Debt Recovery Management Of Sbi

IBMR- INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH

A PROJECT REPORT ON DEBT RECOVERY MANAGEMENT OF STATE BANK OF INDIA

Prepared By---Mishra 238

Pranjala Roll No. DStudent : PGPM & MBA

(2008-10)

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PREFACE Finance is one most volatile area where there is every time a change, where it is important to know about each and every change to keep a track with the changing world. Banking is the same because it is one of the important part of finance. Recovery Management is the process of planning, testing, and implementing the recovery procedures ad standards required to restore service in the event of a component failure; either by returning the component to normal operation, or taking alternative actions to restore service. Recovery Management is the acknowledgement that failures will occur regardless of how well the system is designed. The intent is to anticipate and minimize the impact of these failures through the implementation of predefined, pretested, documented recovery plans and procedures. The primary objective of recovery Management is to ensure that service level requirements are achieved. This is accomplished by having recovery procedures in place that will restore service to a failing component as quickly as possible. To be a Master of Business Administration student is a matter of pride because we are in a field, which helps us to develop from a normal human being into a disciplined, and dedicated professional. One has to be a good learner to sharper

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knowledge in the particular field to achieve and attain the desired goals and heights. We conducted to gain some knowledge in the field of recovery management and learned a lot in this field right from sanctioning a loan to NPA account and understand what a bank does to recover its money back.

ACKNOWLEDGEMENT With Great Pleasure, I Extend our gratitude towards Prof. Raj lakshmi under whose valuable guidance, constant interest and encouragement I have been able to complete the project successfully. This Co-Operation is not useful only for this Project but will also be a constant source of Inspiration for me in the future. I am also thankful to all those who helped me constantly in preparation of this project Directly or indirectly.

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DECLARATION We, hereby, declare that the Project titled, “Debt Recovery Management of State Bank of India”. Is the best of my knowledge and has not been published elsewhere. This is for the purpose of partial fulfillment of Institute of Business Management and Research requirements for the award of the degree of Master of Business Administration, only. Name: Pranjala Mishra (D-238) Place: - Ahmedabad

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Executive Summary Debt presents one of the main stumbling blocks to Least Developed Countries’ social and economic development. Many LDCs have unsustainable debt burdens, besides the 31 LDCs that are classified as HIPCs. At least six other LDCs have, even according to rather conservative and narrowly defined World Bank and IMF criteria, debt levels that exceed their repayment capacity. When the concept of debt sustainability is approached from a human and social development perspective – and there is no other way to approach debt sustainability in a country such as Bangladesh where 78% of the people lives on US$2 a day – many more LDCs have an unsustainable debt level. Thus as far as India is concerned NPA level is increasing day by day and in that scenario many banks and financial institutions are facing a great deal of problem to operate as their main business or the main way to generate revenue is through 6

providing loans and advances and in that case if those becomes NPA then it will really a very problematic situation for the bank or any financial institution to operate.Then comes the role of recovery management where a special team is appointed to recover the NPA. A special team of officers are appointed and the adopt various measures to recover the amount back but still if they couldn’t recover due to any means then the loan amount is converted into bad debt account that means they could not be recovered by any means. Here for our study purpose we took DEBT RECOVERY SYSTEM of State Bank of India. It is clearly seen in the report a great amount has been recovered through out the year with the help of debt recovery management and it helped a lot in reducing the net NPA level and maintaining the profitability of State Bank of India. TABLE OF CONTENT Introduction……………………………………………………… ………………………………9 Brief Introduction of the company………………………………………………..19 Meaning of Recovery Management……………………………………………..22 Meaning of Debt……………………………………………………………… …………….24

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Types of Debt……………………………………………………………… …………..……..26 Debt Rating, Risk and Cancellation……………………………………………..28 Rating & Credit worthiness……………………………………………………… …...29 Effects of Debt……………………………………………………………… ………………..30 Loans and its type……………………………………………………………… ……….…..31 Defaults and its type……………………………………………………………… ………34 Difference between default & bankruptcy………………………………….36 Various interest rates of SBI…………………………………………………………..39 Meaning and type of NPA……………………………………………………….……49 When does a loan becomes NPA…………………………………………..……..52 8

Reasons For NPA………………………………………………………………… …………59 Early symptoms by which one can recognize a performing asset as NPA………………………………………………………………… ……………………..….60 Objectives of Recovery Management of SBI…………………………….….65 Aims of Recovery Management…………………………………………………… 66 Management of NPA………………………………………………………………… ….68 Debt Management…………………………………………………… ………………..…69 Summarized Balance sheet of past 5 years………………………………….71 Comparison of performance of 200809……………………………………..72 Comparison of Performance of 2007-08-09(Q1) ………………………..73

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Credit Risk Management Policy……………………………………………………77 Credit Risk Quantitative Disclosure of SBI……………………………………79 Analysis…………………………………………………………… ………………………………88 Various Debt recovery process of SBI…………………………………………..90 How to review the position of NPA………………………………………………93 Financial Performance…………………………………………………… …………..…95 Management Analysis…………………………………………………………… …..….97 Public Sector Bank Ratio of NPA from 2006 to 2008……………..100 Conclusion……………………………………………………… ………………………………103 Recommendation……………………………………………… …………………………..111 Reference………………………………………………………… ……………………………..112 10

INTRODUCTION: A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money in hopes of repayment (Excludes California). Many other financial activities were added over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany banks are the primary owners of industrial corporations while in other countries such as the United States banks are prohibited from owning nonfinancial companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the zaibatsu.In France, banc assurance is prevalent, as most banks offer insurance services(and now real estate services) to their clients.

Origin of the word: The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in ancient times.

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In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome—that of the Imperial Mint.

Definition The definition of a bank varies from country to country. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as: • conducting current accounts for his customers • paying cheques drawn on him, and • Collecting cheques for his customers. In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments’, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank

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transactions such as cheques do not depend on how the bank is organized or regulated. The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions: • "banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other 15 business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation). • "banking business" means the business of either or both of the following: 1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3

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months] ... or with a period of call or notice of less than that period; 2. paying or collecting cheques drawn by or paid in by customers. Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.

Wider commercial role: The commercial role of banks is not limited to banking, and includes: • issue of banknotes (promissory notes issued by a banker and payable to bearer on demand) • processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means • issuing bank drafts and bank cheques • accepting money on term deposit • lending money by way of overdraft, installment loan or otherwise

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• providing documentary and standby letters of credit (trade finance),guarantees, performance bonds, securities underwriting commitments and other forms of off-balance sheet exposures • safekeeping of documents and other items in safe deposit boxes • currency exchange • acting as a 'financial supermarket' for the sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products.

Law of banking: Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer—defined as any entity for which the bank agrees to conduct an account. The law implies rights and obligations into this relationship as follows: 1. The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank. 2. The bank agrees to pay the customer's cheques up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit.

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3. The bank may not pay from the customer's account without a mandate from the customer, e.g. a cheque drawn by the customer. 4. The bank agrees to promptly collect the cheques deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account. 5. The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship. 6. The bank has a lien on cheques deposited to the customer's account, to the extent that the customer is indebted to the bank. 7. The bank must not disclose details of transactions through the customer's account—unless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it. 8. The bank must not close a customer's account without reasonable notice, since cheques are outstanding in the ordinary course of business for several days.These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms and/or create new rights,obligations or limitations relevant to the bankcustomer relationship.

Entry regulation: 16

Currently in most jurisdictions commercial banks are regulated by government entities and require a special bank licence to operate. Usually the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to the customer’s order— although money lending, by itself, is generally not included in the definition. Unlike most other regulated industries, the regulator is typically also a participant in the market, i.e. a government-owned (central) bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case. In the UK, for example, the Financial Services Authority licences banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government’s central bank. Some types of financial institution, such as building societies and credit unions,may be partly or wholly exempt from bank licence requirements, and therefore regulated under separate rules. The requirements for the issue of a bank licence vary between jurisdictions but typically include: 1. Minimum capital 2. Minimum capital ratio 17

3. ‘Fit and Proper’ requirements for the bank’s controllers, owners, directors, and/or senior officers 4. Approval of the bank’s business plan as being sufficiently prudent and plausible.

