Mycredit

EXECUTIVE SUMMARY
Indian banking sector is described as on “the cusp of revolutionary change.It has
undergone significant transformation following financial sector reforms as laid out by Shri
M.Narasimham Committee in 1991. It is adopting international best practices with a vision to
strengthen the banking sector and its operations in the economy. Several prudential and
provisioning norms have been introduced, and these are expecting the banks to usher
efficiency, bringing down Non Performing Assets (NPA), to improve the profitability and
overall financial health in the banks, in general. But as the Indian economy expands, a state-
dominated banking sector fraughtwith problems such as the accumulation of Non-Performing
Assets (NPA) will ultimately be unable to keep pace with demands for capital investments in
public or private projects, and public-private partnerships (PPP). This discrepancy is especially
problematic for infrastructure projects and other long-term development initiatives.
I had come across a detailed presentation given to banker’s by K.C. Chakrabarty , Reserve
Bank of India deputy governor ,blaming on public sector banks for the rise in non-performing
assets (NPAs) in the last five years, accusing them of being “complacent” when the times were
good and favoring large companies at the expense of small.
He also commented that the Banks always say that the rise in NPAs was mainly due to the
slowdown in the economy, but the truth is that the financial crisis affected Banks, but credit
appraisal had been deteriorating.
In this report, an analysis is made on the trend of NPA in Catholic Syrian Bank as a whole and
Market Road Branch ,CSB in particular to find the extent to which credit appraisal is a reason
for increase in NPA’s.From the study made in CSB, it was found that credit appraisal is just one
factor for an account turning into NPA and there are several other factors which are found to be
the causes of the same. Although the Indian banking sector is “on the cusp of revolutionary
change”, the RBI has a long way to go to make this revolution happen.
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The first chapter of the report confines the introduction, scope and the objectives of the project.
The various methods and sources depended for analysis and the limitations encountered thereby
are also stated with it.
In the second chapter , the organization overview, mission and vision of the bank, and its
corporate values is looked at a glance.
In the third chapter,a study is made on the different types of credit ,credit policies of the bank,
credit appraisal process credit rating methods and the basic concepts of NPA.
In the fourth chapter, analytical study was conducted on the performance of the branch in which
I have worked and on the bank as a whole for the past 5 years. An analysis was also made on
how the total credit is distributed among various sectors and the movement of NPA in those
sectors for the past 6 years. NPA level is predicted for the next three years using the trend
analysis. A comparative analysis is made to find the relative position of CSB with other peer
group banks in terms of profit, PA and volume of business.Reasons for variations in NPA’s and
findings of the report are stated along with the analysis.It also confinesthe analysis to check
whether the bank is adhering to the credit policies.
In the fifth chapter, an individual firm which is rated using CRA format is discussed as a case to
draw conclusions about the guarantee of repayment using Ratio analysis as a tool.
In the last part, suggestions from the findings of the report related to the observationsare
mentioned and have concluded the report.
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1. INTRODUCTION
The 2008 financial crises have become the main cause for recession which was started from US
and was spread across the world. The world economy has been majorly affected from the crisis.
The securities in stock exchange have fallen down drastically which has become the root cause
of bankruptcy of many financial institutions and individuals. The root cause of the economic
and financial crisis is credit default of big companies and individuals which has badly impacted
the world economy. So in the present scenario analyzing one’s credit worthiness has become
very important for any financial institution before providing any form of credit facility so that
such situation doesn’t arise in near future again.
Earlier banks followed the traditional functions of accepting deposits and disbursal of loans. In
those earlier periods, depositors were given undue preferences and as years passed, banks
changed their mottos and started emphasis on profits. As a result along with depositors,
borrowers are being given due importance in the banking sector. Banks can make profits only if
they disburse sizable quality advances. The definition of Banking as per the Banking
Regulation Act itself gives more prominence to lending activity more than any other activity.
The accumulation of huge non-performing assets in banks has also assumed great importance.
The depth of the problem of bad debts was first realized only in early 1990s. Gross non-
performing assets (NPAs) of 40 listed banks has crossed Rs 2.4 lakh crore which reflects 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.
This project has been conducted In order to understand the credit appraisal procedure and the
trend of NPA’s followed with special reference to Catholic Syrian Bank which includes
knowing about the different credit policies of the bank, credit appraisal process and the various
rating methods and analyzing the extent to which the policies are abided.
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The paper also deals with understanding the concept of NPAs, its magnitude in different sectors
and major causes for an account becoming non-performing, projection of NPAs over next three
years in CSB and concluding remarks.
1.1 RELEVANCE OF THE PROJECT
The past two three decades of the banking sector has experienced scenic changes due to
financial sector reforms through Narasimham Committee and changes in the economic policies
through liberalization and globalization. This has opened up trade and finance activities to
various sectors of the economy resulting in the banks to serve these sectors. This has exposed
the banks to assume greater risks like credit risks, transaction risks, operating and liquidity
risks. In order to overcome these inherent risks in the Banks, a system of credit appraisal was
adopted. Under such circumstances, the present system was developed and modified year after
year to suit the requirement of the industry.
Credit appraisal is done to assess the eligibility for borrowing and their capability of the
borrower to repay the loan within the stipulated time. So I personally consider banks need to
give more thrust in identifying the applicants and assess the credit worthiness through proper
credit appraisal techniques. This would enhance safety of money, profitability and overall
performance of the banks . In case of any laxity in the part of credit appraisal would drastically
affect quality of assets which will lead to high volume of irregular accounts and finally to NPA.
Also, RBI,Reserve Bank of India, time and again has been giving instructions to focus on
credit appraisal techniques in order to enhance the quality of advances. The capital adequacy
issues also raised the importance of good credit appraisal
Because of all these reasons
i) need for quality advances
ii) profitability
iii) capital adequacy issues
iv) maintaining good customer relationships and
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v) various risks involved and new internationally advanced methods of credit
appraisals,
I personally felt that this project is very important as far as the bank is concerned
which led to choose this title for my project.
1.2 OBJECTIVES OF THE PROJECT
 To study the credit policy of Catholic Syrian Bank and the credit appraisal process as a
whole.
 To understand the basic concepts of NPA,credit rating methods and to learn how rating
is done for individual firms.
 To find the effectiveness of credit appraisal in the branch by analyzing the trend of NPA
over the past 5 years.
 To evaluate the performance of Catholic Syrian Bank and Market Road Branch ,CSB in
particular using the main financial parameters.
 To compare the CSB Bank with other peer group banks to analyze the relative position.
 To project the NPAs in the Bank over next three years using Trend Analysis as a tool.
 To analyze whether the bank is adhering to the credit policies
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1.3 METHODOLOGY
The present study is both an Analytical and a Descriptive study on the credit appraisal process
andnon performing assets.
Primary data
The primary data of this report is the information gathered from CSB from direct experience
and observations.
Secondary data
The secondary data of this report are collected from CSB Annual report, Bank’s book of
instructions, books of credit policies,CSB web site,Internet sources, textbooks, balance sheets
of companies,circulars, banks official documents,credit manual of the bank, infonet and from
their marvell software.
Tools used-Ratio Analysis, Trend Analysis
1.4 PERIOD OF STUDY:
The study covers a period of seven years which is from 2009-2014.
1.5 LIMITATIONS
1. The period is six year. Hence the data cannot be compared to the longer life of the bank.
2. Unavailability to required published documents.
3. The logic behind the CRA software could not be learned since the source for learning it was
not obtained .
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2. CATHOLIC SYRIAN BANK
The genesis of Indian Banking is associated to a large extent with Swadeshi Movement, which
inspired many Indians to promote Swadeshi Banks in the beginning of the 20th Century. The
enterprising founders of Catholic Syrian Bank Ltd also found this period to be a moment of
opportunity to promote the establishment of a bank. Thus was born The Catholic Syrian Bank
Ltd, Nine decades ago, on 26th November 1920 to be exact at Thrissur,which in later years
acquired the unique distinction of being a Centre with the highest concentration of banks in the
South. The founder directors of the bank were people of eminence known for their foresight,
integrity and initiative. The policy they laid down has been consistently upheld by the
successive generations who guided the destiny of the institution. The bank commenced business
on January 1st, 1921 with an authorized capital of Rs.5 lakhs and a paid up capital of Rs.
45270/-
During the first two decades of its functioning, the Bank concentrated only in Kerala. Banks
and credit institutions which proliferated especially in Kerala received a jolt and many of them
came to their doom following the crash of the Travancore National Quilon Bank in 1938
followed by Palai Central Bank in1960. During the period many small banks came to the verge
of collapse shaking the confidence of the public and what followed was a process of
consolidation. The strategy of mergers and amalgamations of small banks with bigger banks
brought the number of banks within controllable limits, thereby making the industry's base
strong. In 1964-65, The Catholic Syrian Bank Ltd took part in taking over the liabilities and
assets of five small/medium sized banks in Kerala. The expansion programme initiated during
these years gathered momentum in the subsequent years.
In August 1969, the Bank was included in the Second Schedule to the Reserve Bank of
India Act 1934. In 1975, the Bank attained the status of "A" Class Scheduled Bank when its
total Deposits crossed Rs.25 crores. The necessity of imparting training to staff looked very
important and a modest beginning was therefore, made in setting up a Training College in 1975.
In the same year the Bank entered the field of foreign Exchange. At a very early stage, the Bank
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recognizedmechanization as an effective tool of management and streamlined its accounting
procedures by introduction of Data processing system. From November 1975, reconciliation of
inter-branch accounts was mechanized by using IBM Data processing machines.
The decade of the seventies saw the evolution of a new culture in Indian Banking.
Nationalisation of banks imposed "Social Control" and imparted new ethos to commercial
banking . What followed was a massive expansion of bank branches with a distinct thrust on
remote rural belts. Special schemes were formulated to cater to the diverse credit needs of small
scale industries, road transport operators, agriculturists, and other self-employed entrepreneurs.
The Catholic Syrian Bank Ltd did not lag behind in taking up the challenge and more than
75% of its clientele belong to small and economically weaker strata of Society. The Bank has a
strong rural base with around 80% of the branches in rural and semi- urban areas.
Investments in money market and capital market instruments are being expanded and steps
are being taken to have an in house equity research wing so as to face the challenges of the
future. The Bank has also geared up its machinery to increase its market share of corporate
finance in the days to come.
The real inner strength of a growing organization lies in its staff resources. The Bank has
been singularly fortunate all these years in creating an environment in which the employees at
all levels could play their role.
Their contribution to the growth of this institution has been invaluable. The Bank has a
very dynamic team on its Board of Directors who are guiding the destiny of the Bank leading to
growth and prosperity.
At present, the bank has a network of 431 branches and 231 ATMs across India. The
Bank also plans to open more number of branches in a phased manner.
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2.1 Corporate Values, Vision and Mission
Corporate Values
Corporate values reflect what , the bank an organization, hold to be important to everything it
does. These values guide bank’s relationships with customers, employees, shareholders etc.
Bank’s corporate values are:
Ø Fairness and Trust
Ø Integrity and Transparency
Ø Dignity and Respect
Ø Equity and Justice
Ø Performance effectiveness and Efficiency
Corporate Mission
The Bank’s long experience in banking has given them a valuable insight that financial strength
is best achieved through customer trust. The mission is to keep thriving on this philosophy
while infusing sustainable practices for the future. And the goal is to produce predictable
earnings for our shareholders by rallying employees through a dynamic and challenging
environment. With such ideals in place, bank trust that it can outgrow the industry average
growth level and climb to a business volume of Rs 34,000 crore, and also reach a net worth
level of above Rs 700 crore by 2015. Besides, they have geared to increase the branch presence
to 500 centers, covering all prominent locations in India by 2015.
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3.INTRODUCTION TO LOANS
Lending money is one of the two major activities of any Bank. Banks accept deposit from
public for safe-keeping and pay interest to them. They then lend this money to earn interest. In
a way, the Banks act as intermediaries between the people who have the money to lend and
those who have the need for money to carry out business/agriculture/personal requirements.
The difference between the interest paid and charged on loans, is called the "spread".
Loans are advances for fixed amounts repayable on demand or in installment. They are
normally made in lump sums and interest is paid on the entire amount .The borrower cannot
draw funds beyond the amount sanctioned.
A key function of the Bank is deploying funds for income-yielding assets.A major part of
Bank’s assets are loans and advances portfolio and investments in approved securities. Loans
and Advances refer to long term and short-term credit facilities to various types of borrowers
and non-fund facilities like Bank Guarantees, Letters of Credit, etc.
3.1 TYPES OF LOANS
Banks extend credit facilities by way of fund –based long term and short term loans and
advances as also by way of non-fund facilities and classified into two categories-
Fund based and Non –Fund Based
Fund based refers to the type of credit where there is delivery of bank’s funds. Bank provides
money to the borrower in anticipation of getting it back. Where as in a Non-fund Based, Bank
doesn’t provide funds directly but gives assurance or takes guarantee on behalf of its customer
to pay if they fail to do so.
In case of Fund Based there are different categories of loans which are discussed as follows
