Non Performing Assets Project Mba

A PROJECT REPORT A STUDY OF NON-PERFORMING ASSETSIN ANDHRAPRADESH GRAMEENA VIKAS BANK LTD

Project report submitted in Partial Fulfilment for the reward of POST GRADUATION DIPLOMA IN MANAGEMENT SUBMITTED BY: MEDISHETTY KARTHIK Bearing roll no: 1501020 UNDER THE GUIDENCE OF Dr .B.SAI SAILAJA

INSTITUTE OF PUBLIC ENTERPRISE SHAMIRPET, HYDERABAD- 500101 , TELANGANA, INDIA 2015-2017

CE R T I F I C A T E This is to certify that the project report title A STUDY OF NON-PERFORMING ASSETS is a work carried out by MEDISHETTY KARTHIK student of PGDM of our institute in partial fulfilment the requirements of the PGDM of the INSTITUTE OF PUBLIC ENTERPRISE. He has worked under my guidance and supervision

Dr .B.SAI SAILAJA Associate Professor Co-ordinator student affairs Institute Of public enterprise

DECLARATION

This is to certify that the project A STUDY ON NON - PERFORMING ASSETS is entirely done by me except taking into account the internal guidance under Associate Professor Dr. B. SAI SAILAJA and Mr. MANOJ KUMAR (Regional manager) Andhra pradesh Grameena Vikas Bank Ltd . Is is an authentic effort put in by me

MEDISHETTY KARTHIK DATE:

ACKNOWLEDGEMENT

It’s a great privilege that I have done my Project in such a well-organized and diversified organization. I am great full to all those who helped and supported me in completing the project. First of all I would sincerely like to thank Mr. P.MANOJ KUMAR (Regional Manager) NONPERFORMING ASSETS, for their valuable guidance and kind co-operation during the project. I am also thankful to our Coordinator-Student Affairs and my project guide .Dr.B.SAI SAILAJA for helping me in completing the project. Last but not least, I am also thankful to all college staff and my friends for helping me directly or indirectly in my project.

ABSTRACT

The present project work “A STUDY OF NON-PERFORMING ASSETS” Comprises of nine chapters. The first chapter deals with Introduction about the project, objectives of the study, Research design, data sources, data collection methods discussed in the report. After that banking industry in India explaining about Reserve Bank of India, National Bank for Agricultural and rural development and its functions and Co-operative Banking system in India. And history of Andhra Pradesh Grameena Vikas Bank ltd, services and loans provided by the Bank.

TABLE OF CONTENTS S.NO PARTICULARS

PAGE NO

1.

CHAPTER-1 –

INTRODUCTION

01

2.

CHAPTER-2 –

INTRODUCTION TO BANKS

04

 Research methodology

07

3.

4.

5.

CHAPTER-3 –

CONCEPT OF NPAs  Asset Classification  NPA identification norms  Problems due to NPA

32 33 34

   

38 39 40 41

CHAPTER-4 Impact of NPA upon banks Reasons for NPAs Early symptoms of NPA Sale of NPAs to other banks

CHAPTER-5  Preventive measures of NPA  International practices on NPA management

6. 7. 8. 9.

30

CHAPTER-6 CHAPTER-7 CHAPTER-8 CHAPTER-9

10. CHAPTER-10

43 45

Literature review Analysis Objectives of NPA Management policy

48 59

 Findings  Conclusion Bibliography

58 59 61

CHAPTER-1 INTRODUCTION

1

A strong banking sector is important for flourishing economy. One of the most important and major roles played by banking sector is that of lending business. It is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which also results into economic growth. As there are pros and cons of everything, the same is with lending business that carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. The failure of the banking sector may have an adverse impact on other sectors. Non- performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders’ value. The issue of Non-Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. This project deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing, projection of NPAs over next years in banks and concluding remarks The magnitude of NPAs have a direct impact on Banks profitability legally they are not allowed to book income on such accounts and at the same time banks are forced to make provisions on such assets as per RBI guidelines The RBI has advised all State Co-operative Banks as well as the Central Co-operative Banks in the country to adopt prudential norms from the year ending 3103-1997. These have been amended a number of times since 1997. As per their guidelines the meaning of NPAs, the norms regarding assets classification and provisioning Its now very known that the banks and financial institutions in India face the problem of amplification of non-performing assets (NPAs) and the issue is becoming more and more unmanageable. In order to bring the situation under control, various steps have been taken. Among all other steps most important one was the introduction of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by Parliament, which was an important step towards elimination or reduction of NPAs. An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days, However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facility granted by bank to a borrower becomes nonperforming, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status. The NPA level of our banks is way high than international standards. One cannot ignore the fact that a part of the reduction in NPA’s is due to the writing off bad loans by banks. Indian banks should take care to ensure that they give loans to credit worthy customers. In this context the dictum “prevention is always better than cure” acts as the golden rule to reduce NPA’s. 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 NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) is a loan or an advance where; 2

      

Interest and/or instalment of principal remain overdue for a period of more than 91 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 Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility. No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days

Further classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues: 1. Sub-standard assets: a sub-standard asset is one which has been classified as NPA for a period not exceeding 12 months. 2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months. 3. Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the amount has not been written off, wholly or partly. Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. All those assets which cannot be recovered are called as Loss Assets.

3

Introduction of Banking Bank A financial institution that is licensed to deal with money and its substitutes by accepting time and demand deposits, making loans, and investing in securities. The bank generates profits from the difference in the interest rates charged and paid. The development of banking is an inevitable precondition for the healthy and rapid development of the national economic structure. Banking institutions have contributed much to the development of the developed countries of the world. Today we cannot imagine the business world without banking institutions. Banking is as important as blood in the human body. Due to the development of banking advances are increased and business activities developing so it is rightly said, the development of banking is not only the root but also the result of the development of the business world." After independence, the Indian government also has taken a series of steps to develop the banking sector. Due to considerable efforts of the government, today we have a number of banks such as Reserve Bank of India, State Bank of India, nationalized commercial banks, Industrial Banks and cooperative banks. Indian Banks contribute a lot to the development of agriculture, and trade and industrial sectors. Even today the banking system of India possess certain limitations, but one cannot doubt its important role in the development of the Indian economy. Early history Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Banking in India

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 49,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

4

INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27thJanuary 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalized and in 15th April 1980 six more commercial private sector banks were also taken over by the government

.

5

Scheduled Banks

Commercial

Banks

Co-Operatives

Regional rural banks(196)

Foreign banks(40)

Urban cooperati ves (52)

State CoOperatives (16)

Private sector banks(30)

Public sector banks(27)

SBI and Associate Banks (8)

Other national banks(19)

6

RESEARCH METHODOLOGY TYPE OF RESEARCH The research methodology adopted for carrying out the study were  In this project Descriptive research methodologies were use.  At the first stage theoretical study is attempted.  At the second stage Historical study is attempted.  At the Third stage Comparative study of NPA is undertaken.