Banking channels: Banks offer many different channels to access their banking and other services: • A branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array of face-to-face service to its customers. • ATM is a computerized telecommunications device that provides a financial institution's customers a method of financial transactions in a public space without the need for a human clerk or bank teller. Most banks now have more ATMs than branches, and ATMs are providing a wider range of services to a wider range of users. For example in Hong Kong,most ATMs enable anyone to deposit cash to any customer of the bank's account by feeding in the notes and entering the account number to be credited. Also, most ATMs enable card holders from other banks to get their account balance and withdraw cash, even if the card is issued by a foreign bank. • Mail is part of the postal system which itself is a system wherein written documents typically enclosed 18

in envelopes, and also small packages containing other matter, are delivered to destinations around the world. This can be used to deposit cheques and to send orders to the bank to pay money to third parties. Banks also normally use mail to deliver periodic account statements to customers. • Telephone banking is a service provided by a financial institution which normally includes bill payments for bills from major billers (e.g. for electricity). • Online banking is a term used for performing transactions, payments etc. over the Internet through a bank, credit union or building society's secure website.

Types of banks: Banks' activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to midmarket business; corporate banking, directed at large business entities; private banking, providing wealth management services to high net worth individuals and families; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations. Central banks are normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the 19

cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis.

Types of retail banks: • Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses. • Community Banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. • Community development banks: regulated banks that provide financial services and credit to underserved markets or populations. • Postal savings banks: savings banks associated with national postal systems. • Private banks: banks that manage the assets of high net worth individuals. • Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. 20

• Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and mediumsized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralised distribution network, providing local and regional outreach—and by their socially responsible approach to business and society. • Building societies and Landesbanks: institutions that conduct retail banking. • Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments. • Islamic banks: Banks that transact according to Islamic principles.

Types of investment banks: • Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on 21

capital market activities such as mergers and acquisitions. • Merchant banks were traditionally banks which engaged in trade finance. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike venture capital firms, they tend not to invest in new companies.

Both combined: • Universal banks, more commonly known as financial services companies, engage in several of these activities. For example, Citigroup is a large American bank involved in commercial and retail lending, with subsidiaries in tax havens offering offshore banking services to customers in other countries. Other large financial institutions are similarly diversified and engage in multiple activities. In Europe and Asia, big banks are very diversified groups that, among other services, also distribute insurance—hence the term bancassurance, a portmanteau word combining "banque or bank" and "assurance", signifying that both banking and insurance are provided by the same corporate entity.

Other types of banks: Islamic banking • Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around several well22

established principles based on Islamic canons. All banking activities must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on the financing facilities that it extends to customers.

BRIEF INTRODUCTION OF THE COMPAY No any financial institution in this world today can claim the antiquity and majesty of the State Bank of India. It was founded nearly two centuries ago with the primary intent of imparting stability to the money market, the bank from its inception mobilized fund for supporting both the public credit of the Company’s Governments in the three presidencies of British India and the private credit of the European and Indian merchants. From about the 1860s, when Indian economy took a significant leap forward under the impulse of quickened world communication and ingenious methods of industrial and agricultural production, the Bank became intimately involved in the financing of practically every trading, manufacturing and mining activity of the subcontinent. Although large European and Indian merchants and manufacturers were undoable the principal beneficiaries, the small man was never ignored they were also provided loans. Added to this the bank till the creation of the reserve banking 1935carried out numerous central banking functions. Adaptation to the changing world and the need of the hour has been one of the strengths of the bank. In the post Depression era when bank opportunities became extremely restricted. 23

Rules laid in the book of instructions were relaxed to ensure that good business did not go past. Yet seldom did he bank were contravene its rules to depart from sound banking principals to retain or expand its business. New business strategies were also evolved way back in 1937 to render the best banking services through prompt and courteous attention to customers. A highly efficient and experienced management, functioning in a well defined organizational structure did not take long to place the bank on a exalted pedestal in the area of business, profitability, internal discipline and above all credibility. An impeccable financial status, consistent maintenance of the lofty traditions of banking and a observance of a higher standard of integrity in its operations helped the bank gain a pre-eminent status. No wonder the administration of the bank was universal as key functionaries of the Indian office and government of India successive finance ministers of independent India, Reserve Bank governors and representatives of the chambers of commerce showered encomiums on it. State Bank of India (SBI) is India's largest commercial bank. SBI has a vast domestic network of over 11,000 branches (approximately 14% of all bank branches) and commands one-fifth of deposits and loans of all scheduled commercial banks in India. The State Bank Group includes a network of seven banking subsidiaries and several non-banking subsidiaries offering merchant banking services, fund 24

management, factoring services, primary dealership in government securities, credit cards and insurance.

The seven banking subsidiaries are: 1-State 2-State 3-State 4-State 5-State 6-State 7-State

Bank Bank Bank Bank Bank Bank Bank

of of of of of of of

Bikaner and Jaipur (SBBJ) Hyderabad (SBH) India (SBI) Indore (SBIR) Mysore (SBM) Patiala (SBP) Travancore (SBT)

The origins of State Bank of India date back to 1806 when the Bank of Calcutta (later called the Bank of Bengal) was established. In 1921, the Bank of Bengal and two other Presidency banks (Bank of Madras and Bank of Bombay) were amalgamated to form the Imperial Bank of India. In 1955, the controlling interest in the Imperial Bank of India was acquired by the Reserve Bank of India and the State Bank of India (SBI) came into existence by an act of Parliament as successor to the Imperial Bank of India. Today, State Bank of India (SBI) has spread its arms around the world and has a network of branches spanning all time zones. SBI's International Banking Group delivers the full range of cross-border finance solutions through its four wings-the Domestic division, the Foreign Offices division, the Foreign Department and the International Services division.

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MEANING OF RECOVERY MANAGEMENT Recovery Management is the process of planning, testing, and implementing the recovery procedures ad standards required to restore service in the event of a component failure; either by returning the component to normal operation, or taking alternative actions to restore service. Recovery Management is the acknowledgement that failures will occur regardless of how well the system is designed. The intent is to anticipate and minimize the impact of these failures through the implementation of predefined, pretested, documented recovery plans and procedures. 26

The primary objective of recovery Management is to ensure that service level requirements are achieved. This is accomplished by having recovery procedures in place that will restore service to a failing component as quickly as possible. In simple words recovery means to get back our own thing back which we have given it to others. In banks recovery means to get back the amount back which they have given to the customers in the form of loans and advances. The main business of bank is through loans and advances. They accept deposits from the public and lend it to the needed customers in the form of loans and advances and they charge interest plus a certain portion of premium from them and then they provide a certain portion of amount of interest to the customers who had deposited in the bank and the difference of interest is their profit. Suppose the bank accepts deposit @ 7.5% and provides loan @13.5% the difference of 7.5% and 13.5% i.e 6% is the profit of the bank. The role of recovery comes into picture when the customer who has taken loan fails to pay his installment i.e the installment money consist of the interest plus certain amount of loan amount. As the main business of a bank is through providing loans and advances if they don’t get the installment in time it will adversely effect the day to day banking business finally they will be at a loss in order to avoid such unforeseen conditions in case if there is many 27

default recovery management is done where a team of members are specially appointed mainly to see the recovery cases. They adopt many measures to recover the amount that has been provided as loans and advances. Recovery management isalso known as debt recovery management. Getting into Debt and recovering debt are becoming increasing common in today consumer society. If you get into debt it's important to find out what your rights and options are.. If you owed a debt, recovering through the courts can be a long process. By working with debt recovery experts can speed up the process. The magnitude of recovery amount overdue is one of the most important indicators of financial health of a bank. Currently, the accepted standard of measurement of overdues is in relation to demand. The logic for the demand as the basis is that it is the amount which has become due and not the amount which is yet to become due for repayment. This distinction is important because loans will have varying due dates for installments as they are issued on the basis of future cash flow from investments. The term "overdues" is used to convey the meaning that installments of loans and Interest thereon are not paid on due date. The term "recovery" of dues relates to repayments of loans and interest thereon in time. Therefore, overdues exist if recovery of loans is not in time.

