online Banking, ATM, and Core banking facilities to
its customers to stay in come competitive market.
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 A report is not said to be completed unless and until the conclusion is given to
the report. A conclusion reveals the explanations about what the report has
covered and what is the essence of the study. What my project report covers is
concluded below.

 The problem statement on which I focused my study is “Non Performing

Assets of Varachha co-operative bank”. The only problem that the Any Bank is
facing today is the problem of non performing assets.

 The non performing assets means those assets which are classified as bad
assets which are not possibly be returned back to the banks by the borrowers.
If the proper management of the NPAs is not undertaken it would hamper the
business of the banks.

 The NPAs would destroy the current profit, interest income due to large
provisions of the NPAs, and would affect the smooth functioning of the
recycling of the funds.
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 If the concept of NPAs is taken very lightly it would be dangerous for the
bank. The reduction of the NPAs would help the bank to boost up their profits,

and smooth recycling of funds. This would help the bank to develop more
branches and providing the better financial services to the customer.
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 I have taken only five years data of VCB for ratio analysis which is very small
sample size then also I try my best to find actual NPA position of Bank.

 Since my study is based on the secondary data, the practical operations as

related to the NPAs are adopted by the bank is not learned.

 There are different norms related to Assets classification, Definition of NPAs,

provisions and income recognition, for different tier Bank, because of limited
time I can not studied in detail and include all in my project.
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Journals and magazines:-

 Last three years Annual Report of Varachha Co-operative Bank

 Co-operative Banker’s Hand Book Cum Diary-200910_Editor-in-chief: John
D. Silva page No.353 to 362
 Chartered Financial Analyst, August 2004, B P Dhaka, Page 58-62;
"SARFAESI ACT: THE DIAGNOSIS".

 The Chartered Accountant, February2005, Raj Kumar S.Adukia,

"SECURITISATION AN OVERVIEW”

Websites:-

 http://www.rbi.org.in
 http://www.varachhabank.com
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 http://www.indiabankassociation.com/report.html
 http://www.drat.tn.nic.in_Docu_Securitisation-Act