SCOPE OF THE STUDY  Concept of Non-Performing Asset  Guidelines  Impact of NPAs  Reasons for NPAs  Preventive Measures  Tools to manage NPAs OBJECTIVES OF THE STUDY The basic idea behind undertaking the Project on NPA was to:  To evaluate NPAs (Gross and Net).  To study the past trends of NPA  To analyze financial performance of bank at different level of NPA in different years.  To evaluate profitability positions of banks.  To Know the Concept of Non-Performing Asset  To Know the Impact of NPAs  To Know the Reasons for NPAs  To learn Preventive Measures

7

SOURCE OF DATA COLLECTION Survey method of research was adopted. The required data was collected from primary and secondary sources. The primary sources of data include focused group interviews and depth interviews that were administered on both the customers as well as the Employees to determine the factors responsible for NPA in APGVB. The secondary sources of data collection include the information gathered from various reliable sources such as RBI website, banking journals, Articles related to banking etc.

8

CHAPTER-2

9

About APGVB Andhra Pradesh Grameena Vikas Bank is a regional rural bank in India. It was established in 2006 as a Regional Rural Bank as per Regional Rural Banks Act of 1976 and is a 100% government bank promoted jointly by Gov. of India, Gov. of Telangana and AP, State Bank of India.by amalgamation, on 31 March 2006, of the following 5 banks, sponsored by SBI, to participate more energetically, with synergy, in the uplift and development of Rural Farm Sector and Rural Non-Farm Sector, with emphasis on the deprived, the Rural Poor, Rural ISB and Rural crafts APGVB is included under second schedule of RBI Act and is equal to any public sector / Nationalized bank in India in terms of statutory and regulatory provisions of banking regulation act. 1) Sri Visakha Grameena Bank: Established on 30.09.1976 2) Nagarjuna Grameena Bank: Established on 30.04.1976 3) Sangameswara Grameena Bank: Established on 31.03.1982 4) Manjira Grameena Bank: Established on 31.03.1982 5) Kakathiya Grameena Bank: Established on 28.06.1982

Type

Public Sector Bank, sponsored by SBI

Industry

Banking Regional Rural banks

Founded

31 March 2006

Headquarters

Warangal, India

Website

www.apgvbank.in

In terms of adopting the technology in our banking operations our bank is far ahead of others. All our branches are functioning in core banking solutions (CBS) environment since November 2009 our bank has also adopted latest repay technology. Interbank remittance through NEFT/RTGTS has 10

also been enabled, through which our banks customers can transfer money to the account of any other commercial bank like SBI, CORPORATION Bank etc. The APGVB is also awarded with the following awards such as 1) “Best IT Driven Innovations in banking “from NASSCOM 2) Excellence in banking ( Financial Inclusion leveraging bio metric technology and business leadership) platinum award from SKOCH consultancy services

Total number of districts covered under states of Telangana and Andhra Pradesh Mahabubnagar (Population: 35.09 Lakhs) Nalgonda (Population: 32.43 Lakhs) Medak (Population: 26.70 Lakhs) Warangal (Population: 32.46 Lakhs) Khammam (Population: 25.65 Lakhs) Visakhapatnam (Population: 38.32 Lakhs) Vijayanagaram (Population: 22.45 Lakhs) Srikakulam (Population: 25.38 Lakhs)

11

no of branches 800 704 700

638

600 500

728

483

483

527

538

553

574

400 300 200 100 0 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Total No of Branches and their locality under APGVB After amalgamation of 5 different branches the AP Grameena Vikas Bank has got 483 branches in the year 20052006 ,whereas with an the gap of 10 years period it has prominently developed its activities and increased its branches. The growth of the branch expansion in this period of 10 years is shown in the above fig. Now at present the no of branches under AP Grameena Vikas bank are around 800.

Branches in urban semi urban and rural areas 12

By the above diagram we can say that the major part of the AP Grameena Vikas Bank has spread in the rural sector with about 72 % covering more than 500 branches. And it is also spread to the areas of semi urban and urban with about 190 branches among 8 districts in the states of Telangana and Andhra Pradesh.

Ownership

Government of India: Government of Telangana and A.P State Bank of India Table 1 ownership of APGVB

50% 15% 35%

Vision Repositioning the Bank in competitive rural market and accomplish the leadership spot in Rural Banking. Aspiring to realize the vision of excelling in Rural Credit and SME. Pursuing the best practices for delivering the value added service to the customers by transforming the key branches into profit and business centers. Mission With efficiency and service each one of us works in tandem to deliver quality rural service, no matter where our customers choose to experience it. With the advantage of a large network in the rural hinterland, it is our duty and obligation to serve the rural masses, the deprived and denied, retail and agriculture sectors through improved processes, deployment of technology, with an emphasis on employment of rural youth, augmentation of agricultural production, up liftment of the downtrodden and unabated service to rural poor with commitment to the sacred task of rural development and women's empowerment.

13

Values 

Profit orientation



Commitment for rural development



Excellence in customer service



Respect to systems



Procedures Team Synergy.

4.1 DEPOSIT PRODUCTS OFFERED BY APGVB:

1. Savings bank account The facility of Savings Bank Account is meant for cultivating the habit of saving by the individuals for their future needs. The transactions in the SB Account should be of non-business and noncommercial nature. Product features: 

Eligibility: Individuals (singly or jointly), Professionals in their individual names, Clubs, Associations, Charitable trusts, Religious Institutions, Government bodies (established under specific Acts) can are eligible to open the Savings Bank Account. 

Rate of Interest - 4% p.a.



Nomination facility - available.



Cheque Book facility - available (For minimum balance and service charges for not maintaining minimum balance, refer Service Charges) Standing instructions from the customers - executed.

The facility of Savings Bank Account is meant for cultivating the habit of saving by the individuals for their future needs. The transactions in the SB Account should be of non-business and noncommercial nature. 1. Current account Convenient for business people, traders etc., to have Current Account. Withdrawals and deposits can be made in Current Account any number of times. Current Account is not for saving or earning

14

Interest unlike Savings Bank. Convenience of the customer in parking his liquid funds for any time withdrawal, is the primary objective Product features. An individual who has attained majority (singly or jointly), HUL, all legal business entities and companies, other bodies like Clubs, Trusts, Government Departments etc. Rate of Interest – No interest (as per RBI directives) Nomination facility available cheque Book facility available (For minimum balance and service charges for not maintaining minimum balance, refer Service Charges) Standing instructions from the customers executed. Convenient for business people, traders etc., to have Current Account. Withdrawals and deposits can be made in Current Account any number of times. Current Account is not for saving or earning interest unlike Savings Bank. Convenience of the customer in parking his liquid funds for any time withdrawal, is the primary objective Product features: 

Eligibility: An individual who has attained majority (singly or jointly), HUL, all legal business entities and companies, other bodies like Clubs, Trusts, Government Departments.