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MEANING OF DEBT Debt is that which is owed ; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy. A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in many cases, plus interest. Historically, debt was responsible for the creation of indentured servants. Debt is that which is owed. A person who owes debt is called a debtor. People or organisations often enter into agreements to borrow something. Both parties must agree on some standard of deferred payment, most usually a sum of money denominated as units of a currenc, but sometimes a like good. For instance, one may borrow shares, in which case, one may pay for them later with he shares, plus a premium for the borrowing privilege, or the sum of money required to buy them in the market at that time. There are numerous types of debt obligations. They include loans, bonds,mortgages, 29

promisary notes, and debentures. It is very common to borrow large sums for major purchases, such as a mortgage, and pay it back with an agreed premium interest rate over time, or all at once at a later date. The amount of money outstanding is usually called a debt. The debt will increase through time if it is not repaid faster than it grows. In some systems of economics this effect is termed usury, in others, the term "usury" refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted. As noted above, debt is normally denominated in a particular monetary currency, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to inflation or deflation, so it can happen even though the borrower and the lender are using the same currency.Thus it is important to agree on standards of deferred payment in advance, so that a degree of fluctuation will also be agreed as acceptable. It is for instance common to agree to " US dollar denominated" debt. The form of debt involved in banking gives rise to a large proportion of the money in most industrialised nations (see money and credit money Credit money is money that is backed by a promise to pay made by someone other than the state. Examples of credit money include bank deposits and credit card loans. During the Crusades in Europe, precious goods would be entrusted to the Catholic Church's for a discussion of this). There is therefore a complex relationship between inflation, deflation, the mone supply, and debt. The store of value represented by the entire 30

economy of the industrialized nation itself, and the state's ability to levy tax on it, acts to the foreign holder of debt as a guarantee of repayment, since industrial goods are in high demand in many places worldwide. Lendings to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called " risk free interest rate". This is because the debt and interest are highly likely to be repaid.

TYPES OF DEBT A Company uses various kinds of debt to finance its operations. The various types of debt can generally be categorized into: 1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of the characteristics noted above. A debt obligation is considered secured if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company. Unsecured debt comprises financial obligations, where creditors do not have recourse to the assets of the borrower to satisfy their claims.

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Private debt comprises bank-loan type obligations, whether senior or mezzanine. Public debt is a general definition covering all financial instruments that are freely tradeable on a public exchange or over the counter, with few if any restrictions. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity. A basic loan is the simplest form of debt. It consists of an agreement to lend a principal sum for a fixed period of time, to be repaid by a certain date. In commercial loans interest, calculated as a percentage of the principal sum per year, will also have to be paid by that date. In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid; the additional principal has the same economic effect as a higher interest rate. A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum. A bond is a debt security issued by certain institutions such as companies and governments. A bond entitles the holder to repayment of the principal sum, plus interest. Bonds are issued to investors in a marketplace when an institution wishes to borrow 32

money. Bonds have a fixed lifetime, usually a number of years; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to equity.

DEBT RATINGS, RISK AND CANCELLATION RISK FREE INTEREST RATE Lending’s to stable financial entities such as large companies or governments are often termed "risk 33

free" or "low risk" and made at a so-called "risk-free interest rate". This is because the debt and interest are highly unlikely to be defaulted. A good example of such risk-free interest is a US Treasury security - it yields the minimum return available in economics, but investors have the comfort of the (almost) certain expectation that the US Treasury will not default on its debt instruments. A risk-free rate is also commonly used in setting floating interest rates, which are usually calculated as the risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor (in other words, the risk of him defaulting and the creditor losing the debt). In reality, no lending is truly risk free, but borrowers at the "risk free" rate are considered the least likely to default. However, if the real value of a currency changes during the term of the debt, the purchasing power of the money repaid may vary considerably from that which was expected at the commencement of the loan. So from a practical investment point of view, there is still considerable risk attached to "risk free" or "low risk" lending’s. The real value of the money may have changed due to inflation, or, in the case of a foreign investment, due to exchange rate fluctuations. The Bank for International Settlements is an organization of central banks that sets rules to define how much capital banks have to hold against the loans they give out.

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RATING AND CREDITWORTHINESS Specific bond debts owed by both governments and private corporations is rated by rating agencies, such as Moody's, Fitch Ratings Inc., A. M. Best and Standard & Poor's. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him a credit rating. Moody's uses the letters Aaa Aa A Baa Ba B Caa Ca C, where ratings Aa-Caa are qualified by numbers 1-3. Munich Re, for example, currently is rated Aa3 (as of 2004). S&P and other rating agencies have slightly different systems using capital letters and +/qualifiers. A change in ratings can strongly affect a company, since its cost of refinancing depends on its creditworthiness. Bonds below Baa/BBB (Moody's/S&P) are considered junk- or high risk bonds. Their high risk of default (approximately 1.6% for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to default on his debt. These types of debt are frequently repackaged and sold below face value.Buying junk bonds is seen as a risky but potentially profitable form of investment.

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EFFECTS OF DEBT Debt allows people and organizations to do things that they would otherwise not be able, or allowed, to do. Commonly, people in industrialised nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their assets, "leveraging" the return on their equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management of resources). Excesses in debt accumulation have been blamed for exacerbating economic problems. For example, prior to the beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a credit crunch followed. Deflation effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to 36

reduce their debt level, economic agents reduced their consumption and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased debt cost caused by deflation and the reduced demand. It is possible for some organizations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy.

LOAN A loan is a type of debt. This article focuses exclusively on monetary loans, although, in practice, any material object might be lent. Like all debt instruments,a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially does receive an amount of money from the lender, which he has to pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A loan is of the annuity type if the amount paid periodically (for paying off and interest together) is fixed. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan.

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Acting as a provider of loans is one of the principal tasks for financial institutions.For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Legally, a loan is a contractual promise between two parties where one party, the creditor, agrees to provide a sum of money to a debtor, who promises to return the money to the creditor either in one lump sum or in parts over a fixed period in time. This agreement may include providing additional payments of rental charges on the funds advanced to the debtor for the time the funds are in the hands of the debtor (interest).

TYPES OF LOAN The main sources of funding for a new business : 1. Government grants and loans 2. Foundation grants and loans The J. Guggenheim and J. Dawson Foundation only supports individuals and small business owners. Offers grants to assist individuals with innovative business ideas. Offers a $50,000 grant to women who submit a great business idea. These grants are making the dream of business ownership a reality for women around the country.

Secured A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. 38

A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.A type of loan especially used in limited partnership agreements is the recourse note. A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by the lender against loss, using options or other hedging strategies to reduce lender risk. A pre-settlement loan is a non-recourse debt this is when a monetary loan is given based on the merit and awardable amount in a lawsuit case. Only certain types of lawsuit cases are eligible for a pre39

settlement loan. This is considered a secured nonrecourse debt due to the fact if the case reaches a verdict in favor of the defendant the loan is forgiven.

Unsecured Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages: • • • • •

credit card debt personal loans bank overdrafts credit facilities or lines of credit corporate bonds

The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.

DEFAULT

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In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay their debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes.

TYPES OF DEFAULT Default can be of two types: debt services default and technical default. Debt service default occurs when the borrower has not made a scheduled payment of interest or principal. Technical default happens when an affirmative or a negative covenant is violated. Affirmative covenants are clauses in debt contracts that require firms to maintain certain levels of capital or financial ratios. The most commonly violated restrictions in affirmative covenants are tangible net worth, working capital/short term liquidity, and debt service coverage. Negative covenants are clauses in debt contracts that limit or prohibit corporate actions (e.g. sale of assets, payment of dividends) that could impair the position of creditors. Negative covenants may be continuous or incurrence-based. Violations of negative covenants are rare compared to violations of affirmative covenants.

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With most debt (including corporate debt, mortgages and bank loans) a covenant is included in the debt contract which states that the total amount owed becomes immediately payable on the first instance of a default of payment. Generally, if the debtor defaults on any debt to any lender, a cross default covenant in the debt contract states that that particular debt is also in default. In corporate finance, upon an uncured default, the holders of the debt will usually initiate proceedings (file a petition of involuntary bankruptcy) to foreclose on any collateral securing the debt. Even if the debt is not secured by collateral, debt holders may still sue for bankruptcy, to ensure that the corporation's assets are used to repay the debt.,

SOVEREIGN DEFAULT Sovereign borrowers such as nation-states generally are not subject to bankruptcy courts in their own jurisdiction, and thus may be able to default without legal consequences. One example is with North Korea, which in 1987 defaulted on some of its loans. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payment. In the 1998 Russian financial crisis, Russia defaulted on its internal debt (GKOs), but did not default on its external Eurobonds. As part of the Argentine economic crisis in 2002, Argentina defaulted on $1 billion of debt owed to the World Bank.

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DIFFERENCE BETWEEN DEFAULT AND BANKRUPTCY The term default should be distinguished from the terms insolvency and bankruptcy. • "Default" essentially means a debtor has not paid a debt which he/she/it is required to have paid. • "Insolvency" is a legal term meaning that a debtor is unable to pay his debts. • "Bankruptcy" is a legal finding that imposes court supervision over the financial affairs of those who are insolvent or in default.

ADVANCES Any extension of credit. Bankers talk of advances when the rest of us say loans.An advance from a banker in this context could be in the form of a drawing under an overdraft facility, a fully drawn advance or term loan, a line of credit with a bill option, a bill facility or a personal loan.

