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  1. 1. Non Performing Assets CHAPTER: 1 EXECUTIVE SUMMARYB.M. Collage of Business Administration Page 1
  2. 2. Non Performing Assets Executive Summary A project has been prepared under the title of ‘Non Performing Assets inSurat’.First of all the information regarding the banking industry is given. In thatvarious facts regarding the bank industry is being provided. Also the varioustypes of non performing assets.The brief introduction of non performing assets is given. In this the definition,various benefits, objective, limitation etc. are mentioned. Then a analysis ofdata is made.Then the objective of doing the project is mentioned.After that analysis comes. At the last me find Conclusion & Suggestion. Thencomes “facts and finding” part. In this part first of all the details about the nonperforming assets by me is given. Then a comparison is made among the threecompanies selected by me on various parameters.B.M. Collage of Business Administration Page 2
  3. 3. Non Performing Assets CHAPTER: 2 RESEARCH METHODOLOGYB.M. Collage of Business Administration Page 3
  4. 4. Non Performing AssetsRESEARCH METHODOLOGY Research is a one kind of process to get knowledge about some topic.Research is done so that systematic analysis can be done and problem can alsobe solved.TITLE OF STUDY Here it is “NON-PERFORMING ASSETS”BENEFITS FROM THE STUDY ©. It helps me to know more about NPA and the situation of NPA inbank. ©. It helps me to know the strategies adopted by banks to reduce theNPA level and to understand the NPA provisions norms in bank.RESEARCH PROBLEM NPA always affect the profit of bank and also the prestige of bank. Sohere the research problem is to identify the causes for the NPA and to identifythe action plan to reduce the NPA.RESEARCH DESIGN Here the research design is exploratory which helps me to explore theNPA problem of bank.RESEARCH INSTRUMENT As a research instrument I have taken guidance from the CEO of Citybank and also my faculty of college.DATA COLLECTION  Primary Data  Secondary DataB.M. Collage of Business Administration Page 4
  5. 5. Non Performing AssetsHence it is an exploratory research their is not any dependence on primarydata.Sources of secondary data 1. Annual report 2. Journals 3. Websites 4. BooksANALYSIS AND REPORT WRITING Here I have done ratio analysis and used various charts for analysispurpose. And also I have written report on it.B.M. Collage of Business Administration Page 5
  6. 6. Non Performing Assets CHAPTER: 3 OBJECTIVE OF PROJECTB.M. Collage of Business Administration Page 6
  7. 7. Non Performing AssetsSome objectives for the selection of this project are as follows©. To study and understand the concept of NPA©. To analyze the banks policy to recover the level of NPA©. To understand the effect of NPA on banks profit and its prestige©. To understand how corrective measures taken by bank for NPA©. To understand RBI’S rules and regulations for the control of NPA©. To understand the credit appraisal policy and NPA recovery policy of bankB.M. Collage of Business Administration Page 7
  8. 8. Non Performing Assets CHAPTER: 4 LIMITATIONB.M. Collage of Business Administration Page 8
  9. 9. Non Performing AssetsLIMITATION OF PROJECT Some times bank officer was hesitant to give all data on NPA. I have selected only one bank for NPA which is very small sample size. I face difficulty in doing proper analysis as I don’t have prior experiencefor making project report.B.M. Collage of Business Administration Page 9
  10. 10. Non Performing Assets CHAPTER: 5 INTRODUCTION OFBANKING INDUSTRYB.M. Collage of Business Administration Page 10
  11. 11. Non Performing AssetsDEFINITION OF BANK “An organization, usually a corporation, chartered by a state or federalgovernment, which does most or all of the following: receives demanddeposits and time deposits, honors instruments drawn on them, and paysinterest on them; discounts notes, makes loans, and invests in securities;collects checks, drafts, and notes; certifies depositors checks; and issuesdrafts and cashiers checks.”DEFINITION OF BANKING In general terms, “The business activity of accepting and safeguardingmoney owned by other individuals and entities, and then lending out thismoney in order to earn a profit” So we can say that Banking is a company,which transacts the business of banking. The BankingRegulations Acts defines the business as banking bystating the essential function of a banker. The term banking is defined as “Accepting forthe purpose of leading or investment, deposits of moneyfrom the public, repayable on demand or otherwise andwithdrawal by cheque, draft, order or otherwise.”B.M. Collage of Business Administration Page 11
  12. 12. Non Performing AssetsHISTORY OF BANKING IN INDIA Without a sound and effective banking system in India it cannot have ahealthy economy. The banking system of India should not only be hassle freebut it should be able to meet new challenges posed by the technology and anyother external and internal factors. For the past three decades Indias banking system has severaloutstanding achievements to its credit. The most striking is its extensive reach.It is no longer confined to only metropolitans or cosmopolitans in India. Infact, Indian banking system has reached even to the remote corners of thecountry. This is one of the main reasons of Indias growth process. The governments regular policy for Indian bank since 1969 has paidrich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bankcounters for getting a draft or for withdrawing his own money. Today, he hasa choice. Gone are days when the most efficient bank transferred money fromone branch to other in two days. Now it is simple as instant messaging or dialsa pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786.From 1786 till today, the journey of Indian Banking System can be segregatedinto three distinct phases. They are as mentioned below: ©. Early phase from 1786 to 1969 of Indian Banks ©.Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms ©. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991To make this write-upB.M. Collage of Business Administration Page 12
  13. 13. Non Performing Assets more explanatory, we divide scenario in Phase I, Phase II and Phase III PHASE I The General Bank of India was set up in the year 1786. Next wereBank of Hindustan and Bengal Bank. The East India Company establishedBank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843)as independent units and called it Presidency Banks. These three banks wereamalgamated in 1920 and Imperial Bank of India was established whichstarted as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively byIndians, Punjab National Bank Ltd. was set up in 1894 with headquarters atLahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bankof Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks alsoexperienced periodic failures between 1913 and 1948. There wereapproximately 1100 banks, mostly small. To streamline the functioning andactivities of commercial banks, the Government of India came up with TheBanking Companies Act, 1949 which was later changed to BankingRegulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).Reserve Bank of India was vested with extensive powers for the supervisionof banking in India as the Central Banking Authority.PHASE II Government took major steps in this Indian Banking Sector Reformafter independence. In 1955, it nationalized Imperial Bank of India withextensive banking facilities on a large scale especially in rural and semi-urbanareas. It formed State Bank of India to act as the principal agent of RBI and toB.M. Collage of Business Administration Page 13