Rate of Interest – No interest (as per RBI directives)



Nomination facility - available.



Cheque Book facility – available (For minimum balance and service charges for not maintaining minimum balance, refer Service Charges)



Standing instructions from the customers - executed.

Term deposits An amount up to Rs 1 lakh for a fixed period of 5 years invested under this Tax Saving Fixed Deposit, is eligible for deduction from income under Section 80 (C) of Income Tax Act. Fixed Deposits (or Term Deposits) are accepted for any period between 15 days to 10 years) with attractive interest rates. Any number of Term Deposit Accounts can be opened with a minimum amount of Rs 100/- with auto renewal facility.

15

Product features: 

Eligibility: An individual who has attained majority (singly or jointly with an adult or minor) or even a minor represented by the Guardian, , HUL, all legal business entities and companies, other bodies like Clubs, Trusts, Government Departments etc.



Nomination facility - available.



Auto renewal facility and premature closure of the Account – available



Standing instructions from the customers - executed.



Vikas Bahia Tharaka – A Tax Saving Fixed Deposit - An amount up to Rs 1 lakh for a fixed period of 5 years invested under this Tax Saving Fixed Deposit, is eligible for deduction from income under Section 80 (C) of Income Tax Act.

 Vanitha Vikas - Recurring Deposit cum demand loan account An exclusive product for women customers. The women customers who remit RD instalments regularly, can avail Demand Loan up to twice the outstanding in the RD account after 12th RD instalment. The loan would be partially clean and partially secured by the outstanding amount in RD Account. Clean portion of the amount would be repaid in 24 or 48 monthly instalments with EMIs commencing one month after availing the loan till maturity of RD Account. The Demand Loan up to a maximum of Rs 50,000/- can be availed (minimum is Rs 5,000/-)

LOANS & ADVANCES of APGVB Si No 1 A B

2 3

Segment Crop Loans including Agr. Gold Loans, KCC, RMGs a). Up to Rs 3.00 lacs Crop Loans (Disbursed during the subvention period) b). Above Rs 3.00 Lacs After Subvention period(After due date)

Interest Rates 7.00% 14.00% 14.00%

a) Up to Rs.50,000/-

13.00%

b) Above Rs.50,000/a) Up to Rs.50,000/b) Above Rs.50,000/-

14.00% 13.00% 14.00%

Agricultural Term Loans Allied Agri. Term Loans 16

a) Up to Rs.2,00,000/-

14.00%

b) Above Rs.2,00,000/-

15.00%

a) Direct to Groups b) Through MACS/VOs Gold Loans- Personal Purpose

14.00% 15.00% 15.00%

4

ISB-Cash Credits, Term Loans and composite Term Loans including Transport Operators

5

Self Help Groups

6 7

Consumer Durable Loans and Personal Loans

8

Mortgage Loans Housing Loans up to Rs.20 Lacs Housing Loans above Rs.20 Lacs For repairs and Up gradation (Max Rs.2 Lacs) a) Up to Rs.2,00,000/b) Above Rs.2,00,000/- to Rs. Education Loans 4,00,000/c) Above Rs.4,00,000/Demand Loans ( Loans against NSC/KVP/LIC Policies etc)

9

10 11 12

Irrespective of Old or New Vehicles

Vehicle Loans

17.00% 15.50% 11.25% 12.00% 14.00% 12.00% 13.00% 14.00% 15.00% 15.00%

14

a) Up to Rs.10,00,000/Small and Medium Enterprises (SME) Loans b) Above Rs.10,00,000/Clean Overdraft

14.00% 15.00% 18.50%

15

General Purpose Credit Cards (G.C.C)

14.00%

13

Maximum limit of Rs.25000/-

Table 2

SERVICES FEE BASED SERVICES OFFERED BY THE BANK

S.no

Services

1

All our branches provide Core Banking facility (CBS)

2

Lockers facility

3

DDCP (Demand Drafts and Cheques Purchase) facility

4

Collection of Outstation Cheques

5

Issue of Demand Drafts on our Branches 17

6

Issue of Bank Guarantees

7

Issue of Solvency Certificate

8

NEFT & RTGS facility

9

ATM Debit Card & Kisan Credit card facility

Table 3 Highlights 2014-15 

Growth in Business Rs 2227.85 Cr @17.88% (Rs 1772.77 Cr)



Growth in Deposits Rs 922.02 Cr @ 15.71% (Rs 716.19 Cr)



Growth in Advances Rs 1305.85 Cr @ 19.82% (Rs 1056.58 Cr)



Net profit Rs 180.53 Cr growth @ 13.21% (Rs 159 Cr)



Business per Branch Rs 20.86 Cr (Rs 19.53 Cr)



Business per Employee Rs 5.34 Cr ( Rs 5.02 Cr)



Profit per Employee Rs 6.55 Lakh (Rs 6.42 Lakh)



Opened 66 New Branches (64 Branches) taking total to 704



Opened 64 New Ultra Small Branches, taking total to 488



Issued 2.17 Lakh RuPay ATM-cum-Debit Cards and 1.01 Lakh Kisan Cards.



On boarded to Aadhar Payment Bridge System (APBS) on 21.11.2013 to implement Direct Benefit Transfer (DBT) for LPG subsidy and other benefits.



Aadhar numbers seeded on 3,79,261 accounts during the year, of which 64,855 Aadhar Numbers were seeded on a single day on 24.9.2013



Implemented Aadhar Enabled Payment System (AEPS) and making Aadhar authenticated payments of Social Security Pensions (SSP) and MGNREGS wages through BCAs, leveraging Biometric Technology.



Opened 1,03,126 No Frills accounts in a single day on 24.8.2013 by all Branches and another 75328 accounts were opened on the same date by BCAs



Opened 8 Financial Literacy Centres



Conducted a record number of 1705 recovery camps on a single day on 14 February 2014. 18



Stood first in Cross Selling (SBI Life) - Mobilized Rs 10.08 Cr business premium and Rs 1.49 Cr commission against the targets of Rs 10 Cr & Rs 1 Cr respectively.