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i) TERM LOANS
All loans with original contracted tenure in excess of one year are termed as term loans. Loans
for acquisition of fixed assets (outright purchase, construction and/or repairs/renovation of
building(s), purchase of machinery and equipments, commercial vehicles etc) shall be normally
sanctioned by way of term loans only.
Under term loans banks sanction as:
Retail Loans
Retail banking in India is not a new phenomenon. It has always been prevalent in India in
various forms. For the last few years it has become synonymous with mainstream banking for
many banks. The typical products offered in retail segment are:-
• Housing loans(Sanction as Domestic and NRI Housing loans)
• Consumer loans for purchase of durables
• Auto loans(Both as Vehicle Loans (Public) and Vehicle Loans (Private)
• Educational loans(For studies in India and abroad)
• Personal loans .CSB has various schemes under Personal loan schemes
1)Casy Mithra Loan
2)Casy Cash Loans
3)CSB Women Support Scheme
4)CSB Senior Citizen Support Scheme
5)Medicash Scheme for doctors
6)Profession Plus
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7)Tax Payers' Liquidty Scheme
• Retail loans are granted in Priority and Non Priority sectors
In the following Priority sector advances, bank has schemes for :
a)Agriculture & allied activities
i)CSB KissanRaksha Scheme
ii)CSB Farm Support Scheme
iii)project schemes finances
b)Term loans under SME
c)Advances to weaker sections
Retail loan is the practice of providing money to individuals rather than institutions.
Retail lending is done by banks, credit unions, and savings and loan associations. These
institutions make loans for automobile purchases, home purchases, medical care, home repair,
vacations, and other consumer uses. Retail lending has taken a prominent role in the lending
activities of banks, as the availability of credit and the number of products offered for retail
lending has grown. The amounts advanced through retail lending are usually smaller than those
disbursed to businesses. Repayment of term loans are in monthly /quarterly/halfyearly/yearly
installments. Certain term loans have repayment holiday depending on their nature.
Retail loans are disbursedas short term & long term loans. Short term are for a period of 36
months and long term for a period in excess of 36 to 240 months
Eligibility for term loans:
Bank should be satisfied with the repayment capacity of the borrowers. For personal loans CSB
insist for Income tax returns/salary certificates. For priority sector advances ,bank depends on
income generation from the schemes/projects. For Project loans bank insist for project report to
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assess the profitability,DSCR,Cash flow, Fund Flow and break Even Point for ultimate
disbursal of the limit..
ii) WORKING CAPITAL
Working capital is the operating funds required for carrying on day to day operations.
Operating funds that are required for procurement of raw materials, spares and tools and also to
make ongoing operating payments, so that the activities are carried on without break.
A significant portion of CSB’s credit portfolio is in the form of various types of workingcapital
facilities to industries, trade etc. The following types of facilities/ creditinstruments are
normally offered, depending on the nature of activity:
(a)Overdrafts/ Cash credit / Key loans etc.(ODM,ODH, Cash Credit, OD on FD, Clean
ODS,OD on Pledge, Key Loans)
(b) Cheques/ bills purchasing/ discounting
(c) Loans against warehouse receipts
(d)Foreign Currency Loans
e)Export Finance
As explained earlier, advances are classified as Term Loans and working capital loans. Bank
accommodates the following categories in their loan portfolios. Such accommodation are either
as term loan or running accounts.
a)Gold loans
b) Short term corporate loans
c) Foreign currency term loans
d) Advances to capital market
e) Advances to commercial real estate
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f) Advances to Non banking Finance Company
g) Advances to Infrastructure projects.
Non Fund Based Limits:
a) Bank Guarantees
b)Inland LCs
c)Foreign LCs
3.2A STUDY ON THE CREDIT POLICIES OF THE BANK
The bank has an elaborate credit policy list taking into consideration each minute aspect of the
borrower and his dealings including the maximum benefit that can be offered to the borrower to
retain the prospective customers as well as to attain profit. The credit policies of the bank has
been studied and a brief overview of the general credit policies ,its
vision,mission,objectives,strategies and the policies regarding credit appraisal process is
mentioned below.
Main functions of the banks are accepting deposits for the purpose of lending to earn profits for
its shareholders. Traditional profit making source was through advances, commission and
discounts. However economic reforms brought about in early nineties have provided banks
ample scope for growth, simultaneously casting upon them greater responsibility of increased
self-governance. Freedom from the decades old practice of identical products, administered
prices and insulation from developments abroad, widened the scope of banking in India. At the
same time, this welcome change has paved way for heightened competition from within and
outside the industry. The immediate outcome is evolvement of new products and practices,
narrowing of margins, mobility of customers and the like. In tune with the changing needs of
customers, varied products with varying degree of complexity have come into existence,
warranting more competitiveness and professionalism.
Therefore lending function carries additional responsibilities of evaluation of risk and its
management. Attracting and retaining good clients require flexible use of interest rates in tune
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with the market trend. While identifying and canvassing prime customers requires sharpened
marketing skills supported by an overall knowledge of business environment in the areas of
operation, retaining them requires persuasive skills backed by timely and effective response to
their needs with professional approach and care.
a).The objectives of Credit Policy are:
a) Utilization of resources in a prudent manner
b) Diversification of credit risks
c) Ensuring optimum returns
d) Maintenance of quality portfolio
e) Minimizing maturity mismatches and
f) Adherence to all statutory and regulatory requirements.
b.Vision
With a view to create an impact in the competitive environment in mobilizing and
maintaining prime clientele, a vision with five pronged thrust is set out as the core
theme of the credit policy, as follows:
1. Augmentation and maintenance of quality assets
2. Ensuring adequate and timely returns
3. Skilful evaluation with updated knowledge
4. Emergence as a FINANCIAL DOCTOR and TRUE FRIEND of the clients.
c.Mission
Strategy
 Credit growth in tandem with growth in deposits and in tune with Corporate Policy
framed each year.
 Prudent selection of borrower through market report and objective
evaluation of the party and purpose.
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 Quick response to customer needs by conveying decisions in a time bound
manner.
 Use of skill and experience in processing credit applications with a wholesome approach
balancing risk and return. Competitive pricing with due regard to risks, cost of
funds/services, market factors, etc
 Periodical customer interfaces by our senior level functionaries to
understand and address operating problems of the borrowers.
 Development of customer friendly and flexible loan products/special credit
schemes and marketing the same with will and vigour. Prescribing general
norms/bench marks for various parameters in order to maintain and upgrade
borrower standards.
 Thrust to the industries and activities having niche markets as a measure of
portfolio diversification.
 Emphasis to credit marketing and developing sustainable relationship banking with
periodical review of market trends.
 Constant monitoring to ensure quality of assets through risk management
systems and Loan Review Mechanism (LRM)
Approach
 Developing a team of credit officers by imparting adequate training.
 Quick decisions without compromising on the quality of appraisal, through onetime
collection of data using check list.
 Introduction of flow chart for movement of proposals at different tiers to spot the
areas of delay, if any, and to redress the same.
 Periodical qualitative review of all borrowal accounts in order to address
deficiencies, wherever noticed.
 Maximum utilization of electronic media for faster communication and credit
delivery.
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3.2.1. INITIAL STEPS FOR CONSIDERING A CREDIT FILE
a)Selection of borrowers
General selection norms
• Activity of the borrower should be legally permissible.
• Financial strength of the borrower client shall be adequate vis-a-vis the project
size/volume of operations proposed to be undertaken and risks involved therein.
• Information should be gathered through discreet enquiries about the applicant,
promoter(s), and proposed guarantor(s) regarding their financial strength, banking
behavior, antecedents etc.
• Applicants and proposed guarantors of credit facilities are required to disclose the
details of litigation, if any, in which they are involved. Such disclosures and if there
are no litigation, a statement to that effect should be incorporated in the process
note.
• In the case of applications under consortium or multiple banking arrangements,
satisfactory status/credit report should be obtained from other banks/financial
institutions participating in the lending arrangement, before granting any credit
facility.
b) Adherence to KYC and AML norms
As in the case of all banking transactions, credit operations are also subject to strict adherence
to directives on Know Your Customer and Anti Money Laundering norms issued by Reserve
Bank of India and Government of India. Beginning with proper identification of the prospective
borrowers,these norms stipulate various procedures to be followed while allowing transactions
in the account.
c)Reference to Defaulters List etc.
. As required under Credit Information Companies (Regulation) Act, 2005 the Bank has
enrolled itself as a member of Credit Information Bureau of India Ltd (CIBIL). Till the
functions of Credit information companies are fully operationalized in India, the Bank will
continue to make reference to Defaulters’ List and Willful Defaulters’ List provided by RBI
from time to time, wherever required.
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d)Study of project report in the case of term loans or fresh advance file
Term Loans:
Cash Flow/Fund flow/profitability statement for Five years/DSCR/Break Even Point analysis
e)Balance Sheet analysis / credit rating mechanism
f)Focus on Priority sector lending
The Bank continues to give emphasis in lending to various categories of borrowers and
activities identified by Reserve Bank of India as Priority Sectors from time to time.Activities/
categories of borrowers classified under Priority Sectors as per the norms in force now are the
following:
(i) Agriculture and allied activities (direct and indirect finance)
(ii) Small Enterprises (including micro enterprises as defined under MSMED Act)–
manufacturing and service (direct and indirect finance)
(iii) Retail trade
(iv) Micro credit
(v) State sponsored organizations for Scheduled Castes/ Scheduled Tribes
(vi) Education
(vii) Housing
(viii) Weaker sections
Weaker sections:
a)Khadi&village industries whose credit needs do not exceed Rs.50000.00
b)Small & Marginal Farmers, agriculture labourers, tenant farmers, share croppers etc.
c)SGSY loans
d)SJSRY loans
e)DRI loans
f)Self help Groups
g)Loans and advances to the poor upto Rs.1.00 Lac to redeem the high cost outside borrowings
h)Housing loans upto Rs.50,000.00.
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3.2.2 POLICY ON LENDING TO SELECT SECTORS AND TYPES OF EXPOSURES
Apart from the above , bank has formulated policies for dealing with advances in the following
categories:
1. Capital Market Exposure
2. Commercial Real Estate
3. Non-Banking Finance Companies (NBFCs)
4. Infrastructure lending
5.Selective credit commodities
6. Prohibited industries and Trades
7.Restricted industries
In the policy bank gives directions, cautions while dealing with clients belonging to above
categories. Banks policies are not stringent. It will be changed according to the policy changes
of the Govt. and possible cases can be considered with the concurrence of the Board of
directors.
a.) Credit concentration:
A risk concentration is any single exposure or a group of exposures with the potential to
produce losses large enough (relative to a bank’s capital, total assets, or overall risk level) to
threaten a bank’s health or ability to maintain its core operations. Risk concentrations have
arguably been the single most important cause of major problems in banks.
One of the most effective and time-tested measures of addressing credit risk concentration is
risk dispersion across borrowers, industries, activities, geographies etc. The Bank has adopted
the following criteria to ensure that the credit concentration risk is being adequately addressed:
(i) Exposure shall be well diversified;
(ii) Apart from the regulatory exposure ceilings prescribed by RBI, the Bank recognizes the
need for limitations with respect to other parameters, considering the degree of credit
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concentration in a particular economic sector. The Bank also considers the impact of adverse
economic developments in a given geographical area, and its impact on the asset quality; and
(iii) The performance of specialized portfolios may, in some instances, also depend on key
individuals / employees of the bank. Such a situation could exacerbate the concentration risk
because the skills of those individuals, in part, limit the risk arising from a concentrated
portfolio. In developing stress tests and scenario analyses as required under Basel II norms, the
Bank shall, therefore, also consider the impact of losing key personnel on its ability to operate
normally, as well as the direct impact on its revenues.
With a view to ensure proper dispersion of risk, the Bank has fixed exposure ceilings/ limits
based on various parameters, in tune with RBI guidelines and Bank’s assessment of measures
for risk containment. These ceilings and limits are discussed in the following paragraphs
b.)Prudential exposure ceiling (single borrower and group of borrowers)
RBI has stipulated norms regarding maximum exposure of a Bank per single borrowers and
group of borrowers, vis-à-vis its capital funds, as prudential exposure ceiling. The rates, as per
this stipulation, ruling as of now, are as follows:
Category Exposure ceiling
(as % to capital funds)
All sectors/ activities other than
NBFCsand NBFC-AFCs
Single
borrower
15
Group of
borrowers
40
NBFCs 10
NBFC-AFCs 15
Oil companies who have been issued oil
bonds(which do not have SLR status) by Govt of
India
25
Credit exposure ceiling to various industries, activities, purposes and types of advances is as
follows:
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Industry/ activity/purpose/ category Credit Exposure ceiling
(as % to aggregate
advances)
1 Cotton textiles (ginning, spinning and
weaving)
15
2 Dyeing, knitting, hosiery, garmenting and
fabric painting
10
3 NBFCs (including HFCs and NBFC-AFCs) 10
4 Infrastructure (a) Wind Electric
Generators
5
(b) Other infrastructure
(each sub-sector)
10
(c) Total for infrastructure 30
5 Sensitive
sectors
(a) Commercial real estate 6
(b) Capital market
Exposure
4
(c) Total for sensitive
Sectors
6
6 House Loans 12
7 7Service sector [IT, educational institutions,
health care, tourism (excluding hotels) etc]
aggregate
15
8 Unsecured exposure (aggregate) 12
9 Any other industry/ activity (separately) 10
* Ceiling on aggregate exposure to capital market is further subject to the regulatory limit fixed
by Reserve Bank of India, currently 40% of the Bank’s net worth as on March 31 of previous
year computed in the prescribed manner.
3.2.3PRICING OF CREDIT FACILITIES:
Policy has formulated pricing the advances on costs of funds as followed by other
banks.Interests are different according to schemes and can be reconsidered with delegated
powers /Board of Directors
3.2.4 SANCTIONING POWERS:
Supreme authority is the Board of Directors of the bank. They delegate the powers to the
ranks below certain powers limited to their scales. Lending powers have been conferred
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on various functionaries, ranging from Principal Officers of branches to Credit Committee of