  14. 14. Non Performing Assetshandle banking transactions of the Union and State Governments all over thecountry. Seven banks forming subsidiary of State Bank of India wasnationalized in 1960 on 19th July, 1969, major process of nationalization wascarried out. It was the effort of the then City Minister of India, Mrs. IndiraGandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform wascarried out in 1980 with seven more banks. This step brought 80% of thebanking segment in India under Government ownership. The following are the steps taken by the Government of India toRegulate Banking Institutions in the Country: ©. 1949: Enactment of Banking Regulation Act. ©. 1955: Nationalization of State Bank of India. ©. 1959: Nationalization of SBI subsidiaries. ©. 1961: Insurance cover extended to deposits. ©. 1969: Nationalization of 14 major banks. ©. 1971: Creation of credit guarantee corporation. ©. 1975: Creation of regional rural banks. ©. 1980: Nationalization of seven banks with deposits over 200 crore.Banking in the sunshine of Government ownership gave the public implicitfaith and immense confidence about the sustainability of these institutions.PHASE III This phase has introduced many more products and facilities in thebanking sector in its reforms measure. In 1991, under the chairmanship of MB.M. Collage of Business Administration Page 14
  15. 15. Non Performing AssetsNarasimham, a committee was set up by his name which worked for theliberalization of banking practices. The country is flooded with foreign banks and their ATM stations.Efforts are being put to give a satisfactory service to customers. Phonebanking and net banking is introduced. The entire system became moreconvenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It issheltered from any crisis triggered by any external macroeconomics shock asother East Asian Countries suffered. This is all due to a flexible exchange rateregime, the foreign reserves are high, the capital account is not yet fullyconvertible, and banks and their customers have limited foreign exchangeexposure. RESERVE BANK OF INDIA (RBI) The central bank of the country is the Reserve Bank of India (RBI). Itwas established in April 1935 with a share capital of Rs. 5 crores on the basisof the recommendations of the Hilton Young Commission. The share capitalwas divided into shares of Rs. 100 each fully paid which was entirely ownedby private shareholders in the beginning. The Government held shares ofnominal value of Rs. 2, 20,000 Reserve Bank of India was nationalized in the year 1949. The generalsuperintendence and direction of the Bank is entrusted to Central Board ofDirectors of 20 members, the Governor and four Deputy Governors, oneGovernment official from the Ministry of Finance, ten nominated Directors bythe Government to give representation to important elements in the economiclife of the country, and four nominated Directors by the Central Governmentto represent the four local Boards with the headquarters at Mumbai, Kolkata,Chennai and New Delhi. Local Boards consist of five members each CentralB.M. Collage of Business Administration Page 15
  16. 16. Non Performing AssetsGovernment appointed for a term of four years to represent territorial andeconomic interests and the interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1,1935. The Act, 1934 (II of 1934) provides the statutory basis of thefunctioning of the Bank.The Bank was constituted for the need of following: ©. To regulate the issue of banknotes to maintain reserves with a view to securing monetary stability and ©. To operate the credit and currency system of the country to its advantageB.M. Collage of Business Administration Page 16
  17. 17. Non Performing Assets ORGANISATION STRUCTURE OF RBITHE BANKING SYSTEM Almost 80% of the business is still controlled by Public Sector Banks(PSBs). PSBs are still dominating the commercial banking system. Shares ofthe leading PSBs are already listed on the stock exchanges. The RBI has given licenses to new private sector banks as part of theliberalization process. The RBI has also been granting licenses to industrialhouses. Many banks are successfully running in the retail and consumersegments but are yet to deliver services to industrial finance, retail trade, smallbusiness and agricultural finance. The PSBs will play an important role in the industry due to its numberof branches and foreign banks facing the constraint of limited number ofbranches. Hence, in order to achieve an efficient banking system, the onus ison the Government to encourage the PSBs to be run on professional lines.BANKING SECTORS IN INDIA BANKS Public Private Co-operative Regional Rural ForeignSector bank sector bank bank bank bankCO-OPERATIVE BANKSB.M. Collage of Business Administration Page 17
  18. 18. Non Performing Assets The Co-operative banks have a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System,judging by the role assigned to them, the expectations they are supposed tofulfill, their number, and the number of offices they operate. The co-operativemovement originated in the West, but the importance that such banks haveassumed in India is rarely paralleled anywhere else in the world. Their role inrural financing continues to be important even today, and their business in theurban areas also has increased phenomenally in recent years mainly due to thesharp increase in the number of primary co-operative banks. Some of the co-operative banks are quite forward looking and havedeveloped sufficient core competencies tochallenge state and private sector banks. According to NAFCUB the totaldeposits & landings of Co-operative Banks ismuch more than Old Private Sector Banks &also the New Private Sector Banks. Thisexponential growth of Co-operative Banks isattributed mainly to their much better localreach, personal interaction with customers, andtheir ability to catch the nerve of the localclientele. Though registered under the Co-operative Societies Act of the Respective States(where formed originally) the banking related activities of the co-operativebanks are also regulated by the Reserve Bank of India. They are governed bythe Banking Regulations Act 1949 and Banking Laws (Co-operativeSocieties) Act, 1965.B.M. Collage of Business Administration Page 18
  19. 19. Non Performing AssetsCO-OPERATIVE BANKS FINANCE RURAL AREA ASUNDER ©. Farming ©. Cattle ©. Milk ©. Hatchery ©. Personal financeCO-OPERATIVE BANKS FINANCE URBEN AREA ASUNDER ©. Self-employment ©. Industries ©. Small scale units ©. Home finance ©. Consumer finance ©. Personal financeFACTS ABOUT CO-OPERATIVE BANK ©. Some cooperative banks in India are more forward than many of the state and private sector banks. ©. According to NAFCUB the total deposits & landings of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks.B.M. Collage of Business Administration Page 19
  20. 20. Non Performing Assets ©. This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local client.B.M. Collage of Business Administration Page 20
  21. 21. Non Performing Assets CHAPTER: 6 INTRODUCTION OF CITY CO-OP. BANK LTDB.M. Collage of Business Administration Page 21
  22. 22. Non Performing Assets CITY BANKINTRODUCTION OF BANKB.M. Collage of Business Administration Page 22
  23. 23. Non Performing Assets City is a name of the bank where the bank is ready to serve its bankingservices to all customers. The bank is governed by the Gujarat co-operative societies act, alegislation enacted by the state of Gujarat in India. The bank have follows continues “A” Grade Audit systems and it isthe Grade “A” bank till now. The city co-operative bank was started in 1996.City co-operative bankltd was promoted by an experienced and visionary entrepreneur named Mr.MANOJ PATEL; he is the Founder Chair person of the bank and continues tosupervise its growth and development. The Bank started off with exemplary combination of talented Board &potential staff team, stuffed with extreme professionalism and well designedcontours of working method. The bank started as a paperless unit employingTele-banking, Remote banking, Off-time banking, Sunday banking, Holidaybanking and many more allied methodologies from the very beginning rightfrom the D-day. The bank emerged as an exemplary unit offering a wide range ofspecialized services in various sectors. Unlike majority of the banks whereworking timings are linked with employee-convenience, CITY BANKdecided to hold timings as per convenience of the cluster of clients whom itcaters. In the line with the same philosophy some of their branches in theresidential area work all the seven days of the week, without a break. Theywork on Sundays w/o any alternative drop during the week. Likewise to focusspecial attention on the senior citizens the bank offers to credit monthlyinterest in their account with any bank before 5th day of every month.B.M. Collage of Business Administration Page 23