19

20

The Operating profit of the Bank stood at Rs 242.97 Crore as on 31.3.14 with a marginal decline of Rs 4.86 Crore over previous FY figure of Rs 247.83 Crore. The Net profit of the Bank has, however, been on the rise in the last six years, although not at the same rate as in the initial years

Rs. In Crores 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

CASA deposits grew by Rs 523.02 Crore at 21.32% to reach Rs 2976.77 Crore as against Rs 2453.75 Crore Term Deposits grew by Rs 965.81 Crore to reach a level of Rs 5303.24 Crore at 22.27% as against Rs 4337.43 Crore. The growth of 21.32% in CASA during the year 2014-15 has been stupendous when compared with CASA growth rates of 7.74% in 2013-14 and 16.01% in 2012-13. (Rs in Crores) 1200 1080

1000 879 698

800 600

539 419

400

311 221

200

152 0

21

Net worth of the Bank stood at Rs 1174.35 Crore with a growth of Rs 201.61 Crore (@ 20.73%) over previous FY's figure of Rs 972.74 Crore.

( Rs. In Crores

9000

) 8280

8000 7000

6791

6000

5869 5153 4795

5000 3805

4000 3000

3394 2188

2718

2934

2000 1000 0

This growth in deposits assumes greater importance. There has been a consistent growth on month to month basis except a marginal negative growth of Rs 24 Crore as on 30.4.14. Retail deposits constitute 88% of total deposits as on 31.3.2015. The Branches have been motivated to mobilize substantial retail deposits and discouraged offering premium rates on bulk deposits.

2012-13 Target 1.Crop Loans

Achievement

2013-14 Target

Achievement

2014-15 Target

Achievement

2274.93

1352.80

2734.06

1429.16

2223.74

2759.62

2.Total Agr & allied activities

745.72

27.96

792.85

9.95

100.00

60.42

3.NFS

220.30

241.47

279.38

308.21

108.25

90.74

22

4.OPS

1014.48

1990.58

1113.36

1742.77

1764.22

2070.13

5.Total Priority Sector

4255.43

3612.81

4919.65

3490.09

4196.21

4980.91

% of achievement

85

Targets and achievements

23

71

118.70

MANAGEMENT OF NPAS IN AP GRAMEENA VIKAS BANK NPA management is important. NPAs are a drag and drain on the bank’s resources and profits. These are unearning assets. Provisioning, capital adequacy norms, made them untenable. Recovery improves profitability and helps recycling the blocked funds. Proper NPA-recovery and their effective management improves the image of the bank. Early identification will help early and sure care, by helping take prompt corrective and remedial measures. It needs no emphasis, that NPAs impose an additional burden on the performing assets (they bear the cost of NPAs). As a ground level operating functionary, an officer has to keep constant watch over the NPAs at the branch. He has not only to supervise and ensure that the assets remain performing but also see that once they become non-performing, effective measures are initiated to get full recovery and where this is not possible, prompt action is initiated to get rid of the NPAs from the Branch books. Objective i)

Long term viability and financial strength of the Bank.

ii)

To contain/ control NPAs to less than 3% and maintain NPAs at par with national average.

iii)

Preventing further assets from becoming NPAs.

Strategies i)

Management of NPAs at various levels.

ii)

Management Information System on NPAs.

iii)

Identification of NPAs.

iv) Identification of likely NPAs. v)

Review mechanism.

vi) Adopting legal action. 24

vii) Adopting other methods for recovery of loans. viii) Lok Adalats. ix) Write-off. x) Budgeting for NPA Management. xi) Creation of NPA Management Cells.

Management of NPAs at Various Levels in the organization Branches and Regional Offices to organize timely recovery drives and camps. At Branches Systematic, concerted and intensive recovery efforts to keep NPAs under control, by: i)

ABC analysis.

ii)

Case by case study and analysis.

iii)

Identifying borrower with genuine interest..

iv) Timeliness and adequacy of response. v) Recovery teams and adoption methodology. vi) Timing of strategies and follow-up. vii) Identification of likely NPAs.

25

ix)

Village-wise and segment-wise NPA position.

x)

Identification of top 20 NPAs.

xi)

Phone contacts daily.

xii) Personal canvassing frequently. xiii) Serving notices (where necessary legal notices may be served). xii) Involving SHGs, RMGs, VOs, Farmers’ Clubs, etc., in recovery drives. xv) Any other strategy suitable for making recovery drives/ camps more effective. At Regional Office Besides motivating field staff and imparting needed skills to them: I) Identification of cluster branches. ii)

Identification of teams at Regional Office to assist Branch Managers and Field Officers.

iii)

Identification of monitoring officers and team leaders.

iv) Compilation of data of existing NPAs (ENPAs) and likely NPAs (LNPAs). v)

Top 20 accounts per branch to be identified.

vi) Arrangements for jeeps/ cars. vii) Arrangements of recovery schedule with dates and tour programme. viii) Writing letters to Government agencies seeking their cooperation in recovery. 26

ix)

Submitting progress reports, at monthly intervals, to Head Office by the 5th of the following month.

Management Information System

i) ‘P’ Review Reports to be submitted with information on NPAs. ii) Top 20 NPA accounts branch-wise and Regional Office-wise. iii) Position of outstanding advances of Rs.5 lakhs and over. iv) Strategies adopted.

Identification of NPAs Branches/ Regional Offices to identify NPAs as per the IRAC norms. Identification of likely NPAs i)

Transaction related (Persistent irregularity, defaults in repayment, invocation of guarantees, operating losses, etc.)

ii)

Activity related (rejection of products, idle machinery, decrease in activity/workers, etc.)

iii)

Advances not rated well.

iv)

Accounts which are adversely commented upon by Inspectors.

v)

Standard accounts, with deceased borrowers.

vi) Borrowers of standard accounts who left the village. vii) Units of standard accounts turned sick/ defunct. 27

Review Mechanism 

An appropriate action plan to be drawn up, to improve the status of the loans, within a time frame.



After identification of NPAs/potential NPAs, a detailed review to be made.



The review, inter alia should envelope and analyze the factors, both internal and external, which led to the impairment of the asset (loan/advance), for taking any possible action vis a vis the case on hand and for taking preventive action vis a vis other accounts. A representative list is appended. Internal -

Appraisal defects. Faulty documentation. Security deterioration. Follow-up lapses/inadequacy. Absence of remedial action.

External -

Machine (break-down/obsolescence) Material (Raw material quality, price, adequacy) Power, water Competition Quality control/standard Government Polices Natural Calamities Marketing Price disadvantage Heavy borrowings Unplanned capital expenditure Willful default Industrial relations Cost overrun Diversion to:  Consumption needs  Outside borrowings  Investments Lags in receipt of sale proceeds Lack of knowledge, skill and attitude

-

-

Branches/ Regional Offices will conduct review meeting, to consider and discuss: 

Regular tours and visits to villages by field functionaries.



Assessing credit needs correctly. 28



Timely lending/ credit disbursals.



Avoiding under financing or over financing.



Ensuring correct utilization of bank loan amount.



Completeness and correctness of documentation.



Ensuring loan documents enforceability.



Recognizing early warning signals such as, migration, shifting of units, closing of units.



Correct assessment of security (primary and collateral)



Compiling correct opinion reports on borrowers and guarantors.