Board, depending upon nature, size and purpose of advance and value of security available.
These powers are subject to review and revision periodically and will be communicated through
circulars from time to time.
3.2.5 MONITORING OF ADVANCES:
a.)Reporting of credit sanctions
Details of all sanctions accorded by various functionaries should be reported to higher
authorities, in the specified formats, on monthly basis, as follows in the case of CSB for
monitoring:
Sanctioning authority To be reported to:
Principal Officers of branches Zonal Manager
Deputy Zonal Managers and Zonal Managers General Manager
Deputy General Manager (Loans and
Advances)
Chief Executive Officer
General Manager Chief Executive Officer
Chief General Manager Chief Executive Officer
Chief Executive Officer Credit Committee of Board
Credit Committee of Board Board of Directors
b)Post disbursal monitoring
Basic functional responsibility of post lending monitoring rests with the lending branch
concerned. In addition to that, offsite monitoring of borrowal accounts will be done by higher
level functionaries, based on input returns submitted by branches. For this purpose, accounts are
classified based on aggregate exposure per borrower entity and entrusted to various offices, as
follows, as per extant norms:
Above Rs 10 lakh, not exceeding Rs 50 lakh: Zonal Office
Above Rs 50 lakh: CMD
A committee consisting of senior executives (Large Advances Committee- LAC) is
constituted at Head Office. LAC will meet at quarterly intervals and review all accounts above
Rs 50 lakh, based on the report furnished by Circle Office/Branches Further, a sub-committee
of the LAC will review all accounts that require close monitoring and those which exhibit
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symptoms of delinquency, on a monthly basis. Credit Monitoring Dept (CMD) at Head Office
will co-ordinate the functions of LAC and its sub committee.
c)Stock audit and Credit Audit: The system of stock audit and credit audit will be monitored
by CMD. While appointment of stock auditors is entrusted to Zonal Offices concerned, credit
audit will be undertaken by the field level officers attached to CMD directly. Rectification of
irregularities reported in both stock audit and credit audit will be monitored by the respective
Zonal Offices under report to CMD.
It is a custom that each bank formulates their own credit policies. New credit policy is
introduced in CSB once in two years. Meanwhile , there will be amendments to certain
portfolios. It can be to accommodate the instructions of Central Govt/RBI or to replace certain
instructions as to suit the customers and profitable and make it less risky for the bank. Policy
and ammendmends are in fact a broad guideline for the staffs to follow while dealing with
credit matters. It has to be strictly followed at grass route level as to avoid risks in advancing
the amount to borrowers. Changes/amendments in policies will be communicated to branches
and the staff must have update knowledge.
3.3 CREDIT APPRAISAL PROCESS
3.3.1 INTRODUCTION
Main function of banks is accepting deposits for the purpose of lending with the view to make
profits for its shareholders. Deposits belong to the public and it is the utmost concern of the
banks to safe guards the interests of the depositors. Funds received from the customers are
deployed in a judicious manner to earn profits.
Banks deploy the funds as follows:
a)Loans and advances
b) Investments
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Of the two above Loans and Advances are most lucrative for the banks. However, while lending
banks are very vigilant because of the risks involved. Higher the returns, higher will be the risk.
Therefore , banks have formulated their own credit policies to be complied with the
sanctioning authorities. Minimizing credit risks and maximizing profits have become the
objectives of Credit Management, ever since the concept of NPAs was introduced. The health of
an advance depends on the vigilance shown at the time of pre-sanction scrutiny, disbursal and
post-sanction follow up.
3.3.2 PRE-SANCTION SCRUTINY
A major part of the banks’ income is earned from interest and discount on the funds lent to
customers. The business of lending is not without certain inherent risks. To minimize the risks,
banks follow certain
a.CARDINAL PRINCIPLES OF LENDING noted below:
a) Safety:
Since the bank lends funds entrusted to it by depositors, it should be ensured that the loan goes
to the right type of borrower and is repaid with interest after serving the purpose for which it
was taken.
b) Liquidity:
Since Banks are essentially intermediaries for short term funds it should be ensured that the
borrower is able to repay the loan on demand or within a short period in accordance with agreed
terms of repayment.
c) Profitability:
To grow and survive, the bank must make profits which constitute the major source of income
for paying interest on deposits, to meet establishment expenses, salaries etc
d) Purpose
The purpose should be productive so that it will provide a definite source of repayment. We
should not advance money for transactions of anti-social nature such as for hoarding,
speculative activities etc.
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e) Spread:
An important principle in sound lending is diversification of risks. The risks involved in
lending should be spread over a large number of borrowers, over a large number of industries
and areas and over different types of securities.
f) Security:
It has been the practice of banks not to lend as far as possible except against security. Security
is considered as an insurance or cushion to fall back upon in case of an emergency.
g) National Interest/Social interest.
Priority lending: The purpose of the advance, viability of the proposal and national interest,
especially in advance to agriculture,housing,smallindustries,small borrowers and export-
oriented industries are given high weightage.
b .BORROWER STUDY AND REPORTS:
An appraisal of a proposal begins with the gathering of adequate background knowledge about
borrower’s character, capital and credit worthiness. In credit appraisal, much importance is
placed on the credentials of the borrower. Therefore, there is necessity for evaluation of the
borrower in respect of his standing in the business. Elaborate scrutiny concerning all these
aspects is required to be put into a precise credit rating assessment report which helps in taking
decision to advance. Each individual case has to be examined in the light of its own
circumstances .The bank's credit policy, procedures and directives guide the credit assessment
process.
c.SOURCES OF BORROWER INFORMATION
Information regarding character,honesty and financial position has to be discreetly gathered
from following sources.
a. The borrower: The bank should develop as much credit information as possible during the
initial interview with the borrower/partners of firm/directors of company/proposed
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guarantor/co-obligator and principal officials of firms/company ,nature of its business, past and
expected profitability, the degree of competition that the firm/company faces and whether or not
it has had or anticipated any difficulty etc. Information regarding its principal officers should be
collected during such interview.
b. Borrower’s financial statements: for lending decisions, financial information is a significant
part of the total information system. It is derived basically from borrowers:
•Trading and profit and loss statement
•Balance sheet
•Cash and fund flow statements
c. Banks own records: If he is an existing borrower, bank’s own records are a rich source of
additional information. Operations in the borrower’s account and other dealings at the bank
level in regard to collections, discounting/retirement of bills etc. often useful clues to
borrower’s operating and financial transactions. A review of the previous year’s operations in
the account and assessments of borrowers’ financial statements relating to that period will
provide a rich source of information about the borrower.
d. Opinions: Bank should compile opinions on their borrowers. They should contain full and
reliable records of the character, estimated means and business activities of all firms and
individuals who are under any form of liability to the bank, whether as direct borrowers or as
co-obligators. Full particulars of parties immovable properties where they are situated, whether
they are free from encumbrance and in the case of land,acre age should be recorded together
with fair estimates of their value. As far as possible written statements of their properties should
be taken in evaluating properties owned by parties jointly with others and as a rule such
properties should be disregarded in arriving at the net means.
e. From other banks : in respect of fresh proposals, enquiries with local banks should be made
before entertaining the proposal to avoid multiple financing without our full knowledge. In case
of new customer having dealings with other banks, confidential opinion of his banker has to be
obtained .
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.f. Income tax assessment order - Income tax assessment orders agricultural income tax
assessment orders give an insight into the borrower’s account and the extent to which it is
profitable. Comments thereon by the income tax office shall indicate the shortcomings
(lacunae) in the business. In the case of estate owners agricultural tax assessment orders to be
obtained to arrive at parties credit worthiness
g. Sales tax assessment orders : Sales tax assessment orders will reveal the turnover in business
and when read with trading/ manufacturing and profit & loss account, it may be possible to
have a fair assessment of tendencies in trade i.e., whether over-trading or carefully trading
within recourses at command or trading entirely on the borrowed funds.
h. Wealth tax assessment orders : wealth tax assessment order will indicate the net worth of
individuals and reveals the liquid source available to bring the required margin money for the
venture.
i. Market sources : Constant touch with the market will help to have firsthand information about
the gains or losses in particular business transactions of the borrowers.
j. Property statements: The property statement of borrower will give an idea of his worth,
liabilities and his income from real estate’s (immovable properties).
k. Municipal property registers reference to municipal property registers will give an idea of
building owned within the municipality, Rental Values and house tax payable. It may be noted
that the said registers are open for reference to all persons.
l. Other external sources other external sources ,if any , like stock exchange directory, business
periodicals/magazines/journals etc
D.IMPORTANT POINTS REGARDING PRE-LENDING FORMALITIES AND
SECURITY
• Remember 3C’s-Character,Capacity and Capital –while assessing the applicant.
• Purpose of advance-the facility should be need based.
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• Security Offered-Primary and Collateral, its value and quality to be ensured,
marketability of the security
• Guarantee-Personal Guarantee and others
• Guarantor’s honesty,credit worthiness or in other words assess them under 3C
• Ensure Margin norms and requirements
Technical Feasibility
• Location of the project-Land and Building-Leased or Owned
• Choice of technology and size-should be cost effective and scope for expansion
• Technical tie ups
• Selection of Machinery-brand new/second hand.
• Manufacturing process, product mix, storage capacity, disposal of effluents
• Project implementation schedule
Financial Viability
Credit Appraisal tools-Financial projections/forecasting should be reasonable
Analysis of financial statements,RatioAnalysis,Funds/Cash Flow,Working Capital/Term
Loan assessment, Break Even Point etc.
• Estimated Capital Cost-realistic
• Costing and Pricing should be appropriate
• Debt service is adequately covered
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• Compare with Industry averages
Managerial Competence
• Conduct a SWOT analysis with 5C’s of the promoter.
• Promoters background/stake including family background
• Compliance to KYC/AML norms
• Applicant should not be in the Defaulters list
• Previous borrowing-track record
• Age, Professional qualification and experience
• Family support
• Whether he can handle production/marketing/sales/collection/accounting-all functions.
• Conduct a stakeholder analysis-assess the importance of the people, groups of
people or institutions that may influence the success of the project
Commercial Viability/Marketability of the product
• Ensure marketability-to sell whatever is produced and to produce whatever can be
Sold.
• Where the unit is located-access to the market
• Transportation-is cost/reliability
• Infrastructure-power,water,roads
• Raw material availability
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• Marketing and selling arrangements
• Demand is located in a single market-dependence on long distance market
• Present and future demand
• Share of the product in the market
• Change in consumer preferences
 Legal angles-including security aspects
 Socio/Cultural aspects of the projects
 Environmental threat,if any
Analysis of financial statements:
Bank extends two types of funded facilities:
a)Working Capital Limits
Working capital is the operating funds required for carrying on day to day operations which is
given for a period of 12 months. The following types of facilities/ credit instruments are
normally offered, depending on the nature of activity:
(a) Overdrafts/ Cash credit / Key loans etc.
(b) Cheques/ bills purchasing/ discounting
(c) Loans against warehouse receipts
(d) Foreign Currency Loans
(e) Pre shipment credit in Indian Rupee or Foreign Currency (PCL or PCFC)
(f) Post shipment credit in the form of purchase of sight bills (FDBP), discounting of
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usance bills (FUBD) and/or advance against export bills.
(g) Non funded facilities like Bank Guarantees (BG) and Letters of Credit (LC)
(inland or import) for procurement of raw materials, getting mobilization
Term Loans
Term loans are the loans funded for a period more than 12 months to 84 months extending
upto 20 years .
(For purchase/installation of machineries/vehicles/ personal loans/Project loans/Long term
Agriculture loans/Loans against shares,debentures/Loans for infrastructure
development/Commercial real estate etc.
As far as the credit appraisal is considered, we ask for the balance sheet when we get a new
account. If it is an existing concern, we'd go through the balance sheet and the profit and loss
statement for the past three years, analyze it, have the project report of the company to see how
it has been doing and then, on the basis of the project report, we would assess what the
requirement is - whether it is a term loan required to purchase plant and machinery etc.
For Working Capitals
Branch analyze:
a)Financial statements
b)Balance sheets for the past three years
c)Projected balance sheets for the future 2 years
d)Analysis of balance sheets based on the data provided
(Bank consider DER, Current ratio,Interest Service ratio, Debtors Turnover Ratio, Creditors
Turnover Ratio and Net Profit Ratio for Working Capital )
Desirables:
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a)DER---2:1
b)With Quasi Equity—3:1
c)CR—1.33:1
d)Debtors/Creditors Turnover –90days maximum
d)MPBF/Projected turnover method of lending
a)Second Method of Lending –above Rs.500.00Lacs
b)Projected Turnover Method---Upto--Rs.500.00Lacs
For Term loans:
Term loans of smaller size, bank to be provided with salary certificates/IT return for personal
loans and for large amounts the following required:
a)Project report for new concerns
b)previous three years balance sheets and project report for the new unit/concern
a)DER, CR ,DSCR, Fund Flow and Cash flow, Break Even Point analysis for fresh Projects.
Project report to be submitted by the applicants
DSCR desirable is 1.5:1.
EQUATED MONTHLY INSTALMENT
The formula for calculating installment on term loans is given below
EMI=[P(2+(R*R)Y/4800 +i(n+1)]/2n +.01P/100
Where
P=Principal amount,R=Rate of interest, Y= No of years, n=No of months allowed for
repayment.
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i=Rate of interest per month expressed in fraction=R/1200
e.Pre-sanction scrutiny in the case of companies,trusts and clubs
During the time of pre-sanction scrutiny for limited companies , it is important to make a
search at the office of the Registrar of Companies in their ‘ Register of mortgages and charges’