  24. 24. Non Performing Assets SOCIAL OBLIGATIONS City bank does not lag behind in offering contribution for the socialactivities, particularly in the field of education and medicines. Out of activitiesparticularly in the field of education and medicines, Out of the substantialprofits earned by the City bank every year after the year, several goodwillgestures are made such as,©. City Bank conference Hall at KP college of Commerce Surat©. City Bank computer Center at the Engineering College runs by theSarvajanik Education Society of Surat©. Contribution for relief services under the auspices of the serviceorganization “Chhaydo” offered at the civil medical campus for patients andtheir caretakers coming from the surrounding villages.©. Charity Contribution towards Mahavir Cardiac Hospital of Rs. 11,25,000/-in the year 2000-01BANK’S SERVICES LIFE INSURANCEBank has tied with Aviva Life Insurance Co ltd. It is joint venture betweenDabur – Indian FMCG Co & AVIVA – UK’s No 1 & world’s No 5 insuranceco. All the branches are offering all the insurance products of AVIVA viz forchild education, daughter’s marriage, retirement solution, term plan etc. GENERAL INSURANCEB.M. Collage of Business Administration Page 24
  25. 25. Non Performing AssetsBank has tied with IFFCO-TOKIYO General Insurance. It is joint venturebetween IFFCO a big fertilizer company in co-operative sector & TOKIYOGeneral Insurance – Japan’s No 1 & world’s No 5 General Insurance Co. Allthe branches are offering all the products viz Mediclaim, Accident insurance,Vehicle Insurance, House Insurance, factory & Shop keeping Insurance. MUTUAL FUNDBank has tied with Principal PNB Mutual Fund, UTI, Benchmark, ICICIPrudential, SBI Mutual Fund, Lotus India, Reliance Mutual Fund, KotakMahindra, Birla Sunlight, Sundram BNP Pari Bar Mutual. LOCKERSRent free locker facilities are available in Baroda at Kareli Baug, at Bharuch,Navsari & at following branches of Surat 1. Ring Road Branch 2. Abhishek Branch 3. City Light Branch 4. Puna Kumbharia Road Branch 5. Udhna Magdalla Branch 6. Ved Road(Katargam)Branch 7. Patel Park Branch(Adajan)BOARD OF DIRECTORSB.M. Collage of Business Administration Page 25
  26. 26. Non Performing Assets NO. NAME DESIGNATION 1 Shri. Piyushbahi Patel Chairman 2 Shri. Balvanbhai Patel Vice Chairman 3 Shri. Manojbhai Patel Director 4 Shri. Dharmeshbhai Patel Director 5 Shri. Anandbhai Kalgude Director Shri. Amaratbhai 6 Director Brachmabhatt Shri. Dineshbhai 7 Director Tamakuwala Shri. Gaurang Rushi 8 Director 9 Shri. Jayshreeben Talati Director 10 Shri. Umeshabhai Patel DirectorORGANISATION STRUCTUREB.M. Collage of Business Administration Page 26
  27. 27. Non Performing Assets (CHAIRMAN) (DIRECTORS) (CEO) (CHIEF MANAGER) (DIVISIONAL MANAGER) (AREA MANAGER) (BRANCH MANAGER) (OFFICER/CLERK)BALANCE SHEET (Rs. in lacs)Liabilities 2006 2007 Assets 2006 2007B.M. Collage of Business Administration Page 27
  28. 28. Non Performing Assets Share 293.23 340.79 Cash & 1919.33 1822.38 Capital Bank Reserve 1987.08 2282.11 Investment 9326.22 11106.55 Profit & 305.76 236.37 Advances 7093.63 10340.26 Loss a/c Deposits 15449.44 19946.37 Fixed 154.86 284.70 Assets Borrowing 0.11 69.38 Other 181.01 648.88 AssetsOther Liab. 639.43 1327.75 & Prov. 18675.05 24202.77 18675.05 24202.77PROFIT & LOSS ACCOUNT (Rs. in lacs) Income 2006 2007 Expenses 2006 2007Interest & Comm. 1443.1 1769.5 Interest paid 816.59 956.84 0 6 Other Income 129.04 109.45 Operating Exp. 390.48 526.34 Depreciation 46.45 46.52 Provisions 12.86 112.94 Profit for the year 305.76 236.37 1572.1 1879.0 1572.1 1879.01 4 1 4BRANCHES1 Main BranchB.M. Collage of Business Administration Page 28
  29. 29. Non Performing Assets 20, Belgium Chamber, Delhi Gate Ring Road Suart-3.2. Rander Branch 11, Patel Park, Tadwadi,Rander Road, Surat-9.3. Adajan Branch 2, River Park Row House, Adajan Surat-9.4 Ved Katargam Branch24 Ground Floor Parth Building,Singapoor (ved) Katargam, Surat.5. Abhishak Branch1,Balaji Market , Ring Road, Surat – 2.6. Udhana Magdalla Branch11,Udhana Magdalla Road, Surat – 7.7. City Light BranchUG-14 Hira Panna Shopping Mall, City Light Road Surat- 7.8. Puna Kumbharia Branch 6,Trapti Plaza, Nr.Sahara Darwaja,Puna KumbhariaRoad Surat .B.M. Collage of Business Administration Page 29
  30. 30. Non Performing Assets CHAPTER: 7 INTRODUCTION OF NON-PERFORMING ASSETSNON-PERFORMING ASSETS ©. MEANINGB.M. Collage of Business Administration Page 30
  31. 31. Non Performing Assets An asset becomes non-performing when it ceases to generate income for the bank. Earlier an asset was considered as non performing asset based on the concept of “past due”. ©. DEFINITION A NPA was defined as credit in respect of which interest and/or installment of principal has remained “past due” for a specific period of time. The specific period of time was reduced in a phased manner as under: Year ended March,31 Specific Period 1993 4 Quarters 1994 3 Quarters 1995 2 Quarters 2004 1 Quarters An amount is considered as past due, when it remains outstanding for 30 days beyond the due date. However, with effect from March31, 2001 the “past due” concept has been dispensed with and the period is reckoned from the due date of payment. ©. NORMS FOR IDENTIFICATION OF NPAB.M. Collage of Business Administration Page 31
  32. 32. Non Performing Assets With an intense to use the international best practice and to ensure greater transparency, “90 days” overdue norms are accepted for the identification of NPA from the year ended March 31, 2004. With effect from March 31, 2004, a NPA shall be counted on loan and advances where: A. Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. B. The account remains out of order for a period of 90 days, in respect of an Overdraft/ Cash Credit (OD/CC). C. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. D. Any amount to be received remains overdue for a period of more than 90 days in respect of any other accounts. Tier 2 bank like all the Urban Co-Operative Banks (UCBs) other than the Tier 1 bank i.e. Unit bank shall classify their loan accounts as NPA as per 90 day norm as hitherto.FACTORS RESPONSIBLE FOR NPA©. Improper selection of borrower’s activitiesB.M. Collage of Business Administration Page 32
  33. 33. Non Performing Assets©. Weak credit appraisal system©. Industrial problem©. Inefficiency in management of borrower©. Slackness in credit management & monitoring©. Lack of proper follow up by bank©. Recession in the market©. Due to natural calamities and other uncertaintiesINDIAN ECONOMY AND NPA Gross NPAs (non-performing assets) in Indian banking sector havedeclined sharply to close to 3.0 per cent in 2006 (15.7 per cent at end-March1997). Net NPAs of the banking sector are now at close to one per cent andthe gap between the gross and net NPAs has narrowed over the years.Recovery of dues is also more than the fresh slippages. The decline in NPAs is particularly significant as income recognition,asset classification and provisioning norms were tightened over the years. Forinstance, banks now follow 90-day delinquency norm as against 180-dayearlier. Banks are also required to make general provisioning (0.40 per cent)for standard advances. According to Reserve Bank of India, improved profitability,underpinned by robust macroeconomic environment and upturn in interest ratecycle, has enabled banksto reduce the backlog of NPAs.NARSIMHAN COMMITTEEB.M. Collage of Business Administration Page 33
  34. 34. Non Performing Assets©. FIRST COMMITTEE The committee on financial system, also known as Narsimhan Committee,under the chairmanship of Shri M. Narsimhan, appointed by the RBIrecommended the introduction of these prudential accounting norms by IndianBanks in its report submitted in December 1991. The committee was of viewof that… A. If banks want to know the true and fair financial health of bank then they should observed the prudential accounting norms while making balance sheet and profit & loss account. B. Classification of assets has to be done on the basis of objective criteria. C. Provisioning should be made on the basis of classification into four different categories. The income recognition, Assets Classification and provisioning normsalso known as Prudential Accounting Norms, provided that a bank should notshow profit which is merely a book profit by resorting to practice like debitinginterest to a loan account irrespective of its chance of recovery and bookingthe same as income or by not making provisions towards loan losses. ©. NARSIMHAN COMMITTEE’S RECOMMENATIONS@. Committee has suggested that banks should operate on the basis offinancial autonomy and operational flexibility.@. It has recommended “Capital Adequacy Norm” of 8%@. These norms are applicable to all UCB’s from 1st April, 1992.©. SECOND COMMITTEEB.M. Collage of Business Administration Page 34