Obtaining realistic and time bound commitment from the borrowers and guarantors for repayment of loans.



Involving SHGs, RMGs, opinion leaders and Government functionaries for recovery of loans.



Creation of NPA Management Cell: The Bank constituted a NPA Management Cell to specially deal with such assets and aim for reducing levels of NPAs. All the Regional Offices are advised to constitute Non-Performing Asset Management Cell in their office, attached to Manager (Advances).

29

CHAPTER-3

30

Non-Performing Assets (NPA) - Concept The three letters “NPA” strike terror in banking sector and business circle today NPA is a short form of “Non-Performing Assets”. In banking, NPA are loans given to doubtful customers who may or may not repay the loan on time. There are two types of assets viz. performing and nonperforming. Performing loans are standard loans on which both the principle and interest are secured and their return is guaranteed. Non-Performing assets means the debt which is given by the Bank is unable to recover it is called NPA .Non- Performing Asset [NPA] is a result of asset Liability mismatch, A NPA account in the books of accounts is an asset as it indicates the amount receivable from the Defaulters. It means if any bank gives loan to the customer if the interest for that loan is not paid by the customer till 90 days then that account is called as NPA account. A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income.

Definitions: An asset, including a leased asset, becomes Non-Performing 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. The specified period was reduced in a phased manner as under:

w.e.f. 31.03.1993 : four quarters w.e.f. 31.03.1994 : three quarters w.e.f. 31.03.1995 : two quarters w.e.f. 31.03.2001 : 180 days w.e.f. 31.03.2004 : 90 days 90 days’ delinquency norms are not applicable to Agriculture segment 31

With the effect from March 31, 2004, NPA shall be a loan or an advance where:

1. Term loan: Interest and /or installment of principal remain over due for a period of more than 90 days. 2. Cash credit/overdraft: The account remains ‘out of order’ for a period of more than 90 days.

3. Bills: The bill remains overdue for a period of more than 90days from due date of payment. 4. Other Loans: Any amount to be received remains overdue for a period of more than 90 days. 5. Agricultural Accounts: In the case of agriculture advances, where repayment is based on income from crop. An account will be classified as NPA as under: a) If loan has been granted for short duration crop: interest and/or installment of Principal remains overdue for two crop seasons beyond the due date. b) If loan has been granted for long duration crop: Interest and/or installment of principal remains overdue for one crop seasons beyond due date.

Asset classification Assets can be categorized into Four categories namely (1) Standard (2) Sub Standard (3) Doubtful (4) Loss the last three categories are classified as NPAs based on the period for which the asset has remained non-performing and the realisability of the dues. (1) Standard assets: The loan accounts which are regular and do not carry more than normal risk. Within standard assets, there could be accounts which though have not become NPA but are irregular. Such accounts are called as special Mention accounts. (2) Sub-Standard Assets: With effect from 31.3.2005, a sub- standard asset is one, which is classified as NPA for a period not exceeding 12 Months (earlier it was 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 bank in full. In other words, such an asset will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. (3) Doubtful Assets: With effect from 31 march 2005, an asset is to be classified as doubtful, if it has remained NPA or sub standard for a period exceeding 12 months (earlier it was 18 months). A 32

loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weakness make collection or liquidation in full,- on the basis of currently known facts, conditions and values- highly questionable and improbable. (4) Loss assets: A loss asset is one where loss has been identified by the bank or internal or external auditors 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 recoverable value. When a Sub Standard account is classified as Doubtful or Loss without waiting for 12 months: If the realizable value of tangible security in a sub Standard account which was secured falls below 10% of the outstanding, it should be classified loss asset without waiting for 12 months and if the realizable value of security is 10% or above but below 50% of the outstanding, it should be classified as doubtful irrespective of the period for which it has remained NPA.

NPA IDENTIFICATION NORMS With effect from 31st March’2004, a loan or advance would become NPA where; i)Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, ii)

The account remains ‘out of order’ for a period of more than 90 days, in respect of an

Overdraft/Cash Credit (OD/CC), iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv)

With effect from September 2004, loans granted for short duration crops will be treated as

NPA, if the installment of principal or interest thereon remains overdue for two crop seasons and loans granted for long duration crops will be treated as NPA, if installment of principal or interest thereon remains overdue for one crop season, and v)

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

of other accounts. Out of Order: 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 33

credits continuously for 90 days 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. The date of NPA will be the actual date on which slippage occurred, as mentioned below:For Term Loan/Demand Loan Accounts The date on which interest and/or instalment of principal have remained overdue for a period of more than 90 days. For Overdraft/Cash Credit Accounts The date on which the account completed a period of more than 90 days of being continuously out of order.

Income Recognition – Policy 1. The Policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing asset (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. 2. On an account turning NPA, banks should reverse the interest already charged and not collected by debiting profit and loss account, and stop further application of interest. However, banks may continue to record such accrued interest in a memorandum account in their books. 3. 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. 4. If government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realized. 5. If any advance, including bills purchased and discounted, become s NPA as at the close of any year, the entire interest accrued and credited to income account in the past periods, should be reversed or provided for if the same is not realized. This will apply to government guaranteed accounts also. PROBLEMS DUE TO NPA

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

34

2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors lose their assets or uninsured balance. 3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth. 4. Non-performing loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by extension, labor and natural resources.

Non-performing asset may spill over the banking system and contract the money stock, which may lead to economic contraction. This spillover effect can channelize through liquidity or bank insolvency: a) When many borrowers fail to pay interest, banks may experience liquidity shortage.

This can

jam payment across the country, b) Illiquidity constraints bank in paying depositors .c) Undercapitalized banks exceeds the bank’s capital base.

The three letters Strike terror in banking sector and business circle today. NPA is short form of “NonPerforming 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 cannot be then left is to look after the factor responsible for it and managing those factors.  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  Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. 35

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. SARFAESI ACT The policy makers and legislators realized the need for measures for the quick recovery of NPAs, and to empower Banks and Financial Institutions to recover the NPAs without intervention of judicial process. In that process guidance was found from Section 69A of Transfer of Property Act and State Finance Corporation Acts, where there is provision for the sale of secured assets without the intervention of Courts. In that process Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) was enacted. The Preamble of the Act states that ”Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees have suggested enactment of a new legislation for securitization and empowering banks and financial institutions to take possession of these securities and to sell them without the intervention of the Court. Acting on these suggestions the SARFAESI Ordinance 2002 was promulgated on the 21st June 2002 to regulate securitization and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realize long term assets, manage problem of liquidity, asset liabilities

36

CHAPTER-4

37

IMPACT OF NPA UPON BANKS 1. Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn’t affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.

2. Liquidity:Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest 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.

3. 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.