whether any prior charge has already been registered under sec.125 of the Companies
Act,1956.
Before considering an advance to a Company the banker should ascertain whether the Company
has powers to borrow and to create a charge on its assets and how these powers have to be
exercised. For this purpose , the memorandum and articles of association should be looked
into. All trading companies have implies powers toborrow. A non-trading company , however
has no borrowing powers unless they are specifically included in the memorandum of
association.
The following papers should be carefully examined and a certified true copy of each should be
retained for bank’s records.
i) The certificate of incorporation-it is infact the Birth Certificate of the Company.
ii) The certificate of commencement of business
iii) Memorandum and articles of Association
iv) Balance sheets
v) Confidential reports/Credit reports on directors
vi) Board Resolution
In case of clubs, literarysocieties, schoolsetc , unless incorporated as a company under the
Companies Act ,1956, have no legal entity and as such have no powers to enter into contractual
relations. In case proposal is to be entertained as a special case, the bye-laws of the society or
club should be studied with a view to ascertaining the borrowing powers.
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Likewise Trustees have no individual powers. They have all to act together and cannot delegate
their authority to any other person, even to one among themselves unless provided in the trust
deed. Without any express powers in this regard they cannot pledge /charge the trust property.
f.Rating of borrowal accounts
All credit proposals should be appraised using the appropriate appraisal formats, prescribed
based on amount and nature of credit facility. In the case of facilities for trade, industry and
other businesses and applicants other than individuals, financial position should be analyzed
based on Balance Sheet and Profit & Loss Account/Income & Expenditure Account/ Receipts
& Payments Account (based on the constitution/legal status of the applicant) for the immediate
past three years, estimates for the year during which the analysis is done and projections for the
next year. In case the applicant entity is in existence for less than three years, financials for all
thecompleted years should be furnished and analyzed.
In this context, I wish to bring to the notice regarding risks involved in financial intermediation
and banks face various types of financial and non-financial risks such as credit, interest rate
forex rate ,liquidity, equity price, commodityprice,legal, regulatory, reputational , operational
etc.These risks are interdependent. The success of an effective risk management system
depends on its abilityto identify, measure, monitor and control various types of risk it faces.
Credit risk is the most difficult to assess and control.
Credit risk involves the inability or unwillingness of a customer to meet the commitments in
relation to lending or settlement of financial transactions. Credit risk of a bank depends on
external factors like state of the economy, foreign exchange reserves, interest rates etc. as well
as internal deficiencies like absence of prudential exposure norms, deficiencies in credit
appraisal, inadequate risk pricing,post lending follow up and internal compliances.
RBI advised that all banks should have a comprehensive risk rating system.It has to be a single
point indicator of diverse risk factors of a borrower for taking credit decisions in a consistent
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manner. Risk rating system should reveal the over all risk in lending, inputs for pricing of loans
and provide meaning full information for review and management of loan portfolio. It should
provide necessary information to authorities regarding quality of loan at any point of time.
In 2000, CSB adopted a rating system which covered both external and internal risk as follows:
In the Borrower rating we include financial parameters, Market risk, Managerial risk, Track
Record and Compliance level
In terms of Reserve Bank of India guidelines and also in terms of Basel II guidelines, a bank
must have a meaningful distribution of exposures across grades with no excessive
concentrations, on both its Borrower Rating and Facility Rating. To meet these objectives,
Basel II prescribed that a bank must have a minimum of seven borrower grades for non
defaulted borrowers and one for those that have defaulted. A borrower grade is defined as an
assessment of borrower risk on the basis of a specified and distinct set of rating criteria, from
which estimates of PD are derived. There is no specific minimum number of facility grades for
banks using the advanced approach for estimating LGD. It is further specified that a bank must
have sufficient number of facility grades to avoid grouping facilities with widely varying LGD
into a single grade.
Rating system covers funded and non-fundedlimits of Rs.25.00 Lacs and above.
As per Basel II guidelines, the banks are to move for advanced rating methods, vide IRB
system (Internal rating Based Approach) progressively and in compliance to Basel II norms and
in compliance to RBI guidelines CSB adopted IRB system in Credit risk assessment since
2011.And now CSB is using advanced version IRB rating system.
Main features of IRB system :
1)Facility rating (or Loss Given Default (LGD) rating)
2)Borrower rating Or Probability of default—PD)
Facility rating:
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Bank take into account DER,CR, Primary security of movable assets and its charge to the bank,
Immovable assets mortgaged to bank and its value and marketability, guarantors/borrowers net
worth and experience in business.LGD measures the extent of loss that can occur to bank in
case of default of loan.
Borrower rating: It measures the likeliness of loss that can occur in future. In the Borrower
rating we include Financial parameters, Market risk, Managerial risk, Track Record and
Compliance level
To meet these objectives, Basel II prescribed that a bank must have a minimum of seven
borrower grades for non-defaulted borrowers and one for those that have defaulted. CSB has
evolved 8 categories accordingly as follows:
Grading for facility ratings---
Marks awarded(as% to marks
applied)
Credit rating Inference
75 % and above CFR-1 On default very good
recoverability
60% and above but less than 75% CFR-2
50% and above but less than 60% CFR-3 On default-good
recoverability
40% and above but less than 50% CFR-4 On default-moderate
recoverability
30% and above but less than 35% CFR-6 On default-average
recoverability
Less than 25% CFR-8 On default-poor
recoverability
Grades in borrower ratings:
Marks awarded(as% to marks
applied)
Credit rating Inference
80% or more CSB-1 Entry level
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70% or more,but less than 80% CSB-2
60 %or more,but less than 70% CSB-3
55%or more,but less than 60% CSB-4
50%or more,but less than 55% CSB-5 Slippage in asset
quality
45%or more,but less than 50% CSB-6
40%or more,but less than45% CSB-7 Exit level
Less than 40% CSB-8
If the rating assigned is CSB-5 or worse, fresh proposals shall not be considered. The Bank
shall endeavor to come out of the exit level accounts as early as possible. Nursing programme
with additional funds shall be considered only in exceptional circumstances and shall be
sanctioned by General Manager or higher level functionaries only.
Marks for financial parameters shall be awarded based on the analysis of audited financial
statements for the immediate past three years, the latest of which shall not be more than 18
months old.
3.3.3 SANCTION ORDER
After process and sanction of credit facilities bank will issue sanction order to the party
.sanction order will contain formalities to be complied by the borrower for availing the loan and
other terms dictated by the bank. It includes
1. Amount of loan
2. Rate of interest
3. Repayment amount
4. Repayment tenure
5. Guarantee
6. Security for advances
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a. Hypothecation
b. Mortgage
7. Other conditions prescribed by bank
Sanction order with the above stipulation will be sent to applicant and if he is satisfied
with bank’s terms and conditions of the loans will be called for to sign documents to
avail the loan.
3.3.4 DOCUMENTATION
Section 3 of the Indian Evidence Act,1872 states that ‘document’ means any matter
expressed or described upon any substance by means of letters, figures or marks or by more
than one of these means intended to be the used for which may be used, for the purpose of
recording that matter.
The execution of documents in the proper form and according to Law is known as
documentation. The terms and conditions of the loans/advances , the securities charged and the
repayment aare reduced in writing. Adequate and proper documentation comes to the resque of
the banks in a Court of Law. If at any time the filing of a suit against a borrower becomes
necessary, the Court may not pass a decree if the documents are defective and the bank may
lose the case.
It helps to identify the borrower, security and it is used for the purpose of recording
transactions as a written evidence. It is also a means of creating charge over the security.
The documents that banks obtain generally are
i)promissory note for the loan amount.
ii)agreement for the loan
iii)guarantee agreement(if there are guarantors)
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iv) Mortgage of property( if land and building is offered as security)
LAW OF LIMITATION
Section 3(1) of Limitation Act, 1963 provides that every suit or appeal or application
after the period of Limitation prescribed is to be dismissed even though limitation is not set up
as a defence.
Limitation period for some of the important Transactions:
1. TOD-3 years from the date of allowing First Overdraft.
2. AOD-3 years from the date of acknowledgement made by the borrower.
3. Mortgage-12 years from the date of creation of Mortgage for enforcement of security
and 3 years from the date of the creation of Mortgage for personal remedy.
Various methods to keep alive the period of Limitation.
a. Renewal of full set of documents before the expiry of the original documents.
b. Obtaining acknowledgement of debt on requisite revenue stamp duly signed by
all the parties who have executed the documents before the expiry of the original
documents.
c. Part payment of debt or interest paid by the borrower/s under his/her signatures
or by his duly authorized agent before the expiry of the original documents.
Acknowledgement of debt/part payment after the expiry of the documents will
not extend the period of limitation.
3.3.5 DISBURSAL OF LOAN
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After complying with the pre scrutiny formalities and in compliance with the policies of the
bank, branch issue sanction letter to the party. Sanction letter contains the amount of loan, rate
of interest, period of repayment and other terms and conditions to be followed by the applicant
to avail the loan.If the applicant is satisfied with the terms and conditions contained in the
sanction order,he will be required to execute documents to avail the loan.
Precautions while disbursing the loan:
a)Documents to be taken is prescribed forms
b)Signatures to be obtained for borrowers/guarantors
c)End use to ascertained
d)Security property to be properly mortgagd/pledged/ assigned/hypothecated as per extant
guidelines.(creation of charge)
3.3.6 POST LENDING FOLLOW UP:
The main thing in post lending follow up is to have regular contact with the customer.
Traditionally we say, know your borrower like the back of your palm.It's like having complete
knowledge of your customer. Even if we have the best account, everything won't go well all the
time. So you have to find out whether the promoter has the wherewithal to come out of a
difficult situation i.e. how resilient your borrower is. For this, we should need to know about
everything, not just the balance sheet. That means their expertise, their experience, the people
who head their departments, and their internal policies
a)End use of bank funds to be ascertained.
b)Periodical visit of site/verification of security/ books of accounts to bemade after disbursal
c)Funds are not diverted—ascertain
d)Watch the account transaction—do there any signss of slowness/interest not properly
serviced/ delay in payment of installments/
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e)Review/renewal done properly in time
f)Reporting disbursal to higher authorities
h)Reporting abnormalities to higher authorities. Also report irregularities.
i)Inform interest rate changes to the parties.
j)Watch the value of securities with the bank for the facilities and take timely action.
k)Include the loans in various statements as instructed and follow up by authorities.
l)Attention to safe guard the money interest in lending and future recovery.
Symptoms of delinquency- detection and action thereon
Early warning signals and symptoms of delinquencies, if any, shall be diagnosed at
the beginning itself and suitable remedial measures initiated forthwith. The following is
an illustrative list of such symptoms that warrant immediate attention:
• Continuous irregularities in cash credit/overdraft accounts such as inability to
maintain underlying current assets such as inventory and/ or receivable with
stipulated margin, non-servicing of interest debited periodically in time,
transactions in the account not commensurate with the limit sanctioned/ sales
turn over projected etc.
• Failure to make timely payment of installments of principal and interest of term
loans
• Complaints from suppliers of raw materials about non payment or delayed
payment of their dues, continuous delay in payment for utilities like power, water,
communication facilities etc
• Delayed or erroneous submission of stock/ book debts statements and other
control statements or non submission them
• Attempts to divert sale proceeds through accounts with other banks
• Frequent return of cheques and bills
• Steep decline in production, sales and/ or profit
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• Disproportionate increase in inventory turn over ratio and/ or debtors velocity
• Frequent return of documentary bills negotiated/ sent for collection and/ or
allowing large discount on sales
• Failure to pay statutory liabilities in time
• Diversion of working capital to acquire fixed assets and/ or diversion to associate
concerns.
• Requests for ad-hoc facilities or temporary enhancements frequently
• Devolvement of LCs or invocation of BGs
3.4.NONPERFORMING ASSETS
Prudential accounting norms were implemented in banks in India on the recommendations of
Narasimhan Committee on financial sector reforms. These relate to income recognition,.asset
classification and provisioning.
Definition of NPA
With effect from March 31st
2004, a non –performing asset(NPA) shall be a loan or an advance
where;
i)interest and /or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii)the account remains ‘out of order ‘for a period of more than 90 days, in respect of an
Overdraft/Cash Credit(OD/CC),
iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted.
iv)interest and/or instalment of principal remains overdue for two crop seasons in the case of
an advance granted for short duration crops ( which mature within 12 months) and one crop
season in case of long duration crops( which mature after 12 months)
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v) any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.
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 assets (NPA) is not recognized
on accrual basis but is booked as income only when it is actually received. Therefore,
the banks should not take to income account interest on any NPA.
2. 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.
3. If government guaranteed advances become NPA, the interest on such advances should
not be taken to income account unless the interest has been realised.
3.4.1 ASSET CLASSIFICATION
Categories of NPAs
Banks are required to classify non-performing assets further into the following three categories
based on the period for which the asset has remained non-performing and the realisability of the
dues:
α. Sub –standard assets
β. Doubtful assets
χ. Loss assets
Substandard assets: a sub-standard asset is one , which was classified as NPA for a period not
exceeding 12 months. In such cases, the current net worth of the borrower/guarantor or the
current market value of the security charged is not enough to ensure recovery of the dues to the
banks in full. In other words,such an asset will have well defined credit weaknesses that
43