  35. 35. Non Performing Assets The first committee had made recommendations in 1991, which hadresulted in basic changes in the matter of treatment of income, assetsclassification and provisioning norms, etc…it was considered necessary forgovernment to continue the improvement with striker rules in future also andfor that second committee was made to continue changes with certainmodifications.The second committee includes the following points: 1. If bank is working in foreign countries at presently then for them the “Capital Adequacy Norm” is 9% which was 8% earlier. 2. Banks can’t classify the account as NPA which are guaranteed by the Central / State government, effective from the year 2000-2001. 3. As per the existing norms, no provisions for standard assets but from March 31st 2000, there is a norm of 0.25 percent on standard assets. 4. Banks have to make a provision of 2.5% on their investment in Government securities with effect from the year ending 31st March, 2000. In future, this provision is likely to be raised to 5%. 5. The present norm is of 180 days for the account to be treated as NPA but after 31st March, 2000, this period is reduced to 90 days only. 5. Banks have been asked to reduce the level of NPA to 5% of their total advances till 31st March, 2000. The percentage has to be brought down to less than 3% with effect from 31st March, 2002. ASSETS CLASSIFICATIONB.M. Collage of Business Administration Page 35
  37. 37. Non Performing Assets Reserve Bank of India (RBI) has issued guidelines on provisioningrequirement with respect to bank advances. In terms of these guidelines, bankadvances are mainly classified in to following categories: 1. STANDARD ASSETS: Standard assets are one which does not carry any problems and whichdoes not carry more than normal risk attached to the business.Such assetsshould not be an NPA. 2. SUB-STANDARD ASSETS: These assets involved the two types of view as follows… In respect to the norms of March 31, 2005 an asset would be classified asSub standard if it remained NPA for a period less than or equal to 12 months.An assets where the terms of the loan agreement regarding interest &principal have been regenerated or rescheduled after commencement ofproduction, should be classified as sub-standard and should remain in suchcategory for at least 12 months of satisfactory performance under the re-negotiated terms. 3. DOUBTFUL ASSETS: In respect to the norms of March 31, 2005 an asset is required to beclassified as doubtful, if it has remained NPA for more than 12 months.A loan which is classified as doubtful has all the weaknesses inherent as thatclassified as Sub-standard with the added characteristic that the weaknessesmake collection or liquidation in full, on the basis of the currently knownfacts, conditions and values, highly questionable and improbable.Some types of these assets are… A. Less than 1 year B. 1 to 3 yearB.M. Collage of Business Administration Page 37
  38. 38. Non Performing Assets C. 3 year and above 4. LOSS ASSETS A loss asset is one where loss has been identified by the bank or internalor external auditors or by the Co-operation department or by the RBIinspection but the amount has not been written of, wholly or partly.READY RECKONER FOR ASSET CLASSIFICATIONB.M. Collage of Business Administration Page 38
  39. 39. Non Performing Assets WHEN DATE OF NPA ASSET CLASSIFICATIONNO. FALLS? AS ON 31-03-2007 Between 1-10-2006 & 1. Sub-Standard assets 31-03-2007 Between 1-10-2005 & 2. Doubtful up to 1 year 30-09-2006 Between 1-10-2003 & Doubtful asset of 1 year to 3 3. 30-09-2002 year Doubtful asset of more than 3 4. On or before 30-09-2003 year 5. No NPA date Loss asset No security or salvage value of 6. security is less than 5% Chance of realization of dues 7. from all available sources is practically negligible or zero. Account has been identified by the bank or internal/external 8. auditors or RBI inspectors as loss assets, which has not been written off.GUIDELINES FOR CLASSIFICATION OF ASSETSThe guidelines are as follows…1. BASIC CONSIDERATION:B.M. Collage of Business Administration Page 39
  40. 40. Non Performing Assets In simple terms the classification of assets should be done by consideringthe well defined credit weaknesses & extent of dependence on collateralsecurity for realization of dues. In accounts where there is a potential threat to recovery on account andexistence of other factor such as fraud committed by borrowers it will not beprudent for bank to classify that account first as sub-standard and then asdoubtful. Such account should be straight away classified as doubtful asset orloss asset, as appropriate, irrespective of the period for which it has remainedas NPA.2. ADVANCES GRANTED UNDER REHABILITATIONPACKAGES: Banks are not permitted to do classification of any advances in respect ofwhich the term have been re-negotiated unless the package of re-negotiatedterms has worked satisfactory for a period of one year. A similar relaxation is also made in respect of SSI units which areidentified as sick by banks themselves and where rehabilitation packagesprograms have been drawn by the banks themselves or under consortiumarrangements.3. INTERNAL SYSTEM FOR CLASSIFICATION OF ASSETS ASNPA: Banks should establish appropriate internal systems to eliminate thetendency to delay or postpone the identification of NPAs, especially in respectof high value accounts. The banks may fix a minimum cut-off point to decideB.M. Collage of Business Administration Page 40
  41. 41. Non Performing Assetswhat would constitute a high value account depending upon their respectivebusiness levels. The cut-off point should be valid for the entire accountingyear. Responsibility and validation level for proper assets classification may befixed by bank. The system should ensure that doubts in asset classification due to anyreason are settled through specified internal channels with in one month fromthe date on which the account would have been classified as NPA as perextant guidelines.INCOME RECOGNITION POLICY According to the act of 1st April, 1992 the income recognition policy isas follows… The policy of income recognition has to be objective and based on therecord of recovery. Income from non-performing assets is not recognized onaccrual basis but is booked as income only when it is actually received.Therefore, banks should not take to income account interest on non-performing assets on accrual basis. However, interest on advances against term deposits, NSCs, IVPs, KVPs,and Life policies may be taken to income account on the due date, providedadequate margin is available in the accounts. Fees and commissions earned by the banks as a result of re-negotiations orrescheduling of outstanding debt should be recognized on an accrual basisover the period of time covered by the re-negotiated or rescheduled extensionof credit.B.M. Collage of Business Administration Page 41
  42. 42. Non Performing Assets If Government guaranteed advances becomes ‘overdue’ and there by NPA,the interest on such advances should not be taken to income account unlessthe interest has been realized.PROVISIONING NORMS According to the norms the provisions should be made on thenonperforming assets on the basis of classification of assets as we havealready discussed. Taking in to account this provisioning norms the banks have to makeprovision on different assets like Loss Assets, Doubtful Assets and StandardAssets as below :->( | ). LOSS ASSETS The entire assets should be written off after obtaining necessary approvalfrom the competent authority and as per the provisions act of C0-operativesociety Act. If the assets are permitted to remain in the books for any reason,100% of the outstanding should be provided for. If expected salvage value of the loss asset is negligible then 100%provision should be made on it.( || ). SUB-STANDARD ASSETS A general provision of 10% on the total outstanding should be made on theadvances given.B.M. Collage of Business Administration Page 42