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

38

REASONS FOR MANAGING NON – PERFORMING ASSETS. NPAs have multifold effects on the performance of banks. It shows the weakness of management of bank. It is necessary to manage non – performing assets for following reasons:

1. To protect the interest of shareholders. Members of the bank are true owners of bank. They contribute or invest their amount in banks to earn dividend. Being amount of NPA with their amount in banks to earn dividend because high amount of NPAs means earning assets are on deterioration consequently, means lower income of banks that will make unable to satisfy the members by paying high rate of dividend.

2. To protect the interest of depositors. Depositors are the key person of the banks because of their deposits the banks are able to lend to borrowers. Depositors want consistence interest income on their deposits. When their deposits, advanced to borrowers, which would, later on, if become a NPA, banks would be unable to pay timely interest to depositors will switch of their deposits from one bank to another bank which is not commendable for particular bank. Thus it is very important for banks to manage efficiently their advances, which are likely to turn into NPAs.

3. For profitability: Non – performing Assets means an asset, which cease to generate any income. Thus more and more NPA will reduce the income of banks as interest which is main component of bank’s income thus it will jeopardize the profitability or return on assets consequently it will be constraint for bank’s growth.

4. High provision: Higher NPA leads banks to compel higher provision for „Bad Debts Reserve‟ as per the norms of RBI. Provision will be done by realized profit and NPA will block the actual profit of banks for current year thus NPA has a dual effect i.e. not realization of interest income and separate provision for NPA from Profit & Loss account.

5. Creditworthiness of the Banks: NPA works as a tool for worthiness of particular bank. If banks are having high NPA level then it will be very difficult to raise additional funds from market. It will make bad impression of banks on people. 39

6. Expansion plan: For instance banks want to start as its expansion plan and its NPA level is higher. Then prescribed by RBI that is 15% of advances, banks will not be able to get permission from the RBI for starting a new branch. Thus it is necessary to control NPA level within prescribed limit for future growth of banks.

7. Welfare of employees: If banks are having high NPA it will ruin the whole capital and past reserves, which raises question for existence of banks. Thus, many personnel will loss employment, but also banks cannot make any provision for welfare activities of the employee’s future benefits due to lack of availability of free reserves.

8. In the interest of sustained economic growth: For the interest of sustained economic growth it is necessary to control and minimize NPAs of nations banking sectors. High NPA leads to inflation in economy. Further, NPAs will reduce the opportunities for productive investment, ruin the efforts of directed allocation of funds, preferred investment areas, subsequently economy of country will not be able to achieve expected growth, which is decided on formation of budget

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 overdue 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.

40

Operational and Physical: 

If information is received that the borrower has either initiated the process of winding up or are not doing the business.



Overdue receivables.



Stock statement not submitted on time.



External non-controllable factor like natural calamities in the city where borrower conduct his business.



Frequent changes in plan



Nonpayment 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

SALE OF NPA TO OTHER BANKS 

A NPA is eligible for sale to other banks only if it has remained a NPA for at least years in the books of the selling bank



The NPA must be held by the purchasing bank at least for a period of 15 months sold to other banks but not to bank, which originally sold the NPA.



The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasing.



The bank may purchase/ sell NPA only on without recourse basis.



If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.

41

two

before it is

CHAPTER-5

42

Preventive Measurement for NPA Early Recognition of the Problem : Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues. Identification of weakness in the very beginning that is : When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoter’s intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse. Identify 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 Turn around. Based on this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category. Timeliness and adequacy of response : Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoter’s commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.

Focus on cash flow : 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

43

requirements may be done by analysing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow. Management Effectiveness : The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit’s fortunes. A bank may commit additional finance to an align 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 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 exchange on defaulting borrowers once the setup becomes fully operational. C. 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 a t a cost – by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account. D. 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.

44

INTERNATIONAL PRACTICES ON NPA MANAGEMENT Subsequent to the Asian currency crisis which severely crippled the financial system in most In addition to the above, some of the more recent and aggressive steps to resolve NPAs have been taken by Taiwan. Taiwanese financial institutions have been encouraged to merge (though with limited success) and form bank based AMCs through the recent introduction of Financial Holding Company Act and Financial Institution Asian countries, the magnitude of NPAs in Asian financial institutions was brought to light. Driven by the need to proactively tackle the soaring NPA levels the respective Governments embarked upon a program of substantial reform. This involved setting up processes for early identification and resolution of NPAs. The table below provides a cross country comparison of approaches used for NPA resolution. Mergers Act. Alongside the Ministry of Finance has followed a carrot and stick policy of specifying the required NPA ratios for banks (5% by end 2003), while also providing flexibility in modes of NPA asset resolution and a conducive regulatory and tax environment. Deferred loss write-off provisions have been instituted to provide breathing space for lenders to absorb NPA write-offs. While it is too early to comment on’ he success of the NPA resolution process in Taiwan, the early signs are encouraging. Detailed below are the some key NPA management approaches adopted by banks in South East Asian countries. 1. Credit Risk Mitigation As part of the overall credit function of the bank, early recognition of loans showing signs of distress is a key component. Credit risk management focuses on assessing credit risk and matching it with capital or provisions to cover expected losses from default. 2. Early Warning Systems Loan monitoring is a continuous process and Early Warning Systems are in place for staff to continuously be alert for warning signs. 3. Asset Management Companies To resolve NPA problems and help restore the health and confidence of the financial sector, the countries in South East Asia have used one broad uniform approach, i.e. they set up specialized Asset Management Companies (AMCs) to tackle NPAs and put in place Debt Restructuring mechanism to bring creditors and debtors together, often working along with independent advisors. This broad approach was locally adapted and used with a varying degree of efficacy across the region. For example, while in some countries a centralized government sponsored AMC model has been used, in others a more decentralized approach has been used involving the creation of several "bank-based" AMCs. Further different countries have allowed/used different approaches (in-house restructuring versus NPA Sale) to resolve their NPAs. Additionally, the efficacy of bankruptcy and foreclosure laws has varied in various countries. A number of factors influenced the successful resolution of NPAs through sale to AMCs and some of these key factors are discussed below  Increasing willingness to sell NPAs to AMCs Bottlenecks often persist on account of reluctance of lenders to transfer assets to the AMCs at values lower than the book value to prevent a hit to their financials. Banks in Malaysia were encouraged to transfer their assets to Danaharta - AMC in Malaysia by providing them with upside sharing arrangements and the facility to defer the write-off of financial loss on transfer for 5 years. These 45

incentives coupled with the directive of the Central Bank to make adjustments in the book values of the assets not transferred to Danaharta (after Danaharta identifies them) were sufficient to ensure effective sale to the AMC. In Taiwan, there is a regulatory requirement to reduce for banks to reduce NPAs to 5% by the end of 2003. Consequently there is an increasing number of NPA auctions by the banks. 