jeopardizethe liquidation of the debt and are characterized by the distinct possibility that the
banks will sustain some loss,if deficiencies are not corrected.
Doubtful Assets:
A doubtful asset was one ,which remained NPA for a period exceeding 12 months. A loan
classified as doubtful has all the weaknesses inherent in assets that were classified as sub-
standard, with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently known facts, conditions and values, highly questionable and
improbable.
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 recovery value.
When an NPA account should straightway be classified as ‘loss’ or ‘Doubtfull’?
When realizable value of both primary and collateral security falls below 10% of the
outstanding balance the account is straightway classified ‘loss’ and when realizable value is
above 10% but less than 50% of the outstanding balance it is straightway classified as
‘doubtful’.
3.4.2 How an account becomes Non Performing?:
An advance will be performing/standard asset at the time of disbursal.However it can turn to
NPA category subsequently. Various reasons can be attributed to these phenomena.
a)Lapses in pre scrutiny
b)Lack of proper follow up after disbursal of the loan
c)Change in Govt. policies which affect adversely the smooth functioning of the concerns.
44

d)international factors
e)Natural calamities/adverse climatic conditions
f)Fund diversion by the borrowers
g)Wilful default in repayment/closure of facilities.
h)Inefficient management ,experience and market changes.
3.4.3How to avoid slippage to NPA?
a)Early recognition of symptoms of sickness in the units by the bank and take steps to redress it
through proper channels
b)Closely monitor the advances
c)frequent contacts with the borrower and timely inspection of the units
3.4.4 How to reconvert an NPA account to Performing Asset?
a)Persuade the party to regularize the account
b)Restructuring loans
Early recovery of the NPA accounts:
NPA accounts shall not remain irrecoverable long in the balance sheets as it is huge loss of
income. Banks money is public fund and has to be refunded. Therefore it is the duty of the bank
to recover the same as early as possible.Banks resort the following for recoveries:
a)Frequent contact with the defaulters and prompt them to repay
b)Filing of suit/ revenue recovery/initiation of SARFAESI Act
c)Steps to confiscate the movable assets under finance from the bank and its disposal through
auction
45