  43. 43. Non Performing Assets( ||| ). DOUBTFUL ASSETS  On doubtful assets provision is made from 20% to 100% as per the period of asset. The table below shows the provision on doubtful assets. Period for which the advance has Provision Requirement remained in ‘doubtful’ categoryUp to one year 20%One to Three year 30% - 50% as on March 31, 2007More than Three year - 60% as on March 31, 2008( | ) Outstanding NPA as on March 31,2007 - 75% as on March 31, 2009 - 100% as on March 31, 2010( || ) Advances classified as ‘doubtful formore than three years’ on or after April1, -100%2007( |V ). STANDARD ASSETS From the year ended March 31, 2000, the banks should make a generalprovision of a minimum of 0.25% on the standard assets. However, Tier 2 banks are required to do higher provisioning on standardassets as under:-A. General provisioning requirement is 0.40% from the present level of 0.25%. But incase of agriculture or in SME investors the provisioning rate is required to be 0.25%.( V| ). HIGHER PROVISIONSB.M. Collage of Business Administration Page 43
  44. 44. Non Performing Assets There is no objection if the banks create bad and doubtful debts reservebeyond the specified limits on their own or if provided in the respective StateCo-operative Societies Acts.MANAGEMENT OF NPA t is very necessary for bank to keep the level of NPA as low aspossible. Because NPA is one kind of obstacle in the success of bank so, forthat the management of NPA in bank is necessary. And this management canbe done by following way:©. Framing reasonably well documented loan policy and rules.©. Sound credit appraisal on well-settled banking norms.©. Emphasizing reduction in Gross NPAs rather then Net NPAs©. Pasting of sale notice/ wall posters on the house pledged as security.©. Recovery effort starts from the month of default itself. Prompt legal actionshould be taken.©. Position of overdue accounts is reviewed on a weekly basis to arrestslippage of fresh account to NPA.©. Half yearly balance confirmation certificates are obtained from theborrowers regularly.©. A committee is constituted at Head Office, to review irregular accounts.©. Due to lower credit risk and consequent higher profitability, greaterencouragement is given to small borrowers.©. Recovery competition system is extended among the staff members. Therecovering highest amount is felicitated.©. Adopting the system of market intelligence for deciding the credibility ofthe borrowers©. Creation of a separate ‘Recovery Department’ with Special RecoveryOfficer appointed by the RCSB.M. Collage of Business Administration Page 44
  45. 45. Non Performing AssetsRECOVERY OF NPA ©. IMPORTANCE OF RECOVERY:1. Increase in the income of bank.2. Increase in the trust of share holder in bank.3. Level of NPA reduces as the recovery done.4. Decrease in provisioning requirements.©. STEPS TAKEN BY GOVERNMENT TO RECOVERING NPA:1. SECURITIZATION ACT@. Now this act is also applicable to all Urban Co-Operative Banks.@. According to this act Bank can take direct possession of the movable andimmovable property mortgages against loans and sell out the same for suchrecovery, without depending on legal process in the court.2. Gujarat state has also by amending under co-op soc, act empower co-opbank to appoint their staff as recovery officer on getting order from the boardof nominees.Above both act are benefited to bank for the recovery of NPA.B.M. Collage of Business Administration Page 45
  46. 46. Non Performing Assets CHAPTER: 8B.M. Collage of Business Administration Page 46
  47. 47. Non Performing Assets CITY BANK & NON-PERFORMING ASSETSCREDIT APPRAISAL POLICY AT CITY BANK ©. INTRODUCTION At the time of registration of bank, Loan rules were framed andapproved by the DRCS, Surat. Thereafter with the approval of Board, loanrules were changed considering guidelines issued by RBI from time to time.Now in view to increasing branch network in numbers of geographically also,one common document viz. Appraisal policy is framed.B.M. Collage of Business Administration Page 47
  48. 48. Non Performing Assets ©. POLICY ON PRE-SANCTION1. Application for loan should be in standardized form as devised by the bank.2. Branch to collect all the papers/information/documents as suggested in the respective application form.3. Branch to visit the borrower’s office/factory/residence and to satisfy themselves before recommending any loan to higher authority and to keep record of such visit.4. If applicant maintains loan/current/saving account with any other bank/financial institutions, branch to verify such account statement and to satisfy them.5. Branch to ascertain the promptness of applicant in making payment of Power bill/Property Tax/LIC Premium/Existing loan interest or installment, before recommending the proposal to higher authority. ©. APPRAISALA. WORKING CAPITAL FACILITY1. Working capital requirement to be assessed properly considering pastperformance, holding period for debtors as also for inventory at various level,sales, etc…2. Working capital facilities beyond Rs. 5 lacs should not be considered in theform of overdraft.B.M. Collage of Business Administration Page 48
  49. 49. Non Performing Assets3. Margin for CC against stock be 30% and for receivables 50%.B. TERM FINANCE1. term loan limit to be arrived @ 25% margin in respect ofMachinery/Equipment and Vehicles while 50% against land & building,electrification, furniture fixtures.2. Sources for margin money to be ascertained.3. Repayment capacity, considering existing earning to be ascertained.4. Moratorium period to be fixed considering time required going in forcommercial production.C. GENERAL 1. Credit facilities should not exceed segment wise, individual as also group exposures. 2. in case of switch over from other bank, branch to obtain credit information report from the concerned bank. 3. In case of existing borrower/group borrower, branch to satisfy themselves about their dealing with the bank. ©. EXPOSURE As per the RBI guidelines per party exposure is restricted to 15% ofshare capital and Free Reserves and group exposures it is 40%. RBI has givenliberty to recalculate the exposure on the basis of profitability of SeptemberB.M. Collage of Business Administration Page 49
  50. 50. Non Performing Assetshalf. However irrespective of these it is restricted at lower level i.e. Rs.1.55crore for individual and Rs.3.50 crores for group. ©. SANCTIONING AUTHORITY 1. AGM Rs.1.00 lac for all types of fresh loan except staff loan and Rs.2.00 lacs for renewal 2. CEO Rs.2.00 lacs for all types of fresh loan except staff housing loan and Rs.4.00 lacs for renewal 3. COE Committee of executives comprising of all the executives shall have authority to grant all type of fresh loan up to Rs.15.00 lacs except loan against FDR/LIC/GOVT. security and staff housing loan as also renewal of all working capital facilities irrespective of limit. 4. Chairman/Vice Chairman/Founder Chairman Loan against FDR/LIC/GOVT. security and any adhoc request. 5. LOAN COMMITTEE All types of loans to single borrower up to Rs.77.50 lacs and Rs.1.75 crores for group borrower. 6. BOARD All types of loan within exposure ceiling for individual and group borrower.B.M. Collage of Business Administration Page 50
  51. 51. Non Performing Assets ©. DISBURSAL FORMALITIESA. WORKING CAPITAL FACILITY1. Fresh/additional limit against stock to be released only after party obtainsadequate insurance for stock and submit stock/book debts statement.2. In case of new unit, working capital facility to be released, only after theunit starts commercial production.B. TERM FINANCE1. So far as possible, disbursement to be made by direct payment to seller.2. At every time of disbursement, matching contribution to be made by theborrower.3. Immediately after disbursement, branch to follow up insurance policy,receipt for payment made, invoice etc…C. GENERAL1. Disbursement to be made only after complying with all the terms andconditions of sanction, complete documentation and obtaining disbursalauthority.2. In case of Private Ltd. Company, charge with ROC to be registeredimmediately on disbursal of credit facility.3. Before disbursal branch to ensure that borrowers/guarantors becomemember of the bank. ©. POST SANCTIONA. TERM FINANCEB.M. Collage of Business Administration Page 51