Effective resolution strategy

A significant dimension influencing NPA resolution and investor participation is the ease of implementation of recovery strategies. AMCs like danaharta have been provided with a strong platform to affect the resolution of NPAs with clearly laid down creditor's rights. Danaharta has been allowed to foreclose property without reference to the Court and thus has been able to dispose collateral swiftly by using the tender route. Special resolution mechanisms that have involved minimal intervention of the Court have also served to entice investor interest in the NPA market in certain countries like Taiwan. On the other hand the operations of Thailand Asset Management Corporation, the Government owned AMC, have been hindered by deficiencies in the Bankruptcy Law provisions. 

Appointment of Special Administrators In Malaysia, it has been able to exercise considerable influence over the restructuring process through the appointment of special administrators that have prepared workout plans and have exercised management control over the assets of the borrower during plan preparation and implementation stages. The restructuring process affected by the automatic moratorium that comes into place at the time of the administrator’s appointment. Out of court restructuring Most Asian countries adopted “out of court” restructuring mechanism to minimize court intervention and speed up restructuring of potentially viable entities. Internationally, restructuring of NPAs often involves significant operational restructuring in addition to financial restructuring. The operational restructuring measures typically include the following areas:     

Revenue enhancement Cost reduction Process improvement Working capital management Sale of redundant/surplus assets

Once the restructuring measures have been agreed by stakeholders, a complete restructuring plan is prepared which takes into account all the agreed restructuring measures. This includes establishment of a timetable and assignment of responsibilities. Usually, lenders will also establish a protocol for monitoring of progress on the operational restructuring measures. This would typically involve the appointment of an independent monitoring agency. As seen from the Asian experience, in general, NPA resolution has been most successful when 

Flexibility in modes of asset resolution (restructuring, third party sales) has been provided to lenders. 46





Conducive and transparent regulatory and tax environment, particularly pertaining to deferred loss write offs, Foreign Direct Investment and bankruptcy/foreclosure processes has been put in place. Performance targets set for banks to get them to resolve NPAs by a certain deadline.

47

CHAPTER-6

48

LITERATURE REVIEW A large number of researchers have been studied to the issue of non-performing asset (NPA) in banking industry .A review of the relevant literature has been described as under: Non Performing Assets engender negative impact on banking stability and growth. Issue of NPA and its impact on erosion of profit and quality of asset was not seriously considered in Indian banking prior to 1991. There are many reasons cited for the alarming level of NPA in Indian banking sector. Asset quality was not prime concern in Indian banking sector till 1991, but was mainly focused on performance objectives such as opening wide networks/branches, development of rural areas, priority sector lending, higher employment generation, etc. The accounting treatment also failed to project the problem of NPA, as interest on loan accounts were accounted on accrual basis (Siraj K.K. and P. Sudarsanan Pillai, 2012). A Committee on Banking Sector Reforms known as Narasimham Committee was set up by RBI to study the problems faced by Indian banking sector and to suggest measures revitalize the sector. The committee identified NPA as a major threat and recommended prudential measures for income recognition, asset classification and provisioning requirements. These measures embarked on transformation of the Indian banking sector into a viable, competitive and vibrant sector. The committee recommended measures to improve “operational flexibility” and “functional autonomy” so as to enhance “efficiency, productivity and profitability” (Chaudhary & Singh, 2012). The main cause of mounting NPAs in public sector banks is malfunctioning of the banks. Narasimham Committee identified the NPAs as one of the possible effects of malfunctioning of public sector banks (Ramu, N., 2009).It has been examined that the reason behind the falling revenues from traditional sources is 78% of the total NPAs accounted in public sector banks (Bhavani Prasad, G. and Veena, V.D., 2011). An evaluation of the Indian experience in Financial Sector Reforms Published in the RBI Bulletin gives stress to the view that the sustained improvement of the economic activity and growth is greatly enhanced by the existence of a financial system developed in terms of both operational and allocation efficiency in mobilizing savings and in channelizing them among competing demands (G.Rangarajan, 1997).It has been observed that the current banking Scenario and the need for the policy change, opines that a major concern addressed by the banking sector reform is the improvement of the financial health of banks. The Introduction of prudential norms is better financial discipline by ensuring that the banks are alert to the risk profile of their loan portfolios (S.P.Talwar (1998). The Reserve Bank of India has also conducted a study to ascertain the contributing factors for the high level of NPAs in the banks covering 800 top NPA accounts in 33 banks (RBI Bulletin, July 1999). The study has found that the proportion of problem loans in case of Indian banking sector always been very high. The problem loans of these banks, in fact, formed 17.91 percent of their gross advances as on March 49

31, 1989. This proportion did not include the amounts locked up in sick industrial units. Hence, the proportion of problem loans indeed was higher. However, the NPAs of Indian Banks declined to 17.44 percent as on March 31, 1997 after introduction of prudential norms. In case of many of the banks, the decline in ratio of NPAs was mainly due to proportionately much higher rise in advances and a lower level of NPAs accretion after 1992. The study also revealed that the major factors contributing to loans becoming NPAs include diversion of funds for expansion, diversification, modernization, undertaking new projects and for helping associate concerns. This is coupled with recessionary trend and failure to tap funds in the capital and debt markets, business failure (product, marketing, etc.),inefficient management, strained labour relations, inappropriate technology/technical problems, product obsolescence, recession input/power shortage, price escalation, accidents, natural calamities, Government policies like changes in excise duties, pollution control orders, etc. The RBI report concluded that reduction of NPAs in banking sector should be treated as a national priority issue to make the Indian banking system stronger, resilient and geared to meet the challenges of globalization (Parul Khanna, 2012) Das and Ghosh (2003) empirically examined non-performing loans of India’s public sector banks in terms of various indicators such as asset size, credit growth and macroeconomic condition, and operating efficiency indicators. Sergio (1996) in a study of non-performing loans in Italy found evidence that, an increase in the riskiness of loan assets is rooted in a bank’s lending policy adducing to relatively unselective and inadequate assessment of sectorial prospects.

Vradi et.al (2006), his study on´ Measurement of efficiency of bank in India concluded that in modern world performance of banking is more important to stable the economy .in order to see the efficiency of Indian banks we have seen the fore indicators i.e. profitability, productivity, assets, quality and financial management for all banks includes public sector, private sector banks in India for the period 2000 and 1999 to 2002-2003. For measuring efficiency of banks we have adopted development envelopment analysis and found that public sectors banks are more efficient than other banks in India

Brijesh K. Saho et.al (2007), this paper attempts to examine, the performance trends of the Indian commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings are indicative in many ways. First, the increasing average annual trends in technical efficiency for all ownership groups indicate an affirmative gesture about the effect of the reform process on the performance of the Indian banking

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sector. Second, the higher cost efficiency accrual of private banks over nationalized banks indicate that nationalized banks, though old, do not reflect their learning experience in their cost minimizing behavior due to X-inefficiency factors arising from government ownership. This finding also highlights the possible stronger disciplining role played by the capital market indicating a strong link between market for corporate control and efficiency of private enterprise assumed by property right hypothesis.