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DIFFRENCE BETWEEN LONG TERM LOAN AND SHORT TERM CASH ADVANCES From their name alone, short term cash advances and long term loans are immediately recognizable as being different—even opposite, to an extent. There are a great many differences between the two, and it’s important to understand those differences, if you’re looking at either. Long term loans are typically used to start a business, buy a home, buy a car, and other big purchases and major expenses. These loans come from a bank usually, and are secured. When a loan is secured, we mean that you have put up collateral to insure that you will be responsible for and pay back the loan. So, in essence, you have to have the money before you can get the money. People take out loans as an investment. These long term loans are for something they’re sure is going to be worth it in the long run. Long term loans are for thousands and thousands of dollars, even more. There is a lengthy application process, often drawing out over weeks and sometimes months to be approved for a long term loan. The general rule of thumb is: the bigger the loan, the longer the wait. Every aspect of your credit history is poured over and looked into. Failure to pay bills on time, defaulting on previous loans, or simply not making enough money can all seriously hamper your ability to get a long term loan. Even the company you keep as in your business associates and family members can impact your ability to get a long term loan. These loans have set interest rates, and are often 44

renegotiated through the years it takes to pay them back. You often can’t extend a long term loan, although if you’ve done well with your payment history, you can take out a new loan once the first is paid off or even before that. With a short term cash advance, most of the rules associated with a long term loan go out the window. There is no in-depth credit check. As a matter of fact, short term cash advances were designed with those who suffer poor credit history in mind. The maximum amount for a cash advance is usually between $1000 and $1500 from most companies, whereas a long term loan won’t even be given out for such a small expense. The cash advance is due usually within one or two weeks—whenever your next payday is. The only collateral required is a paper or electronic check from your bank account for the amount of the cash advance plus any fees. The amount a cash advance company will loan you is based mostly on your recent earnings and on your history with that company in particular. The short term cash advance is made to help people out of a difficult situation whereas the long term loan is designed to help people make a good situation better.

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VARIOUS INTEREST RATE OF LOANS AND ADVANCES OF STATE BANK OF INDIA  HOME LOAN INTEREST RATE For Loans upto Rs.5 Lac – 8.5% p.a. fixed rate with reset every 5 years* from the date of disbursement of first installment. For Loans above Rs.5 Lac and upto Rs.20 Lacs – 9.25% p.a. fixed rate with reset every 5 years* from the date of disbursement of first installment. *Option to customer at the end of 5 years to convert into floating rate.Reset or conversion will be at the rates prevailing at the time of reset. 46

SBI Happy-Home Loan Offer for new loans sanctioned on or after 2nd February 2009 and at least partially disbursed on or before 30th April 2009 – Interest rate 8% p.a. (Frozen) for a period of one year. Interest rate will be reset after one year as per contracted rate at the time of sanction of loan as underInterest Rates w.e.f. 01.01.2009  Floating Rates linked to SBAR SBAR w.e.f. 01.01.2009 = 12.25 % p.a. Loans (i.e. Sanctioned limits) upto Rs.30 Lacs Loan Loan tenure amount

Loans upto Rs.30 lacs for new loans

Upt o5 Yrs

Abov e5 Yrs & upto

15 Yrs Linkage with 2.25 2.00 SBAR in the % below loan document belo SBAR w SBA R,

Abov e 15 Yrs & upto 25 Yrs 1.75 % below SBAR

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sanction ed on or after 01.01.2 009

Special product level discount which may be withdrawn/revi sed solely at the discretion of the Bank. Effective Rate

0.25 0.25 % %

0.25 %

9.75 10.00 10.25 % % % p.a. p.a. p.a.

Loans (i.e. Sanctioned limits) above Rs.30 Lacs and upto Rs.75 Lacs Loan Upto 5 Tenure Yrs -> Above Rs.30 Linkage 2.00% lacs and with below upto Rs.75 SBAR SBAR Lacs w.e.f. 01.01.2009 Effectiv 10.25%p. e a. rate

Above 5 Yrs & upto 15 Yrs 1.75% Below SBAR

Above 15 Yrs & upto 25 Yrs 1.50% Below SBAR

10.50% p.a.

10.75% p.a.

Loans (i.e. Sanctioned limits) above Rs.75 Lacs

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Above Rs.75 Lacs w.e.f. 01.01.2009

Linkag e with SBAR

2.00% below SBAR

1.75% 1.25% below below SBAR SBAR

Effectiv 10.25% 10.50 11.00 e rate p.a. % p.a. % p.a.  Fixed rates - Re-payment Upto 10 Years (w.e.f. 01.01.2009): Fixed rates (subject to ‘force majeure’ clause and interest rate reset at the end of every two years on the basis of fixed interest rates prevailing at that time) Upto Rs. 30 Lacs 11.25% p.a. Above Rs. 30 Lacs 12.25% p.a.  Loans for deposit of earnest money for allotment of a plot / house / flat Floating rates only)- W.E.F. 01.01.2009 - 1% above SBAR, Min. 13.25% p.a. Loan amount Upto Rs.30 Lacs Above Rs.30 Lacs and upto Rs.75 Lac Above Rs.75 Lac

Margi n 20% 20% 25%

d) Other Home Loans Schemes: 'SBI Gram Niwas' Rural Home Loans, Home Loans under 'Prashasan Plus', 'Teacher Plus' and 'Oil Plus’: 10 bps below applicable card rates for the respective 49

tenures (fixed rate loans only upto 10 years and subject to 'force majeure' clause and interest rate reset at the end of every two year on the basis od fixed interest rates prevailing then). Following rebates will be applicable on the above mentioned rates: (i) Risk Based Discount : upto 0.25% (ii) Loans to customers who maintain their salary accounts with us : 0.10% (iii) Loans for purchase of dwelling units in Green Houses rated by approved agencies : 0.10% 



SBI Life-style Loan (only for existing Home Loan borrowers) (w.e.f.2nd February 2009) –8% p.a. CAR LOAN INTEREST RATE w.e.f. 01.01.2009 (SBAR 12.25%)

New Car including NRI Car Loan Tenure Up to 3 years (for loans Rs. 7.5 lac & above) Up to 3 years (for loans below Rs. 7.5 lac) Above 3 yrs up to 5 yrs (for all loans)

Rate of Interest 0.75% below SBAR i.e. 11.50% p.a. 0.50% below SBAR i.e. 11.75% p.a. 0.50% below SBAR i.e. 11.75% 50

Above 5 yrs up to 7 yrs (for all loans)

p.a. 0.25% below SBAR i.e. 12.00% p.a.

Car Loan Overdraft: New Car only Tenure Up to 3 years (for loans Rs. 7.5 lac & above) Up to 3 years (for loans below Rs. 7.5 lac) Above 3 yrs up to 5 yrs (for all loans) Above 5 yrs up to 7 yrs (for all loans)

Rate of Interest 0.25% below SBAR i.e. 12.00% p.a. At SBAR i.e. 12.00% p.a. At SBAR i.e. 12.00% p.a. 0.25% above SBAR i.e. 12.50% p.a.

Used Vehicles Tenure Up to 3 years

Rate of Interest 3.00% above SBAR i.e. 15.25% p.a.

Above 3 yrs up to 7 yrs

3.25% above SBAR i.e. 15.50% p.a.

EDUCATION LOAN INTEREST RATE w.e.f. 01.01.2009 (SBAR 12.25%) SBI Student Loan Scheme RBI Educational Loan (Old Scheme) Loan Amount

Rate of Interest

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Loans upto Rs. 4.00 Lacs

0.50% below SBAR i.e. 11.75% p.a.

Loans above Rs. 4.00 Lacs and upto Rs. 7.50 Lacs Loans above Rs. 7.50 Lacs

1.00% above SBAR i.e. 13.25% p.a. At SBAR i.e. 12.25% p.a.

An Interest Rate concession of 0.50% to Girl Student availing Education Loans SBI Scholar Loan Scheme Loan Amount Irrespective of Amount

Rate of Interest 1.50% below SBAR i.e. 10.75% p.a.

An Interest Rate concession of 0.50% to Girl Student availing Scholar Loans PERSONAL LOAN AGAINST THIRD PARTY SECURITY w.e.f. 01.01.2009 (SBAR 12.25%) Personal Loan against Third Party Security of NSC/ IVP/ RBI Relief Bonds etc. Tenure Up to 3 years

Rate of Interest 1.00% above SBAR i.e. 13.25% p.a. 52

Above 3 years upto 6 0.25% above SBAR i.e. years 12.50% p.a. LOANS AGAINST SHARES / DEBENTURES / BONDS w.e.f. 01.01.2009 (SBAR 12.25%) Loan against Shares/ Debentures/ Bonds Scheme Equity Plus Scheme

Rate of Interest 2.25% above SBAR i.e. 14.50% p.a.