  52. 52. Non Performing Assets1. On installation of machineries branch to inspect the unit and to ensure thatmachineries as per sanction is received & place the inspection report onrecord.2. At least twice a year, branch to inspect the unit to ensure that machineriesfinanced by the bank are in running condition.B. WORKING CAPITAL1. No finance to be considered against inter-firm receivable and for thereceivables of more than 90 days.2. Drawing power to be arrived at regularly every month on the basis of stockstatement/book debt statement submitted by the party.3. Branch to ensure that receipt and payment through CC/OD accountsrepresent genuine business transactions.4. Branch to carry out inspection of the unit at least on quarterly basis. @. Renewal of working capital facility1. Personal balance sheet of proprietor/partner/directors is also to be obtained.2. Branch to submit the renewal papers along with memorandum for renewalto higher authority for renewal, with its comments on performance with thebank, financial performance viz. sales, profit etc…B.M. Collage of Business Administration Page 52
  53. 53. Non Performing Assets3. If financial performance does not justify the limit at current level, branch topersuade the party to reduce the limit.4. Where the accounts are statutorily required to be audited, branch to obtainaudited accounts at the time of renewal.NPA NORMS OF CITY BANK©. CLASSIFICATION:1. SUB STANDARD ASSETSOverdue of 90 days and for loan up to Rs.1.00 lacs overdue for 6 monthsNPA up to 12 months remain in sub standard assets.2. DOUBTFUL ASSETSNPA for more than 12 months is doubtful assets.©. PROVISION:1. STANDARD ASSETS 0.25% of standard assets in SME and direct agriculture advances. 0.40% in case of all other standard loans 1.00% for personal loan, Commercial Real Estate Loan, Loan againstshares And for housing loan up to Rs.20.00 lacs the provision is 2.00%.2. SUB STANDARD ASSETS 10% of sub standard assets3. DOUBTFUL ASSETS 20% for NPA from 13 months to 24 monthsB.M. Collage of Business Administration Page 53
  54. 54. Non Performing Assets 30% for NPA from 25 months to 48 months 50% for NPA from 49 months and above 100% for loss assetsRECOVERY POLICY AT CITY BANK©. BANK’S POLICY: At present they are making recovery but procedure for the same is notdocumented in the form of policy. Although the bank is committed tocollection/recovery of its dues but the dignity of and respect for the customeris central to their recovery policy. The policy is framed on the principal ofcourtesy, fair treatment and persuasion.©. GUIDELINES FOR BRANCH/RECOVERY STAFF: All the branches of City bank have to follow the followingguidelines… 1. Branch to continuously inform the borrower about the due date of repayment schedule. Recovery efforts to starts from the first month of default itself. 2. Position of overdue account to be reviewed on the monthly basis to arrest slippage of fresh accounts to NPA category. 3. If the branch does not get response from the borrower for paying the amount, they have to visit the unit and meet with the borrower. During visit to customer’s place for collection of dues, decency and decorum would be maintained and customer’s privacy would be respected as far as practicable.B.M. Collage of Business Administration Page 54
  55. 55. Non Performing Assets 4. If the branch does not get any favorable response, during personal visit, they should write a notice letter to borrower. 5. If borrower still behaves irresponsible, they should meet the guarantor and ask guarantor to peruse the borrower. Guarantor must be informed about legal complication to arise if borrower fails to repay the dues. 6. On failure of all the recovery steps, branch to contact Area office/Control centre. 7. Area office/Control centre to call the borrower along with guarantor and try to find out the reason for overdue. If borrower is in genuine difficulty, problem to be resolved in a mutually acceptable and in an orderly manner. 8. If party behaves indifferent, legal actions must be initiated. In such case prompt legal action and seizure action to be taken. Preference to be given for steps under Securitization Act rather than go for filling a case in the court of Board of Nominees. 9. Reasonable notice would be given before Repossession of Security and its realization, unless the borrower is about to dispose of/remove the whole or any part of the security from the locality where it ordinarily remained or by whom it is used or caused to be remained or used, as the case may be, at the time of creation of security. 10. The aim of possession under Securitization or State co-op. Act will be to recover the dues and will not be aimed at whimsicalB.M. Collage of Business Administration Page 55
  56. 56. Non Performing Assets deprivation of the property. The bank shall resort to repossession of the security only when the collection/recovery of dues is not forthcoming in spite of request made and the policy for repossession shall be in accordance with the terms and conditions of the loan documents and with in the legal framework. The policy fairness and transparency in repossession, valuation and realization of security. CHAPTER: 9B.M. Collage of Business Administration Page 56
  57. 57. Non Performing Assets ANALYSIS OF DATAYEAR WISE NPA AT CITY BANK©. YEAR 2003 (RS. IN LACS) Details Amount %of Total STANDARD ASSETS 5912.67 91.90084 SUB-STANDARD ASSETS 189.75 2.949291 DOUBTFUL ASSETS 316.69 4.922324B.M. Collage of Business Administration Page 57
  58. 58. Non Performing Assets LOSS ASSETS 14.64 0.22755 TOTAL 6433.75 100 NPA OF 2003 LOSS ASSETS 0.22755 DOUBTFUL ASSETS 4.922324 ASSETS--> %of Total SUB-STANDARD ASSETS 2.949291 STANDARD ASSETS 91.90084 0 20 40 60 80 100 VALUES-->©. YEAR 2004 (RS. IN LACS) Details Amount %of TotalSTANDARD ASSETS 6923.74 93.95SUB-STANDARD ASSETS 143.60 1.95DOUBTFUL ASSETS 291.00 3.95LOSS ASSETS 10.84 0.15B.M. Collage of Business Administration Page 58
  59. 59. Non Performing Assets TOTAL 7369.18 100 NPA OF YEAR 2004 LOSS ASSETS 0.15 DOUBTFUL ASSETS 3.95 ASSETS--> %of Total SUB-STANDARD ASSETS 1.95 STANDARD ASSETS 93.95 0 20 40 60 80 100 VALUES-->©. YEAR 2005 (RS. IN LACS) Details Amount %of Total STANDARD ASSETS 7266.63 94.28 SUB-STANDARD ASSETS 156.65 2.03 DOUBTFUL ASSETS 278.40 3.61 LOSS ASSETS 1.04 0.01B.M. Collage of Business Administration Page 59
  60. 60. Non Performing Assets TOTAL 7707.72 100 NPA OF YEAR 2005 LOSS ASSETS 0.01 DOUBTFUL ASSETS 3.61 ASSETS--> %of Total SUB-STANDARD ASSETS 2.03 STANDARD ASSETS 94.28 0 20 40 60 80 100 VALUES-->©. YEAR 2006 (RS. IN LACS) Details Amount %of Total STANDARD ASSETS 6867.81 96.82 SUB-STANDARD ASSETS 12.24 0.17 DOUBTFUL ASSETS 213.58 3.01 LOSS ASSETS 0.00 0.00 TOTAL 7093.63 100B.M. Collage of Business Administration Page 60
  61. 61. Non Performing Assets NPA OF YEAR 2006 LOSS ASSETS 0 DOUBTFUL ASSETS 3.01 ASSETS--> %of Total SUB-STANDARD ASSETS 0.17 STANDARD ASSETS 96.82 0 20 40 60 80 100 120 VALUES-->©. YEAR 2007 (RS. IN LACS) Details Amount %of TotalSTANDARD ASSETS 9801.49 94.78SUB-STANDARD ASSETS 120.12 1.16DOUBTFUL ASSETS 258.80 2.50LOSS ASSETS 159.85 1.54 TOTAL 10340.26 100B.M. Collage of Business Administration Page 61
  62. 62. Non Performing Assets NPA OF YEAR 2007 LOSS ASSETS 1.54 DOUBTFUL ASSETS 2.5 ASSETS--> %of Total SUB-STANDARD ASSETS 1.16 STANDARD ASSETS 94.78 0 20 40 60 80 100 VALUES-->B.M. Collage of Business Administration Page 62
  63. 63. Non Performing Assets SEGMENTWISE CLASSIFICATION OF NPA (RS. IN LACS) 2005 2006 2007 SEGMENT NO AMOUNT NO AMOUNT NO AMOUNT OF OF OF TOTAL TOTAL TOTAL A/C NPA A/C NPA A/C NPA ADVANCES ADVANCES ADVANCES RETAIL TRADE 267 752.63 17.69 248 641.90 20.21 343 802.03 76.81SMALL BUSINESS 31 46.48 4.38 25 44.17 20.15 122 88.02 50.93SMALL SCALE IND 582 4021.55 210.74 642 3832.29 44.88 975 6323.86 180.86CONSTRUCTION & 246 323.43 21.02 231 343.86 2.70 345 459.76 22.43 REPAIRS AGRICULTURE 2 3.72 0.00 0 0.00 0.00 517 115.64 0.12 SMALL ROAD & 10 5.23 0.00 0 0.00 0.00 34 8.18 1.90TRANSPORTATION PROFESSIONAL 84 89.81 5.00 2 7.33 0.00 80 72.52 3.10 EDUCATION 2 10.71 0.00 8 3.41 0.00 3 7.26 0.00OTHER PRIORITY SECTOR 0 0.00 0.00 55 41.82 3.47 326 68.05 16.42 OTHE NON 375 2454.16 177.26 285 2178.85 134.41 310 2394.94 186.20PRIORITY SECTOR TOTAL 1599 7707.72 436.09 1496 7093.63 225.82 3055 10340.26 538.77 B.M. Collage of Business Administration Page 63