d)Compromise settlements.
Thus,Slippage to NPA is a loss to the bank. Bank can not account the interest accrued therewith
and apart find provision from its profits.Slippage to NPA is a serious concern to the banks and
the disbursing officials are held responsible for the same if it occurs due to negligence and
inadequate follow up.
3.4.5 CREDIT APPRAISAL AND ITS IMPACT ON NPA
On a general study made ,it was found that one of the important reasons for the high NPAs
was faulty credit appraisal. There was no in-depth appraisal at all and in a large number of
accounts, people were being judged based on the fact that they were well known or that their
company was well known. Banking is not like that. An in-depth analysis is required.
Loans and Advances should be properly analyzed as per the guidelines prescribed by the bank.
Any shortfalls/deficiencies will lead to bad symptoms and finally result in slippage to NPA. In
this context, we have to differentiate between Performing Asset and Non- Performing Asset.
Banks disburse loans to get revenue. Income generating accounts are termed as Performing
Assets. Income Non Generating accounts are categorized as Non-Performing assets. Banks
therefore bestow utmost care and vigilance to prevent slippage of standard assets to NPA.
First symptom will be deflected as irregular. Loans and Advances become irregular under the
following circumstances:
a)Terms loans become irregular if one installment is overdue.
b)Working capital loans are overdue if monthly interests is not serviced.
c)CP/BP is irregular if it is not realised within 10 days after due date.
d)Short term agriculture loans become overdue if it remains unpaid after 30 days from due date.
Such nature of irregularity shall not continue. Bankers follow up vigilantly toregularise the
accounts. Regularization is possible through:
46

a)Close follow up with the borrowers and persuasion
b)Induction additional funds in case of shortage of funds.
c)Watch use of funds and take steps to avoid diversion of funds
a.Slippage to NPA
NPA occurs in the following cases:
a)Terms loans remain unpaid more than 3 months.
b)Working capital loans remains out of order since 90 days since:
1)Interest is not serviced
2)Renewal overdue
3)Stock statements not submitted
c)CP/BP is irregular if it is not realised after 90 days from due date
d)Short term agriculture loans become overdue if it remains unpaid after two crop seasons.
When borrowal accounts are slipped to NPA, it stops generation of income.
Consequences:
a)Interest is kept in interest suspense accounts and not to Profit and Loss account of the bank.
b)Provision to be provided for the NPA accounts
As a result ,instead of creation of revenue by advancing, bank suffer loss.
Therefore immediate steps to be followed are:
a)Contact the borrower and regularise the account and upgrade to NPA
b)Restructuring of loans for upgradation as per extant guidelines and eligibility.
47

c)Recover y measures through legal measures/ SARFAESI enforcement.
d)Confiscate movable assets through legal measures immediately.
b.NPA and Credit Appraisal:
As mentioned earlier appraisal should be done properly before disbursal of loans. Improper
selection of borrowers/activities/marketability/expertise/capital/competition /change in govt.
policies etc. can lead to irregularity in the borrowal accounts.
Banks should strictly follow the norms laid in :
a)Pre sanction scrutiny.
b)Disbursal
c)Primary security/ collateral security
d)Post sanction follow up.
4.DATAANALYSIS AND INTERPRETATION
ANALYSIS ON NPA
The following analysis is made using the various financial parameters, to find out the
various trends in the bank in order to comment about the performance of the bank.
4.1 TRENDS IN THE MOVEMENT OF ADVANCES FROM THE YEAR 2009 TO 2014
48

Fig 1: TRENDS IN THE MOVEMENT OF ADVANCES FROM THE YEAR 2009 TO 2014
YEAR TOTAL NO OF
ADVANCES
TOTAL ADVANCE(IN
LAKHS)
% INCREASE IN
ADVANCE
01-Apr-2009 To : 31-Mar-
2010
470 1251.02
01-Apr-2010 To : 31-Mar-
2011
816 4046.4 223.44
01-Apr-2011 To : 31-Mar-
2012
772 4291.73 6.06
01-Apr-2012 To : 31-Mar-
2013
918 5752.22 34.03
01-Apr-2013 To : 31-Mar-
2014
773 6260.89 8.843
TABLE 1:ADVANCES FROM THE YEAR 2009 TO 2014
From the above table it can be seen that there is a drastic increase in the number of advances
from the financial year 2009-10 to 2010-11 and a corresponding increase in advance with a
percentage increase of 223.44% .It has been advised to the bank to achieve a target of 25-
30% any year and the branch has achieved about 8 times the target in the financial year 2010-
11. In the following years the branch has attained only a growth of 6.06% .But a30% increase
was shown in the year 2012-13. In the last financial year they could only attain a growth of
8.843% only.
The drastic % increase in advances in the year 2011 is due to the following reasons.
49

a. Intense efforts made by the Chief manager and the timely support from the
sanctioning authorities.
b. Incentives given to good borrowers and new customers as low rate of
interest,reduction in processing fee and other concessions.
c. Geographical location of the branch : Market Road Branch ,CSB is located at the heart
of Kochi where lots of gigantic businesses takes place. This bank is quickly accessible
by all the bigger enterprises and the establishments located nearby.
d. Various advance schemes offered by the Bank.
e. Latest marketing techniques used by the management.
f. Support from chartered accountants and loan syndicators.
g. Bigger corporate and partnership accounts accounted for sudden leaf in advances
h. Pleasant ambience and better services provided to customers.
4.2 TRENDS IN THE MOVEMENT OF ADVANCES AND ITS ANALYSIS WITH
RESPECT TO NPA FROM 2008-2014
FIG 2: COMPARISON OF ADVANCES WITH NPA
50

FIG 3: VARIATIONS IN THE % OF NPA
The total advances the bank has given during the period 2008 to 2014 has increased year by
year except in the year 2010 and 2011 where there was a decrease in the total advances .The
total NPA level is also increasing steadily from 2009 to 2014.However the percentage of NPA
is decreasing gradually because of the comparatively larger increase in advances and few
recoveries. Thus we can say that this branch of CSB is performing satisfactorily by increasing
the business in terms of advances and reducing the non performing assets. Their process of
credit appraisal includes an elaborate pre-sanction scrutiny and an intensive post sanction
follow up which is a main reason for their reduced slippage. It has also been noticed that there
are no fresh NPA’s in the past three years and the existing NPA’s are the carried one’s from the
previous years. Out of 312.66 lakhs shown in the branch NPA list,200 lakhs is transferred from
other branches of the bank for the legal procedural convenience since Debt Recovery
Tribunal(DRT) is functioning at Ernakulam. Deducting the other branches share,the NPA % of
market road branch,CSB is only 1.2% of the total advance. When we analyze the position of the
NPA of the branch, I comment that there is a remarkable reduction in NPA by the joint effort of
the Branch Manager and his team.
51

4.3 SECTOR WISE DISTRIBUTION OF BANK CREDIT(CSB MARKET ROAD
BRANCH)
Theabovepie chart shows the proportion of advances given against each sector. It can be
clearly seen that in the year 2011 ,maximum advances is disbursed in the SME sector which
52
ADVANCES(2011)
AGRICULTURAL AND
ALLIED ACTIVITIES
SMALL AND MEDIUM
ENTERPRISES
SERVICES
PERSONAL LOANS
OTHER UNCLASSIFIED
LOANS

accounts to 35% of total advance whereas in 2012 it is the service sector which accounts upto
42% of the total advance.
FIG 4: SECTOR WISE DISTRIBUTION OF BANK CREDIT
Even in the year 2013 and 2014 ,the same trend is continued and the percentage of advances
against service sector increased to 46 % and 51% respectively. The branch is situated at the
heart of Kochi and therefore it has extended credit to large number of retail and wholesale
53
ADVANCE(2013)
AGRICULTURAL AND
ALLIED ACTIVITIES
SMALL AND MEDIUM
ENTERPRISES
SERVICES
PERSONAL LOANS
ADVANCE(2014)
AGRICULTURAL AND
ALLIED ACTIVITIES
SMALL AND MEDIUM
ENTERPRISES
SERVICES
PERSONAL LOANS
OTHER UNCLASSIFIED
LOANS

shops.The scope for hotel finance is also higher in these areas and a lumpsum amount is
extended in this regard. This has resulted to an increase in% distribution of credit against the
service sector.
4.3.1 AGRICULTURAL AND ALLIED ACTIVITIES
Fig5 : AGRICULTURAL AND ALLIED ACTIVITIES
AGRICULTURAL
AND ALLIED
ACTIVITIES
NUM
A/C
LIMIT(in
lakhs)
NUM
NPA
A/C
NPA
BAL
TOTAL
ADVANCE
% OF
AGRICULTURAL
ADVANCE
AGAINST
TOTAL
ADVANCE
AS ON MARCH
2011
216 264.27 0 0 4350.99 6.07
2012 254 282.44 0 0 7097.6 3.97
2013 153 187.72 0 0 8822.22 2.12
2014 123 163.82 0 0 8838.13 1.85
54