OTHER SCHEMES w.e.f. 01.01.2009 (SBAR 12.25%) Other Loans Type of Facility Clean Overdraft Personal Loans Scheme (SBI Saral) SBI Loan to Pensioners Festival Loan Scheme Loans to Employee to Subscribe to ESOPs Loan against

Rate of Interest 4.00% above SBAR 16.25% p.a. 4.25% above SBAR 16.50% p.a. 0.50% above SBAR 12.75% p.a. 2.50% above SBAR 14.75% p.a. 2.25% above SBAR 14.50% p.a.

i.e. i.e. i.e. i.e. i.e.

1.00% over the rate paid 53

Bank Time Deposit

on Relative time deposit

Rent Plus Scheme Centr e Metro

Non Metro

Loan Amount

Rate of Interest

Loan upto Rs. 7.50 Crores Above Rs. 7.50 Crores

1.00% above SBAR i.e. 13.25% p.a.

Loan upto Rs. 5.00 Crores Above Rs. 5.00 Crores

1.00% above SBAR i.e. 13.25% p.a.

1.25% above SBAR i.e. 13.50% p.a.

1.25% above SBAR i.e. 13.25% p.a.

XPress Credit Type

Facility

Demand Loan

Check-off from Employer

Overdraft

Where salary A/C is with us

Rate of Interest 0.75% above SBAR i.e. 13.00%p.a. 1.25% above SBAR i.e. 13.50% p.a.

OTHER SCHEMES w.e.f. 01.01.2009 (SBAR 12.25%) 54

Other Loans Type of Facility

Rate of Interest

XPress Credit Type

Facility

Demand Loan

Check-off from Employer

Overdraft

Where salary A/C is with us

Rate of Interest 0.75% above SBAR i.e. 13.00%p.a. 1.25% above SBAR i.e. 13.50% p.a.

LOANS AGAINST NSCs /RBI RELIEF BONDS / KVPs / IVPs / SURRENDER VALUE OF SBI LIFE / LIC / SBI MAGNUMs ETC. w.e.f. 01.01.2009 (SBAR 12.25%) Loans against NSCs/ RBI Relief Bonds/ KVPs/ IVPs/ Surrender Value of SBI Life/ LIC/ SBI Magnums Etc. Tenure Upto 3 years More than 3 years upto 6 years

Rate of Interest 0.25 above SBAR i.e. 12.50% p.a. 0.25 above SBAR i.e. 12.50% p.a.

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LOANS AGAINST GOLD ORNAMENTS, MORTGAGE OF PROPERTY w.e.f. 01.01.2009 (SBAR 12.25%) a) Loan against Gold Ornaments Size of Credit Limit Upto Rs. 1,00,000/Above Rs. 1,00,000/-

Rate of Interest At SBAR i.e. 12.25% p.a. 0.50 above SBAR i.e. 12.75% p.a.

a)

Loan against Mortgage of Immovable Property

Size of Credit Limit (Term Loan) Upto Rs. 1,00,00,000/-

Rate of Interest

1.00 above SBAR i.e. 13.25% p.a. Above Rs. 1,00,00,000/1.25 above SBAR i.e. 13.50% p.a. *No Overdraft against Mortgage of Property

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

Definitions:

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An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or installment of principal has remained ‘past due’ for a specified period of time. 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, from 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; • Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, •

The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),

•

The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

•

Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and

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•

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

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004.

'Out of Order' status: An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.

‘Overdue’: Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. 59

Types of NPA: A] Gross NPA B] Net NPA A] Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. It can be calculated with the help of following ratio: Gross NPAs Ratio =

Gross NPAs Gross Advances

B] Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. It can be calculated by following Net NPAs = Gross NPAs – Provisions Gross Advances – Provisions

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WHEN DOES A LOAN OR ADVANCES BECOMES A NPA The main business of a bank is through loans and advances section the bank accept deposits from the public and certain amount they keep it as reserve balance and the rest of it they lend it to the needed customers who require it in the form of loans and advances. The customer who deposit the money they get interest and the person who takes the loan pays interest and the difference between is the profit of the bank. Suppose the customer who took loan could not pay back the loan amount or the installment money which consist of the interest amount and the principal amount continuously for some specific period of time they are then converted to probable NPA and then comes the role of recovery team which put their maximum effort to get back the amount back which they have given as a loan or advances and at the end if they fail to get back the money then finally the amount is converted as Non Performing Assets. If the installment is overdue or pending for more then 90 days then a bank can convert the loan amount to probable NPA and if it could not be recovered by the recovery management team then it is converted into NPA.

ASSETS CLASSIFICATION Categories of NPAs:

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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 does 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 nonperforming and the realisability of the dues: a) Sub-standard Assets b) Doubtful Assets c) Loss Assets Sub-standard Assets: A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the 62

liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets: A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, 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 substandard category for 12 months. Loss Assets: A loss asset is one where the bank or internal or external auditors have identified loss or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

INCOME RECOGNITION 63

Income recognition – Policy 

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



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



Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.



If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been 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 64

account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also. 

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

Leased Assets 

The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became nonperforming, and remaining unrealised, should be reversed or provided for in the current accounting period.



The term 'net lease rentals' would mean the amount of finance chargetaken to the credit of Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount of statutory depreciation and lease equalisation 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 Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be. Further, Lease Equalisation Account should be 65

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 Income'.

Appropriation of recovery in NPAs 

Interest realised 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 (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

Interest Application: There is no objection to the banks using their own discretion in debiting interest to an NPA account taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma accounts.

Reporting of NPAs 

Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks’ global 66

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 nonperforming advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report.



Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

Impact of NPA Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA 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

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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 shot\rtes 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 .

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

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

External Factors: External factors are those, which are external to banks they are not controllable by banks.  Socio political pressure:  Chang in industry environment:  Endangers macroeconomic disturbances: 69

        

Natural calamities Industrial sickness Diversion of funds and willful defaults Time/ cost overrun in project implementation Labour problems of borrowed firm Business failure Inefficient management Obsolete technology Product obsolete.

Early symptoms by which one can recognize a performing asset turning in to Non-performing asset Four categories of early symptoms: 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 dye 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.

Operational and Physical: 70



  

 

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

Attitudinal Changes:  Use for personal comfort, stocks and shares by borrower  Avoidance of contact with bank  Problem between partners Others:  Changes in Government policies  Death of borrower  Competition in the market

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 71

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 technoeconomic 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. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters’ sincerity, and capability to achieve turnaround. Base don 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 72

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.  Focus on Cash Flows: While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.  Management Effectiveness:

73

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.  Multiple Financing: A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure. B. In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular 74

flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd. (CIBIL) may be very useful for meaningful information C. exchange on defaulting borrowers once the setup becomes fully operational. D. In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even at a cost – by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account. E. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements.

75

OBJECTIVES OF RECOVERY MANAGEMENT OF SBI  NPA REDUCTION: Now a days NPA is a great issue that the banks are facing. Before loans and advances were granted without proper guarantee so as result default occurs and those loan account are converted into non performing assets as no revenue could be generated from it. So now a days various Assets Liability Management Committee (ALMC) are being appointed so that such default does not arise. Now a days also proper scrutiny of the loan holder is done and rating is given then only loans and advances are provided. 

DEPOSIT GROWTH:

If NPA occurs then lots of bank assets are being blocked and they are converted into bad debts so it reduces the assets of the bank which creates a lot of problem in generating the banks business. So if Debt recovery is done properly then it will help the bank to generate the outstanding amount that is due from the customer 76

and it will increase its deposit growth and do its business efficiently without any problem. 

ADVANCE GROWTH:

If recovery is being properly made then it will help to generate fund and then the bank will have sufficient fund and it could provide loans and advances to its customer and generate its business. So it could be said that if recovery is properly done then it will help in all round development of the bank.