  64. 64. Non Performing AssetsRATIO ANALYSIS To analyzed the NPA situation in bank and from that to know about thebanks credit appraisal system and level of risk in bank I have done the ratio analysis.Ratio analysis is the tool which will help us to do financial analysis of bank. Some names of ratio are as follows: 1. GROSS NPA RATIO. 2. NET NPA RATIO. 3. PROBLEM ASSETS RATIO. 4. SHAREHOLDER’S RISK RATIO. 5. PROVISION RATIO. 6. SUB-STANDARD ASSETS RATIO. 7. DOUBTFUL ASSETS RATIO. 8. LOSS ASSETS RATIO.B.M. Collage of Business Administration Page 64
  65. 65. Non Performing Assets 1. GROSS NPA RATIO Gross NPA is the sum of the total assets which are classified as the NPA by bankat the end of every year. Gross NPA is the ratio of Gross NPA to Gross Advances. It isexpressed in percentage form. Gross NPA Ratio = Gross NPA * 100 Gross Advances (RS. IN LACS) GROSS NPA GROSS YEAR GROSS NPA RATIO ADVANCES (%) 2003 521.08 6433.75 8.10% 2004 445.44 7369.18 6.04% 2005 436.09 7707.72 5.68% 2006 225.82 7093.63 3.18% 2007 538.77 10340.26 5.21% GROSS NPA RATIO 9.00% 8.10% 8.00% 7.00% 6.04% 5.68% PERCENTAGES--> 6.00% 5.21% 5.00% RATIO 4.00% 3.18% 3.00% 2.00% 1.00% 0.00% 2003 2004 2005 2006 2007 YEAR-->B.M. Collage of Business Administration Page 65
  66. 66. Non Performing Assets ©. ANALYSIS Gross NPA ratio shows the bank’s credit appraisal policy. High Gross NPA ratiomeans bank have liberal appraisal policy and vice-versa. In city bank this ratio was 8.10% in March-2003 and it has been decreased fromyear 2003 to 2006 from 8.10% to 3.18%. But again in March-2007 this ratio reach at5.21%. This variation was come because City bank has merged with Baroda dist. in the financial year 2006-2007. However it is revels from the chart that bank’s Gross NPA ratio is continuouslydecreasing which is positive trend for bank and we can say that bank have good appraisalsystem.B.M. Collage of Business Administration Page 66
  67. 67. Non Performing Assets 2. NET NPA RATIO The Net NPA Ratio is the ratio of net NPA to Net Advances. This ratio shows thedegree of risk in bank’s portfolio. Net NPA ratio can be obtain by Gross NPA minus theNPA provisions divided by Net advances. Net NPA Ratio = Net NPA *100 Net Advances (RS. IN LACS) NET NPA RATIO YEAR NET NPA NET ADVANCES (%) 2003 299.13 6211.80 4.82% 2004 0.00 6888.84 0.00% 2005 0.00 7236.74 0.00% 2006 0.00 6622.57 0.00% 2007 0.00 9733.62 0.00% Net NPA = Gross NPA – Provision for NPA Net Advances = Gross NPA – Provision for NPA NET NPA RATIO 6.00% 4.82% 5.00% PERECNTAGE--> 4.00% 3.00% NET NPA RATIO 2.00% 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2003 2004 2005 2006 2007 YEAR--> ©. ANALYSISB.M. Collage of Business Administration Page 67
  68. 68. Non Performing Assets Net NPA ratio shows the degree of risk in portfolio of bank. High net NPA ratiomeans banks don’t have enough fund to do provision against the Gross NPA. In City Bank Net NPA ratio was 4.82% in year March-2003 which shows that inthat year bank had not enough fund for provisions. But after that from March-2004 toMarch-2007 Net NPA ratio is 0.00% which shows that bank has now enough provisioncapacity. So, here the degree of risk is less. City bank has done more provision every year which is good at one side but at otherside it also reduces the profit of bank. And shareholder will get fewer dividends. When all bank will do provision then Net NPA will become zero but if we want toknow the true and fair situation of bank we must consider the Gross NPA of bank. 3. PROBLEM ASSETS RATIO This ratio is also known as the Gross NPA to Total Assets ratio. This ratio showsthe percentage of risk on the total assets of the bank. High ratio means high risk for bank. Problem Assets Ratio = Gross NPA *100 Total Assets (RS. IN LACS) PROBLEM YEAR GROSS NPA TOTAL ASSETS ASSETS RATIO (%) 2003 521.08 13381.91 3.89% 2004 445.44 15935.97 2.80%B.M. Collage of Business Administration Page 68
  69. 69. Non Performing Assets 2005 436.09 16337.35 2.69% 2006 225.82 18675.05 1.21% 2007 538.77 24202.77 2.23% PROBLEM ASSETS RATIO 4.50% 3.89% 4.00% 3.50% PERCENTAGE--> 3.00% 2.80% 2.69% 2.50% 2.23% PROBLEM ASSETS 2.00% RATIO 1.50% 1.21% 1.00% 0.50% 0.00% 2003 2004 2005 2006 2007 YEAR--> ©. ANALYSIS This ratio shows the percentage of risk on the assets of bank. It shows the level ofrisk on bank’s assets. High ratio shows the high risk on liquidity. In City Bank this ratio was 3.89% in March-2003 and after that it has beendecreased from 3.89% to 1.21% in March-2006. But again it increase to 2.23% inMarch-2007 because in that year City Bank was merged with Baroda dist. Co-op. bank inthe financial year 2006-2007. This ratio is continuously decreasing in bank except in March-2007. But overall thisratio is good for bank which indicates the level of risk is low in bank.B.M. Collage of Business Administration Page 69
  70. 70. Non Performing Assets 4. SHAREHOLDER’S RISK RATIOIt is the ratio of Net NPA to Total capital and reserve of bank. Shareholder’s risk Ratio = Net NPA *100 Total Capital & Reserve (RS. IN LACS) TOTAL SHAREHOLDER’S YEAR NET NPA CAPITAL & RISK RATIO RESERVE (%) 2003 299.13 1793.76 16.68% 2004 0.00 2075.06 0.00%B.M. Collage of Business Administration Page 70
  71. 71. Non Performing Assets 2005 0.00 2262.39 0.00% 2006 0.00 2551.64 0.00% 2007 0.00 3014.58 0.00% SHAREHOLDER’S RISK RATIO 18.00% 16.68% 16.00% 14.00% PERCENTAGE--> 12.00% 10.00% SHAREHOLDER’S RISK 8.00% RATIO 6.00% 4.00% 2.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2003 2004 2005 2006 2007 YEAR--> ©. ANALYSIS This ratio shows the degree of risk with share holder’s investment. High ratiomeans high ratio with the investment. In City Bank this ratio was 16.68% in year March-2003 which shows that in thatyear risk on share holder’s investment was quite high but after that this ratio is 0.00% upto year March-2007, which shows that Bank have enough capacity for provision and therisk on investment is nil. As we know that this ratio is 0.00% show the risk is nil but on the other sidebecause of more provision the profit will decrease and the shareholder will get lessdividends.B.M. Collage of Business Administration Page 71
  72. 72. Non Performing Assets 5. PROVISION RATIO Provisions are to be made against the Gross NPA of bank. As bank makeprovision for NPA it directly affects the profit of bank. This ratio shows the relation oftotal provision to Gross NPA. Provision Ratio = Total Provision *100 Gross NPA (RS. IN LACS) PROVISION TOTAL YEAR GROSS NPA RATIO PROVISION (%)B.M. Collage of Business Administration Page 72
  73. 73. Non Performing Assets 2003 221.95 521.08 42.59% 2004 480.34 445.44 107.83% 2005 470.98 436.09 108.00% 2006 471.06 225.82 208.59% 2007 606.64 538.77 112.60% PROVISION RATIO 250.00% 208.59% PERCENTAGE--> 200.00% 150.00% 107.83%108.00% 112.60% PROVISION RATIO 100.00% 42.59% 50.00% 0.00% 2003 2004 2005 2006 2007 YEAR--> ©. ANALYSIS Provision ratio shows the degree of provision that is made against the Gross NPAof bank. As bank made the provision it directly affect the profit of bank and also thedividend payout ratio of bank too. If Provision ratio is less then it means that bank has make under provision and ifprovision is more then it means that it is over provision. In City Bank they have made 42.59% provision in March-2003 which shows thatit was under provision but after that in March-2004 and March-2005 it is 107.83% and108% respectively which indicate that provision was nearer to total amount of GrossB.M. Collage of Business Administration Page 73
  74. 74. Non Performing AssetsNPA but in March-2006 the provision ratio reach at 208.59% which indicate that it is thevery over provision. And again in March-2007 it is 112.60% which is fair ratio. City bank should make the provision in the range of 100% to 115%. Theprovision in March-2006 which is 208.59% is very high and it is not necessary to do that. 6. SUB-STANDARD ASSETS RATIO Sub-standard Assets Ratio = Total Sub-standard Assets *100 Gross NPA (RS. IN LACS) SUB-STANDARD SUB-STANDARD YEAR GROSS NPA ASSETS RATIO ASSETS (%) 2003 189.75 521.08 36.41% 2004 143.60 445.44 32.24% 2005 156.65 436.06 35.92%B.M. Collage of Business Administration Page 74