Agricultural advances shows a negative trend as the branch is located in the metro city whereby
the scope for advances is less.On verification it is found that there is no NPA in agricultural
category . All the agricultural advances are on the security of gold .
4.3.2 SMALL AND MEDIUM ENTERPRISES
FIG 6: SMALL AND MEDIUM ENTERPRISES
SMALL AND
MEDIUM
ENTERPRISES
NUM
A/C
LIMIT(in
lakhs)
NUM
NPA
A/C
NPA
BAL
TOTAL
ADVANCE
% OF SME ADVANCES
AGAINST TOTAL
ADVANCE
AS ON
MARCH
2011
8 1514.17 0 0 4350.99 34.8
2012 9 2207.08 0 0 7097.6 31.09
2013 14 2657.59 0 0 8822.22 30.12
2014 15 629.56 0 0 8838.13 7.12
The SME sector also shows a decline trend even though there is a small increase in the number
of accounts. The % of SME advance has come down drastically to 7.12%. But the total advance
has doubled from the position of 2011. There is no NPA account in this category. It is learned
55

that bank is giving much emphasis particularly in the growth of SME sector in the year 2014-
15. For this they have appointed a Vertical head in every regional office.
4.3.3 SERVICES
FIG 7:SERVICES
SERVICES(YEAR) NUM
A/C
LIMIT(in
lakhs)
NUM
NPA A/C
NPA
BAL
TOTAL
ADVANCE
% OF
SERVICE
ADVANCE
AGAINST
TOTAL
ADVANCE
AS ON MARCH
2011
101 1244.52 14 191.04 4350.99 28.6
2012 107 2975.63 17 275.49 7097.6 41.92
2013 78 4034.58 17 310.74 8822.22 45.73
2014 63 4477.1 14 176.01 8838.13 50.65
56

Since Kochi is a main center for tourism/business, there is large scope for advances under
service sector.The branch is exploring the potential of this sector and is already extending credit
facilities to this sector.Under this category, advance level of the branch is grown more than
three and half times from the year 2011. But slippage to non-performing assets are very high
when compared to other loan category. With propermonitoring, follow up, immediate initiation
of legal measures , compromise settlements the % of NPA is now showing a downward trend.
4.3.4 PERSONAL LOANS
FIG 8 :PERSONAL LOANS
PERSONAL
LOANS
NUM
A/C
ADVANCE(i
n lakhs)
NUM
NPA A/C
NPA
BAL
TOTAL
ADVANCE
% OF
PERSONAL
LOANS
AGAINST
TOTAL
ADVANCE
AS ON MARCH
2011
764 1279.35 8 34.19 4350.99 29.4
2012 710 1601.06 7 39.07 7097.6 22.55
2013 861 1867.51 4 0.31 8822.22 21.16
2014 600 3260.39 4 0.31 8838.13 36.89
57

Under this category, bank is accommodating loans for houses ,purchase of vehicles,consumer
durables, education loan and other personal loans under bank’s schematic loans. The increase in
personal loans is mainly due to fresh disposals to individuals and corporates against pledge of
deposit receipts.
4.4 CLASSIFICATION OF LOAN ASSETS OF THE MARKET ROAD BRANCH,CSB
Year Standard Assets Sub-standard Assets Doubtful assets(DA1)
No of
accounts
Amount %age No of
accounts
amount %age No of
accounts
Amount %age
2010 2377.00 85.81 4 47.32 1.7 9 20.78 .0074
2011 1067 3990.5 91.71 3 49.77 1.14 4 1.24 .0002
2012 1055 6632.75 93.52 1 26.10 .0036 5 123.63 1.74
2013 1084 8357.37 95 1 53.94 .006 0 0 0
2014 783 8525.47 96.46 0 0 0 0 0 0
Year
Doubtful Assets 2(DA2) Doubtful Assets 3(DA3) Total DA
No of
accounts
Amount %age No of
accounts
amount %age No of
accounts
Amount %age
2010 8 30.27 .006 14 295.88 10.6 31 346.93 12.49
2011 5 17.15 .004 10 292.31 6.71 19 310.7 7.14
2012 4 1.42 .0002 14 307.92 4.34 23 433.05 6.47
2013 8 118.14 1.33 12 292.76 3.31 20 410.9 4.994
2014 4 141.37 1.59 14 171.29 1.93 18 312.66 3.54
58

TABLE 2: CLASSIFICATION OF LOAN ASSETS OF THE MARKET ROAD BRANCH,CSB
There are no loss asset accounts in this period of study from 2011 to 2014. Hence their
percentage contribution in the total loan classification is nil.
CLASSIFICATION OF LOAN ASSETS(in %)
Year Standard
assets
Sub-standard
assets
Doubtful assets Loss
assets
2010 85.81 1.7 12.49 0
2011 91.71 1.14 7.15 0
2012 93.52 0.0036 6.47 0
2013 95 0.006 4.994 0
2014 96.46 0 3.54 0
FIG 9 :CLASSIFICATION OF LOAN ASSETS
59

The above chart clearly states that the rise in the standard assets over the years compensates the
fallin the other three types of assets. The sub standard assets have reduced from 2010 to 2011
after which it came down to zero. What is remaining is the doubtful assets which have
decreased drastically from 12.49% in 2010 to 3.54% in 2014. Thus the branch is putting its best
efforts to recover from the NPA’s. If the same input is continued ,it is possible for the branch to
be a non-NPA branch by 2015.It goes without saying that CSB is taking good care and
following ideal norms of granting advances and they havebeen very meticulous in recovering
from defaulters.Another observation is that the bank has strictly followed the RBI guidelines by
makingprovisions against NPAs.It is very encouraging that the gross NPA ratio in the last
threeyears is very less.
4.5 BRANCH PERFORMANCE
FIG 10 :BRANCH
PERFORMANCE
YEAR 2009 201
DEPOSITS 3215.45 347
ADVANCES 5661 273
PROFIT 1.49 190
CDR 1.76 78.7
% of NPA 4.09 13.0
TABLE 3:
FINANCIAL
PARAMETERS OF
THE BRANCH
From the above figures and table ,we can see that the deposits of the Market Road Branch has
increased drastically over the years to 152 crore by 2014. It is learned that the increase in
deposits is due to the attractive interest rates offered, increase in the number of new customers,
good customer service and the bulk deposits obtained.
60

Advances has also increased over the years to 88 crore and has occurred due to increase in
new corporate borrowers, special interest rate given for good and large borrowers.Take over of
borrowal accounts from other banks have also resulted in the increase of advances.
The branch presently is at operating loss since the interest paid on deposits is more than the
revenue earned. However ,the branch will be at profit when the transfer price is transferred to
the branch at half yearly intervals.
The NPA % has reduced drastically from 13.02 % to 3.53% by 2014.Out of 312.66 lakhs
shown in the branch NPA list,200 lakhs is transferred from other branches of the bank for the
legal procedural convenience since Debt Recovery Tribunal(DRT) is functioning at Ernakulam.
Deducting the other branches share,the NPA % of market road branch,CSB is only 1.2% of the
total advance. The existing NPA accounts were studied to find the reasons for becoming NPA.
There are several reasons for an account becoming NPA.
* Internal factors
* External factors
Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or other debt instrument
from capital markets.
6. Business failures.
7. Diversion of funds for expansionmodernizationsetting up new projects helping or
promoting sister concerns.
8. Willful defaults, fraud, disputes, management disputes etc.
9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,
delay in settlement of payments subsidiaries by government bodies etc.,
61

External factors:
1. Scarcity of raw material, power and other resources.
2. Industrial recession.
3. Shortage of raw material, raw materialinput price escalation, power shortage, industrial
recession, excess capacity, natural calamities like floods, accidents.
4. Government policies like excise duty changes, Import duty changes etc.,
Conclusion Regarding Contributory Reasons
I have made a study of about 25 NPA accounts and the following are the important factors for
units becoming sick/weak and constantly accounts turning NPA in the order of prominence:
* Diversification of funds (No. 7 above – Internal factor), mostly for expansion
diversification modernization, taking up of new projects, is the single most prominent reason.
Besides being so, this factor also has significant proportion of cases, when compared to other
factors.
* Internal factor (No. 6 above), failure of business (product), inefficient management,
inappropriate technology, product obsolescence.
* External factor (No. 3 above), comprising industrial recession, price escalation, power
shortage, accidents etc.
* Time cost overrun during the project implementation stage leading to liquidity strain and
turning NPA into next factor (No. 2 above – Internal factor).
62

4.6 PROJECTION OF NPAS IN THE BRANCH OVER NEXT THREE YEARS USING
TREND ANALYSIS
The analysis focuses on projecting the Non Performing Assets of the branch over next three
years. The method used for this study is "Trend Analysis – Three year Moving Average
Method."
The study focused on measuring the Trend of Gross NPAs to Total Advances
The formula used for "Three year Moving Average" is:
A+b+c , b+c+d , c+d+e , d+e+f, …….
3 3 3 3
This is one of the flexible methods of measuring the trend. While applying this method, it is
necessary to select a period for moving average appropriately depending upon the availability
of the data. In this case the data available was forseven years and hence the Three-year moving
average found to be suitable for projecting the future trend.
Gross NPAs to Gross Advances
Year Gross
NPAs/total
Advance
Trend
1-2008 19.34
2-2009 4.09 12.14
3-2010 13.01 8.46
4-2011 8.28 9.25
63

5-2012 6.46 6.67
6-2013 5.26 5.08
7-2014 3.53
FIG 11: TREND ANALYSIS USING MOVING AVERAGE
FIG 12 : TREND ANALYSIS USING LINEAR TREND
64

From the above graphs, using moving average method and linear trend it can be seen that the
trend of gross npa/gross advance is declining and if the following pattern is continued , by the
year 2015-16 the trend line would meet the x axis indicating that there will be a large reduction
in NPAs reaching a point where there is no npa.
And it was found that last year there was reduction in NPA due to closure of few NPA accounts.
Previous to 2014, there was increase in NPA in the branch. It is the effort of the bank to bring
down the NPAs and avoid slippage . Therefore the branch is taking earnest efforts for
recoveries in NPA accounts and avoiding slippage. As a result there will be a tendency for
reduction in NPAs. And it is likely for the branch to continue this trend for the next three years
Advances are growing. Fresh accounts can turn NPA in future. Bank is taking utmost care to
avoid such instances. Head Office has set up Credit Hubs in HO and various regions for speedy
scrutiny of proposals. Such practices will control elimination of non credit worthy proposals at
the grass root level.
Further staffs are given consistent training in credit management and management of NPA
accounts.
Violation of instructions and policies of the bank is a serious offence. As a reponsible officer,
every body ought to comply the same. Such responsibilitiy/obligation also reduces ill practices.
Considering the above points and major thrust given by the bank and the obligatory forces,
there is the possibility of control of NPA accounts in future. However due to unavoidable
circumstances , beyond the control of the branch and the clients , fresh slippage can also
emerge.
4.7 ANALYSIS OF THE BANK’S PERFORMANCEFOR THE PAST 5 YEARS
65