AIM OF RECOVERY MANAGEMENT  Indicative Non Performing Assets (NPA) to be brought to zero.  No NPA in staff loans, loans against specified securities, loans to pensioners, KCC/ ACC. NPA in staff loans, loans against specified securities and loans to pensioners should be upgraded by 20th January 2009.  No account should be NPA for non renewal/non review  In case of salary account if the account are in arrear but the salary now is being received, the branches should effect recovery so that arrear outstanding do not in any case exceed two installment.  In case the salary is not credited to savings bank account, branches to advice controllers so that DDO’s can be contacted by AGM (rural) and the 77











 

matter escalated to the DDO’s controller. In case of salary accounted default, attachment of salary on selective basis may be considered and in case of PDC’s , criminal action may be initiated on selective basis so that the message is conveyed to delinquent borrowers. OMRs are to be utilized for NPA recovery with specified targets and their performance is to be monitered. BMs must visit ITS site on daily basis and understand details. They must also ensure that FO’S and other concerned officials are utilizing their data to reduce their NPA on day to day basis. BMs and FO’s should have full awarness of stamped, indicative and probable NPAs under various categories e.g Housing Loans , Car Loans,Cash Credit. NPA recovery through bank adalat should be organized once in a month.Bakijai cases where they have been filed should be followed up vigorously. Up – gradation, write off and compromise to be given top priority and full provision should be utilized . Wherever sufficient securities is available, SARFEASI Acg to be implemented services of enforcement agents, seizure agents and recovery agents should be utilized. NPA account in Housing Loan are to rephrased in all eligible cases with top priority. People at grass root level need to understand what is to be done and proper communication of instructions is the key for better performance.

78

IMPLICATIOS OF NPA ACCOUNTS Bank cannot credit income to their profit and loss account to the debit of loan account to the debit of loan account unless recovery thereof takes place.Interest or other charge already debited but not recovered have to be provided for and provision on the amount of gross NPAs also to be made.All loan account of the borrower would be treated as NPAs ,if one account is NPA.

MANAGEMENT OF NPAs As reported in the RBI annual report,2005-2006, banks in India have been able to contain their NPAs to just two per cent to their net advances in spite of

79

adopting 90 days delinquency norms. This has been possible because of treasury profits by banks. Recovery and management of NPAs has significantly strengthened the lenders ability to enforce its right to collateral under the securitization and reconstruction of financial assets Enforcement of security interest (SARFAESI) ACT, 2002.The corporate debt restructuring (CDR) system has also emerged as a time bound and transparent mechanism for arriving at a borrower. The credit information companies Act 2005, enables sharing of credit information which help in reducing transactional costs of banks in extending credit to small and medium borrowers which again translates into lower NPAs.

DEBT MANAGEMENT 80

The following debt collection practices will be applied to all debts (rates and sundry debtors) over $200 that is not in dispute which have been outstanding for 90 days; • First reminder letter will be forwarded, requesting payment within 14 days or to contact Council to enter into an arrangement. • Where no response is received, second reminder letter will be forwarded requesting payment within 14 days or to contact Council to enter into an arrangement. • Where no response has been received a letter of demand for payment within 7 days will be forwarded. The letter will state that failure to make payment in full or to enter into an arrangement will result in the commencement of legal action. • Where no response has been received, outstanding debt will be forwarded to Council’s debt collection agent.

VARIOUS RECOVERY PROCEDURE State Bank of India adopts various recovery procedures to recover the debt from its defaulters. The various recovery procedures are mentioned below:  REASONS FOR DEFAULT :

81

There are various reasons for

default like mismanagement, diversification of fund, short fall in investment, will fall default etc. So a credit manager should take various factors into account before lending a loan.  DEMAND NOTICE:

When a defaulter does not repays loan a demand notice is issued to him that he has to repay his loan with a stipulate time period.  LEGAL NOTICE: When a defaulter does not respond to the demand notice a direct notice is issued to him that if he does not repay the loan action would be taken against him legally and the court notice is issued against him.  TRANSFER TO NPA ACCOUNT: When a defaulter does not respond to respond to any legal notice or he becomes bankrupt the Whole account is transferred to NPA account.

82

SUMMARISED BALANCE SHEET OF STATE BANK OF INDIA OF PAST FIVE YEARS Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus

634.88

631.47

526.30

526.30

526.30

-

-

-

-

-

-

-

-

-

-

57,312.8 48,401.1 30,772.2 27,117.7 23,545.8 2 9 6 9 4

Loan funds Secured loans Unsecured loans Total

7,42,073. 13 8,00,020. 82

5,37,403. 4,35,521 94 .09 5,86,436. 4,66,819 60 .65

3,80,046. 06 4,07,690. 14

3,67,047 .53 3,91,119 .66

Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-inprogress Investments

10,403.0 8,988.35 8,061.92 7,424.84 6,691.09 6 -

-

-

-

-

6,828.65 5,849.13 5,385.01 4,751.73 4,114.67 3,574.41 3,139.22 2,676.91 2,673.11 2,576.43 263.44

234.26

141.95

79.82

121.27

2,75,953. 1,89,501. 1,49,148 1,62,534. 1,97,097

83

SUMMARISED BALANCE SHEET OF STATE BANK OF INDIA OF PAST FIVE YEARS 96 27 .88 24 .91

Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets

37,733.2 7 1,10,697. 57 72,964.3 0

44,417.0 3 83,362.3 0 38,945.2 7

25,292.3 1 60,042.2 6 34,749.9 5

22,380.8 4 55,538.1 7 33,157.3 2

18,390.7 1 49,578.8 9 31,188.1 8

Miscellaneous expenses not written 2,06,827. 1,53,929. 1,17,217 1,32,129. 1,68,607 Total 50 48 .80 85 .42

Notes: Book value of unquoted investments Market value of quoted investments 7,67,567. Contingent liabilities 52 Number of equity sharesoutstanding 6348.80 (Lacs)

-

-

-

-

-

-

-

-

8,29,740. 3,29,954 2,49,437. 1,76,119 48 .73 78 .50 6314.70 5262.99 5262.99

5262.99

84

85

86

COMPARISION OF PERFORMANCE ( ABRIDGE P/L ACCOUNT) OF 2007-08 2008-09(Q1)

87

Definitions of past due and impaired assets (for accounting purposes) Non-performing assets An asset becomes non-performing when it ceases to generate income for the Bank. As from 31st March 2006, a non-performing Asset (NPA) is an advance where: (i) Interest and/or instalment 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),

88

(iii) The bill remains ‘overdue’ for a period of more than 90 days in the 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. (v) A loan granted for short duration crops is treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons and a loan granted for long duration crops is treated as NPA, if instalment of principal or interest thereon remains overdue for one crop season. vi) An account would be classified as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.

Out of Order’ status An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Bank’s Balance Sheet, or where credits are not enough to cover the interest debited during the same period, such accounts are treated as ‘out of order’.

‘Overdue’

89

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

Discussion of the Bank’s Credit Risk Management Policy The Bank has in place a Credit Risk Management Policy, as a part of its Loan Policy, which is reviewed from time to time. Over the years, the policy & procedures in this regard have been refined as a result of evolving concepts and actual experience. The policy and procedures have been aligned to the approach laid down in Basel-II Guidelines. The Policy aims at ensuring that there is no undue deterioration in quality of individual assets within the portfolio. Simultaneously, it also aims at continued improvement of the overall quality of assets at the portfolio level, by establishing a commonality of approach regarding credit basics, appraisal skills, documentation standards and awareness of institutional concerns and strategies, while leaving enough room for flexibility and innovation. Credit Risk Management encompasses identification, assessment, measurement, monitoring and control of the credit exposures. In the processes of identification and assessment of Credit Risk, the following functions are undertaken :

90

(i) Developing and refining the Credit Risk Assessment (CRA) Models to assess the Counterparty Risk, by taking into account the various risks categorized broadly into Financial, Business, Industrial and Management Risks, each of which is scored separately. (ii) Conducting industry research to give specific policy prescriptions and setting quantitative exposure parameters for handling portfolio in large / important industries, by issuing advisories on the general outlook for the Industries / Sectors, from time to time. The measurement of Credit Risk includes setting up exposure limits to achieve a well-diversified portfolio across dimensions such as companies, group companies, industries, collateral type, and geography. For better risk management and avoidance of concentration of Credit Risks, internal guidelines on prudential exposure norms in respect of individual companies, group companies, Banks, individual borrowers, non-corporate entities, sensitive sectors such as capital market, real estate, sensitive commodities, etc., are in place. The Bank has processes and controls in place in regard to various aspects of Credit Risk Management such as appraisal, pricing, credit approval authority, documentation, reporting and monitoring, review and renewal of credit facilities, managing of problem loans, credit monitoring, etc.

91

92

93

94

95

96

97

98

99

100

101

ANALYSIS 

It can clearly be seen that the gross NPA of December 2007 is 11183 and the Net NPA of December 2007 5610, so it can be said that there is a difference of 5573 that means it has reduced to 49.83% it was only possible through recovery management.