  75. 75. Non Performing Assets 2006 12.24 225.82 5.42% 2007 120.12 538.77 22.30% SUB-STANDARD ASSETS RATIO 40.00% 36.41% 35.92% 35.00% 32.24% 30.00% PERCENTAGE--> 25.00% 22.30% SUB-STANDARD 20.00% ASSETS RATIO 15.00% 10.00% 5.42% 5.00% 0.00% 2003 2004 2005 2006 2007 YEAR--> ©. ANALYSISThis ratio shows the percentage of Sub-Standard assets in the Gross NPA of bank. HighSub-Standard ratio means more proportion of Sub-Standard asset in the Gross NPA.High ratio shows that there is a chance of recovery of assets is high.In City bank this ratio was 36.41% in March-2003 which is good for bank and it is 5.42%in year March-2006 which is not good for bank.As the level of Sub-Standard assets are more the chances of recovery of NPA are high.B.M. Collage of Business Administration Page 75
  76. 76. Non Performing Assets 7. DOUBTFUL ASSETS RATIOIt is the ratio of total doubtful assets to Gross NPA of the bank. Doubtful Asset Ratio = Total Doubtful Assets *100 Gross NPA (RS. IN LACS) TOTAL DOUBTFUL YEAR DOUBTFUL GROSS NPA ASSETS RATIO ASSETS (%) 2003 316.69 521.08 60.78% 2004 291.00 445.44 65.33% 2005 278.40 436.09 63.84%B.M. Collage of Business Administration Page 76
  77. 77. Non Performing Assets 2006 213.58 225.82 94.58% 2007 258.80 538.77 48.03% DOUBTFUL ASSETS RATIO 100.00% 94.58% 90.00% 80.00% 70.00% 60.78% 65.33% 63.84% PERCENTAGE--> 60.00% 48.03% DOUBTFUL ASSETS 50.00% RATIO 40.00% 30.00% 20.00% 10.00% 0.00% 2003 2004 2005 2006 2007 YEAR--> ©. ANALYSISThis ratio shows the percentage of Doubtful assets in the Gross NPA of bank. HighDoubtful assets ratio means more proportion of Doubtful asset in the Gross NPA.More Doubtful assets means Bank should take action through recovery policy to reducethe level of Doubtful assets.As the Doubtful assets ratio is high which shows that bank should take quick action toreduce that level.This ratio should be less for the bank.B.M. Collage of Business Administration Page 77
  78. 78. Non Performing AssetsIn City Co. Bank this ratio is in between from 60.00% to 65.00% in year fromMarch-2003 to March-2005 but in March-2006 this ratio reach at 94.58% which indicatethat bank must take some necessary action to recover it. And again in March-2007 thisratio decrease to 48.03% which is good for bank. 8. LOSS ASSETS RATIOIt is the ratio of Total loss assets to Gross NPA of bank. Loss Assets Ratio = Total loss Assets *100 Gross NPA (RS. IN LACS) LOSS ASSETS TOTAL LOSS YEAR GROSS NPA RATIO ASSETS (%) 2003 14.64 521.08 2.81% 2004 10.84 445.44 2.43% 2005 1.04 436.09 0.24% 2006 0.00 225.82 0.00% 2007 159.85 538.77 29.67%B.M. Collage of Business Administration Page 78
  79. 79. Non Performing Assets LOSS ASSETS RATIO 35.00% 29.67% 30.00% 25.00% PERCENTAGE--> 20.00% LOSS ASSETS RATIO 15.00% 10.00% 5.00% 2.81% 2.43% 0.24% 0.00% 0.00% 2003 2004 2005 2006 2007 YEAR--> ©. ANALYSISThis ratio shows the percentage of loss assets in the Gross NPA of bank. High loss assetsratio means more proportion of loss asset in the Gross NPA.This should be less in bank. The high ratio indicates that bank has more fraudulentaccount and it is bad for bank. The bank must take necessary action to reduce the level ofloss assets.In City Co. Bank this ratio is 2.81% in March-2003 and from it reach at 0.00% in the yearMarch-2006. This ratio is decreasing in bank which is good for bank but again inMarch-2007 this ratio reaches at 29.67% which is the very high increase and it is verybad for bank. But the increase in the ratio of March-2007 is because bank was mergedwith Baroda dist. Co-op. bank in that year.Hence, bank should take some action to reduce the level of loss assets from the totalNPA.B.M. Collage of Business Administration Page 79
  80. 80. Non Performing AssetsFINDINGS FROM RATIO As I have already analyze the ratio and from that I can say that bank’s financialcondition is good. Hence, there is correction in the ratio of year 2007. And this correctionis because of City bank was merged with Baroda Industrial co-op bank in year 2007. So,this effect of merging can be showing from the ratio of year 2007. From ratio I am able to find the following findings… 1. The Gross NPA ratio of bank is 8.10% in the year 2003 after then it reaches to 5.21% in the year 2007. Hence, the idle gross NPA ratio is 5.00% and bank have 5.21%. So, we can say that bank’s financial condition is good. 2. Bank’s Net NPA ratio is 4.82% in the year 2003 and from 2004 to 2007 it remains 0.00% which is positive for bank. 3. The Problem assets ratio was 3.89% in the year 2003 which was the highest ratio and from that year it is decrease to 1.21% in the year 2006 which is good for bank. And this ratio is 2.23% in the year 2007.B.M. Collage of Business Administration Page 80
  81. 81. Non Performing Assets 4. Provision ratio for the year 2003 is 42.59% which show that their was under provision in that year but in year 2007 this ratio is 112.60% which shows that bank have enough profit for the provision. 5. It will be considered good if the Sub-standard assets ratio is high. For City bank this ratio is 36.41% in the year 2003 which is good but it reaches to 5.42% in the year 2006 which is very bad for bank’s health. 6. Doubtful assets ratio should be low for the good health of bank and in City bank this ratio is 94.58% in the year 2006 which is very bad but in year 2007 this ratio decrease to 48.03% which is positive for bank. 7. Loss assets ratio should be zero and bank have 0.00% in the year 2006 which is good but in year 2007 this ratio reaches to 29.67% which is very rapid change with in a one year. And it is also bad for bank.B.M. Collage of Business Administration Page 81
  82. 82. Non Performing AssetsCLASSIFICATION OF TOTAL NPA (RS. IN LACS) 2005 2006 2007 YEAR SUB- STANDARD 156.65 12.24 120.12 ASSETS DOUBTFUL 278.40 213.58 258.80 ASSETS LOSS 1.04 0.00 159.85 ASSETS TOTAL 436.09 225.82 538.77 NPAB.M. Collage of Business Administration Page 82
  83. 83. Non Performing Assets CLASSIFICATION OF NPA 600 500 PERCENTAGE--> 400 SUB-STANDARD ASSETS DOUBTFUL ASSETS 300 LOSS ASSETS 200 TOTAL NPA 100 0 2003 2004 2005 2006 2007 YEAR-->CLASSIFICATION OF TOTAL ADVANCES (RS. IN LACS) YEAR 2003 2004 2005 2006 2007 TOTAL 521.08 445.44 436.09 225.82 538.77 NPA STANDARD 5912.67 6923.74 7266.63 6867.81 9801.49 ASSETS TOTAL 6433.75 7369.18 7707.72 7093.63 10340.26 ADVANCESB.M. Collage of Business Administration Page 83
  84. 84. Non Performing Assets CLASSIFICATION OF TOTAL ADVANCES 12000 10000 8000 TOTAL NPA RS IN LACS--> 6000 STANDARD ASSETS 4000 TOTAL ADVANCES 2000 0 2003 2004 2005 2006 2007 YEAR--> CHAPTER: 10B.M. Collage of Business Administration Page 84
  85. 85. Non Performing Assets CONCLUSION & SUGGESTIONCONCLUSION Now as we know that NON-PERFORMING ASSETS is like a black spot ondiamond. They affect the profit of bank and also the financial health of bank. This NPAhave number of effects on banks working. During my training in bank I gathered as much as possible information aboutNPA from bank and on the basis my experience I conclude the following points: City Co. bank’s NPA level is decreasing year by year which good for bank.B.M. Collage of Business Administration Page 85
  86. 86. Non Performing Assets In year 2007 City bank’s own NPA is very low but because of merger with Barodaindustrial co-op bank the level of NPA was increase. The Gross NPA ratio of bank is 8.10% in the year 2003 after then it reaches to 5.21%in the year 2007. Hence, the idle gross NPA ratio is 5.00% and bank have 5.21%. So, wecan say that bank’s financial condition is good. Bank’s Net NPA ratio is 4.82% in the year 2003 and from 2004 to 2007 it remains0.00% which is positive for bank. Loss assets ratio should be zero and bank have 0.00% in the year 2006 which is goodbut in year 2007 this ratio reaches to 29.67% which is very rapid change with in a oneyear. And it is also bad for bank. City Co. Bank has sound credit appraisal system and also sound recovery policy. City Co. Bank’s NPA level is decreasing year by year and because of that City Co.Bank is being considered very good bank by citizens of Surat. Hence in present time the position of NPA in bank is much better then the pastposition. In year 1997 in India the Gross NPA was 15.7% but now it is 3.00% in the year2007. This is very favorable to Indian economy and also banking sector of India. Government’s act and also the Narsimhan committee on NPA are very useful toreduce the level of NPA. So, I can conclude that level NPA in any bank is important parameter to analyze thehealth of bank.SUGGSTIONSB.M. Collage of Business Administration Page 86