FIG 13: CSB PERFORMANCE
YEAR 31.3.2009 31.03.2010 31.03.201
1
31.03.201
2
31.03.13
Deposits 6332 6978.35 8725.67 10604.87 12341.63
Increase in % 10.2 25.03 21.53 16.37
Advances 3533.85 4344.51 6302.55 7767.69 8851.52
Increase in % 22.93 45.06 23.24 13.95
NPA 171.78 149.29 192.45 182.93 210.86
Profit 37 1.65 12.18 25.9 32.67
Movement of NPA 31.03.2009 31.03.2010 31.03.201
1
31.03.201
2
31.03.2013
Opening balance 131.39 171.78 149.29 192.45 182.93
Additions 62.83 53.48 107.87 100.2 171.31
Reduction 22.44 75.97 64.71 109.72 143.38
Closing balance 171.78 149.29 192.45 182.93 210.86
TABLE 4: FINANCIAL DATA OF THE BANK
66

I have made a study on the banks performance by scrutinizing the year by year growth of
the deposits and advances and a corresponding analysis on the profit.
It is advised that the deposits should envisage an average growth rate of 25%. From the data
given it is noticed that the growth rate is achieved in the year 2011 only. On my enquiry, I
noticed the reasons for such increase in deposits are
a) Attractive rate of interest compared to other banks.
b) Canvassing new customers and opening of new accounts.
However in the following years the bank couldnot maintain the growth rate in deposits mainly
due to closure of bulk advances.
Looking into the banks advances,average growth rate expected was 30% .This target is given to
make immediate utilization of excess fund.From the table we can see that, similar to deposits
the target of advances is attained only in the year 2011. The reasons were the introduction of
attractive schemes and lower interest rates to good and trustable borrowers. Even though the
advances are increasing year by year the %increase in advances is showing a declining trend
after 2011 and the bank is not able to maintain this target.
NPA figures for various years and their movement is shown above. It is seen that the NPA is
reduced in 2010 and it was found that the main reasons for reduction were
i) Compromise settlements
ii) Restructuring of loans
iii) Upgradation of NPA accounts
iv) Closure of NPA accounts in normal process
In the consequent years we could see an increase in the NPA which was mainly due to
i) Failure of the newly disbursed bulk advances
ii) Low Recoveries
67

On the analyisis of profit for the past 5 years, we can see an increase in the profit from 2011.
But this increase is not satisfactory compared to the existing volume of business. And the
important causes are
i) Reduced number of high yielding advances
ii) Less low cost deposits
iii) Increased staff cost
iv) Higher operating expenses of the bank
v) Increasing number of NPA accounts
Compared to the staff strength, the volume of business has to be improved to a greater extend
,to increase the profit of the bank to a satisfactory level.
4.8 COMPARISON OF CSB WITH PEER GROUP BANKS IN KERALA
This is a comparative study made to know the position of different banks in terms of their
advances,deposits,profit and NPA to relate their overall performance.
FIG 14 : COMPARISON OF CSB WITH PEER GROUP BANKS IN KERALA
a. ADVANCE POSITION
68

YEAR 31.3.2009 31.03.2010 31.03.201
1
31.03.201
2
31.03.13 31.03.14
FEDERAL BANK 22392 26950 31953 44096.71 37755.9
9
-
SOUTH INDIAN
BANK
11847 15822.92 20488.73 27280.74 31815.5
3
36229.85
STATE BANK OF
TRAVANCORE
32971.58 38461.26 46044.23 55345.95 67483.6
2
69404.61
CSB 3533.85 4344.51 6302.55 7767.69 8851.52 -
DHANLAKSHMI
BANK
3196.05 5006.25 9065.15 8758.05 7777.06 7935.96
The above table and graph makes it very clear that State Bank of Travancore and South Indian
Bank is maintaining a steady growth in advances every year.Federal bank ,however has shown
a decline in advances in the year 2013 besides the steady growth in the previous years.
Comparing with these banks, the advance position of CSB is stagnant over the years and was
not able to make any significant improvement over the years. And it goes without saying that
Dhanlakshmi Bank is showing a declining trend in advances.
b. DEPOSIT COMPARISON
69

YEAR 31.3.2009
FEDERAL BANK 32198
SOUTH INDIAN
BANK
18092.33
STATE BANK OF
TRAVANCORE
48196
CSB 6332
DHANLAKSHMI
BANK
4968.81
The above graph looks exactly similar to the previous graph. From this ,we can infer that the
advances are given in direct proportion to the growth in deposits.
c. CREDIT DEPOSIT RATIO
It is the ratio of how much a bank lends out of the deposits it has mobilised. A higher ratio
indicates more reliance on deposits for lending and vice-versa. The regulator does not stipulate
a minimum or maximum level for the ratio. But, a very low ratio indicates banks are not
making full use of their resources. And a very high ratio is considered alarming because, in
addition to indicating pressure on resources, it may also hint at capital adequacy issues, forcing
banks to raise more capital. Moreover, the balance sheet would also be unhealthy with asset-
liability mismatches.
At present, the credit-deposit ratio for the banking sector as a whole is 75 per cent. In the case
of Indian banks, a credit-deposit ratio of over 70 per cent indicates pressure on resources as
they have to set aside funds to maintain a cash reserve ratio of 4.5 per cent and a statutory
70
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
AMOUNT(incrores)
FEDERAL BANK
SOUTH INDIAN BANK
STATE BANKOF
TRAVANCORE
CSB
DHANLAKSHMI BANK

liquidity ratio of 23 per cent. Banks can lend out of their capital, but it is not considered prudent
to do so.
CDR=(Advances/Deposits)*100
YEAR 31.3.2009 31.03.2010 31.03.201
1
31.03.201
2
31.03.13 31.03.14
FEDERAL BANK 69.54 74.74 74.28 76.53 77.15 -
SOUTH INDIAN
BANK
65.48 68.76 68.93 74.74 71.87 76.28
STATE BANK OF
TRAVANCORE
68.41 75.58 79.17 77.43 79.74 77.68
CSB 55.8 62.25 72.22 73.24 71.72 -
DHANLAKSHMI
BANK
64.32 70.52 72.34 74.58 69.424 65.4
It can be seen that Federal Bank ,South Indian Bank and State Bank of Travancore is keeping
up a good CDR Ratio and is increasing every year. CSB on the other side has improved their
volume of business to a greater extend from 2009 to 2011. The effort made by the CSB has to
be remarkably appreciated as this drastic hike is usually uncommon. However ,the ratio has
slightly decreased by 2013 which would be compensated in 2014. The CDR Ratio of
Dhanlakshmi Bank is decreasing steeply which is clear from their advances and deposits.
Presently,the recovery of bank is doubtful.
d. PROFIT COMPARISON
71

YEAR 31.3.2009 31.03.2010 31.03.201
1
31.03.201
2
31.03.13 31.03.14
FEDERAL BANK 500.49 464.55 587.08 776.79 838.17 -
SOUTH INDIAN
BANK
194.75 233.76 292.56 401.65 502.27 507.5
STATE BANK OF
TRAVANCORE
467.04 684.27 727.72 510.45 615.04 304.34
CSB 37 1.65 12.18 25.9 32.67 -
DHANLAKSHMI
BANK
57.45 23.3 26.06 115.63 2.62 -251.91
It is clear from the above graph that besides the steady growth maintained by SBT and SIB in
advances and deposits ,only SIB could maintain a proportionate growth in profit. The profit
growth rate of SBT is unpredictable as it is showing varyingtrend over the years. The profit
position of CSB when compared to previous years has an improvement. But when compared to
the peer group bank’s, the growth percentage is much lower. Contrary to the above , the
position of Dhanlakshmi Bank is very poor.
72

e. % NPA
YEAR 31.3.2009 31.03.2010 31.03.201
1
31.03.201
2
31.03.13 31.03.14
FEDERAL BANK 2.57% 2.97% 3.59% 3.35% 3.44%
SOUTH INDIAN
BANK
2.18% 1.32% 1.11% 0.97% 1.36% 1.19%
STATE BANK OF
TRAVANCORE
1.12% 1.66% 1.80% 2.66% 2.56% 4.35%
CSB 4.56% 3.29% 3.05% 2.36% 2.34%
DHANLAKSHMI
BANK
1.99% 1.54% 0.74% 1.18% 4.82% 5.98%
The above table and graph makes it very clear that the % of gross NPA in SIB is declining. It is
seenthat the gross NPA which was 2.18% in 2009 reduced marginallyevery year and finally
reached 1.19% in 2014. Dhanlakshmi Bank, SBT and Federal Bank is showing an increase in
their NPA’s over the years. Looking into CSB’s % of NPA, it is declining every year and it
goes without saying that CSB is taking good care and following ideal norms of granting
advances, so that the recovery is satisfactory leading to lower gross NPA.
73

f.CONCLUSION FROM COMPARISON
South Indian Bank
From the analysis of the above tables and graphs, comparing the main aspects, it can be
concluded that South Indian Bank is best performing bank in all parameters likeadvances,
deposits,CDR Ratio,NPA and Profit. Along with a steady growth in advances and deposits, SIB
could maintain a steady growth in profit by decreasing NPA’s gradually over the years.The
CDR Ratio is also showing an increasing trend.
State Bank of Travancore
Although SBT could maintain a steady growth in advances and deposits and a corresponding
increase in CDR Ratio, when looking into its profit ,the bank is showing a varying trend over
the years. This variability could be mainly because of the increase in percentage of NPA’s year
by year. So, I strongly comment that the profit of SBT could be increased to a greater extend
and the overall performance could be improved much above SIB if a serious action is taken to
arrest the slippage and recovery of NPA accounts
Federal Bank
Federal bank unlike the other banks is exhibiting a confusing statistic. By 2013 ,the bank had a
steep decline in advances and deposits,however the CDR Ratio has increased compared to the
previous years to 77.15%. The % of NPA is also increasing over the years. This may be due to
the decrease in the total advance position. Despite all these facts and figures ,the Bank is having
an increasing profit year by year and the bank stands above the other banks in terms of profit.
And I think the reasons for this increase in profit could be due to the intense effort made in the
reduction of operating expenses and staff costand an increase in the low cost deposits. The
existing advances could also be high yielding contributing to profit.
Dhanlakshmi Bank
74

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