And, finally, concerning the scale elasticity behaviour, the technology and market-based results differ significantly supporting the empirical distinction between returns to scale and economies of scale, often used interchangeably in the literature. . B.Satish Kumar (2008), in his article on an evaluation of the financial performance of Indian private sector banks wrote Private sector banks play an important role in development of Indian economy. After liberalization the banking industry underwent major changes. The economic reforms totally have changed the banking sector. RBI permitted new banks to be started in the private sector as per the recommendation of Narashiman committee. The Indian banking industry was dominated by public sector banks. But now the situations have changed new generation banks with used of technology and professional management has gained a reasonable position in the banking industry.

Nelson M. Waweru et.al (2009), Study that many financial institutions that collapsed in Kenya since 1986 failed due to non-performing loans, this study investigated the causes of non-performing loans, the actions that bank managers have taken to mitigate that problem and the level of success of such actions. Using a sample of 30 managers selected from the ten largest banks the study found that national economic downturn was perceived as the most important external factor. Customer failure to disclose vital information during the loan application process was considered to be the main customer specific factor. The study further found that Lack of an aggressive debt collection policy was perceived as the main bank specific factor, contributing to the non performing debt problem in Kenya.

Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of great importance given its association with bank failure and financial crises, and it should therefore be of interest to developing countries. The purpose of this paper is to build a multivariate model, incorporating macroeconomic and bank-specific variables, to forecast non-performing loans in the banking sector of Barbados. On an aggregate level, our model outperforms a simple random walk model on all forecast horizons, while for individual banks; these forecasts tend to be more accurate for longer prediction periods only.

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CHAPTER-7

52

ANALYSIS

Assets Classification

(Rs in Crores)

Assets

2012-13

2013-14

2014-15

O/s

%

O/s

%

O/s

%

6322.13

95.94

7545.61

95.57

8766.58

96.70

Sub Standard

148.74

2.26

159.53

2.02

165.09

1.82

Bad & Doubtful

118.71

1.80

189.23

2.40

133.25

1.47

0

0.00

1.05

0.01

0.68

0.01

267.45

4.06

349.81

4.43

299.03

3.30

6589.58

100.00

7895.42

100.00

9065.61

100.00

Standard

Loss Total NPAs Total Advances

Movement of NPAs S No

Particulars

I

Movement of Gross NPAs

(Rs in thousands) Current Year (2014-15)

Previous Year (2013-14)

Opening balance

Ii

Additions during the year

3498163.55

2674486

Reductions during the year

1430706.85

1605003

Closing balance

1938568.45

781325

Gross NPAs as % to total Advances

2990301.95

3498164

3.30

4.43

Movement of Net NPAs 2550101.26

1728084

Additions during the year

499297.91

1075396

Reductions during the year

825141.26

253379

2224257.90

2550101

2.47

3.27

Opening balance

Closing balance Net NPAs to Net Advances (%)

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Status of NPA for year 2013, 2014 and 2015 of AP GVB 400 349.81 350 299.81

300

267.4

Rs in Cr

250 200 150 100 50 0 Series 1

2012-13

2013-14

2014-2015

267.4

349.81

299.81

Financial Year

status of NPA for 2 financial years in APGVB From the above graph we can show the status of NPA for two financial years i.e. 2012-13, 2013-14and 2014-15 the X axis represents the financial year and the Y axis as the amount in crores. The NPA value for the year 2012-13 is Rs 267.40 Cr whereas the other value for 2013-14is of Rs 349.81 Cr and when it comes to the present financial year it is around 299.81. That means there is a gradual increase in NPA for 2012-13 and 2013-14 of Rs 82.41 Cr and when it comes to the financial years of 2013-14 and 2014-15 the decrease of 50 Cr in NPA can be seen .Which shows positive impact on the development of the bank.

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Overall representation of Loan and NPA last three years in the branches of (Amount in ‘000)

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Best performing branches are Chowdergudem, kadthal, telkapally because loan amount which is converting NPA is low. Poor performing branches are padra, peddakothapally, thummanpet because loan amount which is converting NPA is high

YEARWISE LOAN AND THEIR NPA IN TEN BRANCHES OF APGVB.

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CHAPTER-8

57

FINDING AND SUGGESTIONS

 Gross NPA & Net NPA of APGVB are not constant every year . It’s being increasing and decreasing.  Total advances given by APGVB and Net Profits are also not constant.  Because of mismanagement in bank there is a positive relation between Total Advances, Net Profits and NPA of bank which is not good.  Positive relation between NPA & profits are due to wrong choice of clients by Banks.  There is an adverse effect on the Liquidity of Bank.  Bank is unable to give loans to the new customers due to lack of funds which arises due to NPA.

Suggestions  Good management needed on the side of banks to decrease the level of NPA.  Proper selection of borrowers & follow ups required to get timely payment  In order to reduce the balance of NPAs, Bank should constantly review and monitor the accounts and the progress of the project for which the loan has been sanctioned.

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CONCLUSION

The problem statement on which I focused my study is “NPAs the big challenge before the Banks”. The only problem that the Bank is facing today is the problem of nonperforming assets, if the proper management of the NPAs is not undertaken it would hamper the business of the banks. The NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of the funds. The bank must have to find out the measures to reduce the evolving problem of the NPAs, the reduction of the NPAs would help the bank to boost up their profits, smooth recycling of funds in the nation. This would help the nation to develop more banking branches and developing the economy by providing the better Finally I can conclude that the bankers can avoid sanctioning loans to the noncredit worthy borrowers by adopting certain measures. They are careful appraisal of the project which involves checking the economic viability of the project. A banker must consider the return on investment on a proposed project. If the calculated return is sufficiently higher than the credit amount he can sanction the loan. Also, he can constantly monitor the borrower in order to ensure the amount sanctioned. This involves the post sanction inspection by the banker. Further the banker should get both the formal and informal reports about the goodwill of the customer. If he had already proven as a defaulter than there is no question of sanctioning loan to him. By considering all the above factors the banker can reduce the non-performing assets in a bank.

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CHAPTER-9

60

BIBILOGRAPHY

• • • • •

Annual Reports of APGVB bank Credit Risk Grading Manual, published by RBI Banking Credit Risk Management Manual Daily affairs of Apgvb bank, ashok nagar Consumers Financing Policy of Apgvb bank

WEBSITE o http://www.apgvbank.in/ o ww.yourarticlelibrary.com/banking/indian-banking-system-structure-and-other-details-withdiagrams/23495/ o https://www.rbi.org.in/

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