In March 2008 the gross NPA was 13599 and the Net NPA was 7424 and the difference between them is 6175 that means it ha reduced to 45.40% and it a positive sign in comparisons to December 2007.

102



In September 2008 the gross NPA was 12552 and the Net NPA was 6618 and the difference between them is 5934 that means it ha reduced to 47.27% and it a negative sign in comparisons to December 2007.



In December 2008 the gross NPA was 13314 and the Net NPA was 6864 and the difference between them is 6450 that means it ha reduced to 48.45% and it a negative sign in comparisons to September 2007.

103

VARIOUS DEBT RECOVERY PROCESS OF SBI     

APPOINMENT OF MRT TEAM. CONDUCT OF RECOVERY CAMP. COMPROMISE PROPOSAL. LOK ADALAT. APPONMENT OF DEBT RECOVERY OFFICER.

1) APPOINMENT OF MRT TEAM: This is a special team appointed bt sbi under different branches. Here the officers are appointed mainly for debt recovery purpose. When the amount of loan are not properly recovered or received then those amount are converted into probable NPA account and further also they are not recovered they are converted into NPA account., so to overcome this difficulty MRT team are appointed to recover the amount outstanding from the loan holder. 2) CONDUCT OF RECOVERY CAMP: This is a kind of gathering done by MRT team and the loan holder, whose account are converted into NPA account. Here the MRT team divides the NPA account holder into into different regions and districts and calls a meeting with those loan holder and discuss the matter and give them ways and directions how to return the money which they have taken. 104

3) COMPRISE PROPOSAL: This is a kind of joint agreement between the bank and the loan holder, that if they return back the money, certain amount of money will be relieved. 4) LOK ADALAT: This is a kind of dispute settlement done between the bank and the loan holder with the help of a court i.e. the dispute is settled between them by court judgment. Here the bank files a case against the loan holder and based on the evidence and legality the court gives a decision which the bank and the loan holder are bound to follow through various legal proceeding. The claims settled at the Lok Adalat organised include Rs 20.82 crore pertaining to 14 borrowers of State Bank of India (SBI), Rs 15.60 crore. 5) OUT OF COUT SETTELMENT:

BANKS should try to enter into out of-court settlement with defaulters, as far as possible. The process of getting a decree takes a long time and even if a bank obtains a decree in its favour, it usually encounters difficulties in executing the decree. And, even then, it is usually a distress-sale of the seized asset, which may not fetch a good price in the market. Therefore, it is better that the bankers settle to a compromise with the defaulters. 6) DEBT RECOVERY OFFICERS: 105

This officers are

specially appointed for debt recovery purpose. Their key responsibilities lies on how they could recover all the debt that the bank holds. These are the various methods that State Bank India adopts to recover the debt which are outstanding from the loan holder. VARIOUS ACTION PLAN THAT ARE TO BE IMPLEMENTED 

NPA Management is one of the most priority area of the bank. Considering its importance and present economic situation, the chairman has focused to reduce NPA subsequently within a short period.

 Accordingly the CMC has formulated an action plan as under: a. Technical ( non-financial ) NPA s are to be made nil by 15th December b. Technical ( non- financial ) NPA s inside probable NPA are to be removed by 15th December 2008. 

Simultaneously, special Mention Accounts are to be monitored and irregularities to be zeroised.



One or two in installment default accounts are to be taken up on priority basis to prevent these accounts from becoming NPA. 106



Stamped NPA as on 31st march 2008 are to reduced to least to budgeted level.

HOW TO REVIEW THE POSITION OF NPA AND THEIR MOVEMENT PARTICULARS

a) Gross NPA at the beginning b) Migration from SAMG

AS AT PREVIOUS AS AT CURRENT QUARTER/ YEAR QUARTER / YEAR ENDED ENDED ---

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---

107

c) Fresh addition in NPA

---

d) Recoveries during the period

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h) Gross Reduction( d+e+f+g)

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i) Net Reduction( h-b-c)

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j) Gross NPA level at the end of the period

---

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---

e) Up gradation during the period f) Write off during the period g) Migration to SAGM

k) Gross Advances at the 108

end of the period l) Net NPA at the end of the period

---

---

Financial Performance Profit

109

The Operating Profit of the Bank for 2007-08 stood at Rs. 13,107.55 crore as compared to Rs.9,999.94 crore in 2006-07, registering a growth of 31.08%.The Bank has posted a Net Profit of Rs 6729.12 crore for 2007-08 as compared to Rs.4,541.31 crore in 2006-07, registering a growth of 48.18%. While Net Interest Income recorded a growth of 13.04% and Other Income increased by 28.52%. Operating Expenses increased by 6.64%.

Dividend The Bank has increased dividend to 215%.

Net Interest Income The Net Interest Income of the Bank registered a growth of 13.04% from Rs.15,058.20 crore in 200607 to Rs. 17,021.23 crore in 2007-08. This was due to growth in interest income on advances. The Net Interest Margin was at a healthy 3.07% in 2007-08. The gross interest income from global operations rose from Rs. 37,242.33 crore to Rs. 48,950.31 crore during the year. This was mainly due to higher interest income on advances. Interest income on advances in India registered an increase from Rs.22,872.66 crore in 2006-07 to Rs 32,162.68 crore in 2007-08 due to higher volumes. Also average yield on domestic advances increased from 8.67% in 200607 to 9.90% in 2007-08. Interest income on advances at foreign offices also increased due to higher volumes. Income from resources deployed in Treasury operations in India increased by 11.03% 110

despite decline in average yield mainly due to higher average resources deployed. The average yield, which was 6.99% in 2006-07, declined to 6.92% in 2007-08. Total interest expenses of global operations increased from Rs.22,184.14 crore in 2006-07 to Rs. 31,929.08 crore in 2007-08.Interest expenses on deposits in India during 2007-08 recorded an increase of 45.56% compared to the previous year, whereas the average level of deposits in India grew by 22.09%. This resulted in increase in the average cost of deposits from 4.69% in 2006-07 to 5.59% in 2007-08.

Non-Interest Income Non-interest income stood at Rs.8,694.93 crore as against Rs.6,725.26 crore in 2006-07. During the year, the Bank received an income of Rs. 197.41 crore (Rs.598.12 crore in the previous year) by way of dividends from Associate Banks/ subsidiaries and joint ventures in India and abroad.

Operating Expenses There was marginal decline of 1.84% in the Staff Cost from Rs.7,932.58 crore in 2006-07 to Rs 7,785.87 crore in 2007-08. Staff Cost included an amount of Rs.575.00 crore towards Wage arrears.

111

MANAGEMENT ANALYSIS Economic Backdrop and Banking Environment After growing at 5.0% in 2006 and 4.9% in 2007, IMF estimates global GDP growth to decelerate to 3.7% in 2008 in the wake of the current financial crisis. The financial market turbulence in developed economies following the US subprime mortgage crisis has reduced financial leverage, lowered credit availability and negative wealth effects have emerged as risks to consumption and growth in advanced economies, especially in the US. Continuing inflationary pressures from food and commodity prices as well as high and volatile crude oil prices are other risks being faced by the global economy. India continued to be one of the fastest growing economies of the world. During 200708, the Indian economy grew at a robust pace for the fifth consecutive year. Real GDP growth, estimated at 8.7% in 2007-08, is in tune with the average annual GDP growth of 8.7% in the five year period 2003-04 to 2007-08. Agriculture and allied activities are estimated to grow by 2.6% in 200708, which is in line with the a verage growth of 2.6% per annum during 2000- 01 to 2007-08. Foodgrains production touched a record high in FY08, with total foodgrains production placed at 227.3 million tonnes, surpassing the target of 221.5 million tones and recording an increase of 4.6% over the previous year. 112

Industrial growth at 8.6% during 2007-08 has moderated somewhat against 10.6% in the previous year. The services sector maintained its double-digit growth at 10.6% during 2007-08, higher than the long term average of 8.9% (2000-01 to 2007-08). Within services, transport and communications and financial services recorded double-digit growth for the last two years and are expected to maintain the growth momentum. Trade and hotels showed higher growth of 12.1% in 200708 against 11.8% growth in 2006-07. Another positive feature underpinning growth is the sharp rise in the rate of savings and investment in recent years, which rose to 34.8% and 35.9% respectively in 200607. Towards the close of the fiscal year, higher inflation rate was noticed due to rise in global prices of food, metals and crude oil. Inflation based on WPI declined from 6.4% at the beginning of the fiscal year to a low of 3.1% by mid-October 2007, partly reflecting moderation in the prices of some primary food articles and manufactured products. After hovering around 3% during November 2007, inflation began to edge up from early December 2007 to touch 7.4% by 29 March 2008, mainly reflecting hardening in prices of primary articles such as fruits and vegetables, oilseeds, raw cotton and iron ore, as well as fuel and manufactured products such as edible oil/oil cakes and basic metals, partly due to international commodity price pressures. However, fiscal and monetary measures are being taken to contain inflation and maintain high growth. Despite Rupee appreciation, exports continued to show a healthy growth, rising by 113

23% in dollar terms during 2007-08 against 22.6% in the previous year. Overall exports growth was driven by petroleum and crude products, gems and jewellery, iron ore, non-basmati rice, cotton, transport equipment, etc. While India’s exports to USA, its single largest trading partner, showed deceleration, exports to UAE and China remained robust. In the same period, imports increased by 27.0% against 24.5%, mainly due to higher oil imports; non-oil imports were led by capital goods, chemicals and related products, edible oils, gold, silver and pearls, precious and semiprecious stones. Due to higher growth in imports than exports,the trade deficit widened by 35.5% to US$ 80.4 bn during 2007-08 from US$ 59.3 bn in the previous year. The overall stance of RBI’s monetary and credit policy during the year was to ensure price stability and financial system stability along with continuation of the growth momentum, emphasis on credit quality and credit delivery including financial inclusion. During 2007-08, the Bank Rate, Repo and Reverse Repo rates were kept unchanged. To manage the liquidity in the economy, RBI raised the Cash Reserve Ratio four times: in April, August and November 2007 from 6% to 7.50%. In line with liquidity tightening, PLRs and deposit rates of major banks were hiked during the year. While lending rates rose to 12.25-12.75% from 12.25- 12.50%, deposit rates (for more than one year maturity) rose to 8.25-9.0% from 7.5-9.0% in the previous financial year. However, in the month of February 2008, to keep up the growth momentum in 114

the economy, some banks announced cuts in their PLR and interest rate on housing loans below Rs.20 lakh. The tight monetary policy followed by RBI to control inflation and money supply had a moderating impact on credit growth, which whichincreased by 21.6% in 2007-08 against 28.1% in 2006-07. Deposit growth also moderated to 22.2%in 2007-08 from 23.8% in 2006-07.For the current year, despite slowdown in the major economies of the world, the Indian economy will continue to grow at 8-8.5% driven by investment. Due to a number of fiscal and monetary measures taken by the Government and RBI to put a check on prices, inflation is expected increased by 21.6% in 2007-08 against 28.1% in 2006-07. Deposit growth also moderated to 22.2% in 2007-08 from 23.8% in 2006-07. For the current year, despite slowdown in the major economies of the world, the Indian economy will continue to grow at 8-8.5% driven by investment. Due to a number of fiscal and monetary measures taken by the Government and RBI to put a check on prices, inflation is expected to come down to 5-5.5% by March 2009.

115

PUBLIC SECTOR BANK RATIO OF NPA FROM 2006-2008 Statement VIII :Public Sector Banks : Ratios (In Crores)

NATIONALIS D BANKS

200 6

Net NPA as % to Net Advance s 200 200 7 8

Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas

0.84

1.07

0.80

3.36

4.95

6.04

3.69

3.68

0.24 0.87

0.17 0.60

0.15 0.47

4.27 3.96

5.36 5.55

6.27 7.10

3.69 2.13

4.14 2.73

1.49 2.03

0.95 1.21

0.52 0.87

3.81 3.06

4.98 4.05

6.52 5.16

1.66 0.36

2.71 1.95

1.12 2.59

0.94 1.70

0.84 1.45

4.42 2.40

5.49 3.04

6.09 4.01

3.02 0.68

3.24 1.35

0.64

0.47

0.32

5.27

6.37

8.39

4.13

4.79

3.04 0.79 0.65

1.99 0.35 0.55

0.94 0.24 0.60

3.64 2.95 3.55

4.58 3.64 4.67

5.59 4.88 5.83

0.72 2.36 3.22

1.99 3.64 4.04

BANKS

Business Per Employee

Profit per

200 6

200 7

200 8

200 6

2007

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Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank TOTAL OF 19 NATIONALIS ED BANKS [I] State Bank of India (SBI) ASSOCIATES OF SBI State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of

0.49

0.49

0.99

5.70

7.43

9.24

5.37

5.61

2.43

0.66

0.37

2.77

3.29

4.67

1.14

2.34

0.29

0.76

0.64

3.31

4.07

5.05

2.48

2.68

0.86

0.76

0.97

3.49

4.89

5.86

2.05

2.76

2.10 1.56

2.14 0.96

1.98 0.17

3.87 4.36

4.64 5.09

5.80 6.99

0.82 2.66

1.30 3.25

1.95

1.50

1.10

2.54

3.50

4.63

1.18

1.59

0.85

0.59

0.57

3.69

4.55

6.13

1.16

3.04

1.88

1.56

1.78

2.99

3.57

4.56

2.17

2.37

1.18

1.09

0.83

2.77

3.56

4.45

1.20

2.57

0.36

0.22

0.16

4.14

4.74

5.99

3.26

3.92

1.83

1.04

0.73

3.68

4.77

6.04

2.09

2.91

0.74

0.45

0.43

2.90

3.98

4.95

2.22

2.60

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Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore TOTAL OF 7 ASSOCIATES [III] TOTAL OF STATE BANK GROUP. [II+III] Other Public Sector Bank IDBI Ltd

0.99

0.83

0.60

4.93

6.00

7.60

2.66

3.24

1.16

0.70

0.91

3.04

3.43

3.96

0.64

1.21

1.47

1.08

0.94

3.81

5.06

5.59

2.34

2.96

1.01

1.12

1.30

17.1 8

13.8 7

18.0 9

12.4 5

8.44

TOTAL OF PUBLIC SECTOR BANKS[I+II+ III+IV]

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CONCLUSION Financial distress and insolvency are broad concepts: failure in economic terms usually follows cash flow decay - revenues not covering costs over defined periods. It also implies investment rates of return fall short of hurdle rates e.g. capital costs on a sustainable basis. Financial failure occurs when firms cannot meet current obligations when due, though (book) assets may exceed liabilities.However when the market value of liabilities exceeds asset market values, the end result is insolvency. Recovery Management is the process of planning, testing, and implementing the recovery procedures ad standards required to restore service in the event of a component failure; either by returning the component to normal operation, or taking alternative actions to restore service. Recovery Management is the acknowledgement that failures will occur regardless of how well the system is designed. The intent is to anticipate and minimize the impact of these failures through the implementation of 119

predefined, pretested, documented recovery plans and procedures. The primary objective of recovery Management is to ensure that service level requirements are achieved. This is accomplished by having recovery procedures in place that will restore service to a failing component as quickly as possible. Getting into debt and recovering those debt are becoming increasing common these days. The magnitude of recovery amount overdue is one of the most important indicator of financial health of a bank. The main business of a bank is through providing loans and advances to its customers. So it is important that the bank provides loans to its customers but it should provide at care in doing so. The bank should know about the detail of the customer before providing loan ti him and they should rate him according him according to his efficiency , financial position etc. it should try to find out the track record if any of the customerand then only sanction loan to him. Finally the banks have woken up, thanks to some hard talking by RBI on the irregularities in loan recovery mechanism. State Bank of India (SBI) , the largest public sector bank has taken a step towards making the loan recovery process smooth and accountable. It is going to hire about3000loan recovery officers. The officers will also handle the responsibility of marketing the bank's products, conduct surveys, file applications, and participate in the verification process in addition to recover loans in

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a 'soft' manner. These officials will get a compensation of around Rs. 2 lakhs per annum.

121

122

123

124

125

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RECOMMENDATION Based on the above study we could recommend that       

Debt collection software should be developed. Strong debt recovery team should be appointed. Proper Credit risk manager should be appointed. Loans should be properly workout. Proper analysis of seasonal loan should be done. Projection analysis should be done. Proper analysis of secured and unsecured credit, debt recoveries and management turnover should be done properly.

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REFERENCES: http://www.google.co.in/ http://moneycontrol.com/ http://www.vbook.pub.com. www.AllBusiness.com http://www.reuters.com/finance/stocks/ratio file://bankr/Finance%20and%20Investment %20Banking F:\sbi bankr\ - Wikipedia, the free encyclopedia.mht file:///F:/sbi%20bankr/CapitalMarket_com

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