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A REPORT ON

NPA MANAGEMENTAT

THE JAMMU AND KASHMIR BANK LTD

BYSHAHID AMIN ROLL No. 39

IN PARTIAL FULFILLMENT OF MBA(BA) BHARTI VIDYAPEETH UNIVERSITY

INSTITUTE OF DEVELOPMENT PUNE 2009

MANAGEMENT

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ENTREPRENEURSHIP

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PREFACEThis research project is a part of the Business Administration Course being taken up at Deptt. of Management Studies, Bharati Vidyapeeth University. I was provided opportunity to undergo training at The Jammu & Kashmir Bank Ltd. at its zonal office sopore Dist Baramulla my field of interest was to study the:

NPA Management OF THE J&K BANK LTD.

This project has been of great help in providing me an insight in to the real life working of an organization; it gave me a chance to apply, all I had learnt to practical situations, enhancing my understanding and image of the business world. This experience in decision making and practical application of knowledge has Contributed greatly to my growth both as a person and trainee.

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STUDENT DECLERATION

I declare that project entitled NPA Management at THE J&K BANK LTD. A critical and comprehensive Study of NPA Management of The Jammu and Kashmir bank is my own work. I also undertake that the work is purely academic and no part has been copied or taken from anywhere.

SHAHID AMIN M.B.A (BA) BHARATI VIDHYAPEETH UNIVERSITY

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ACKNOWLEDGMENTIt gives me immense pleasure to present the report of my project titled NPA Management AT THE J&K BANK LTD. This work would not have been possible without the assistance and guidance of a no. of people . I Would like to take this opportunity to thank each and every one of them. At first I would like to thank the management of the Jammu & Kashmir Bank Ltd. for providing me an opportunity to work as summer trainee with their Zonal Office sopore Disst Baramulla. I also express my sincere gratitude to my guide Mr. Riyaz Ahmad Wani Sr. Executive Manager Zonal Office sopore and Farooq Ahamad advance manager TP Baramulla for taking keen interest in my training/project work and giving me valuable guidance at every stage.4

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SHAHID AMIN MBA (BA-39)

Certificate5

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This is to certify that Mr. SAHAHID AMIN is a bonafide student of MBA (BA) 4Th trimester program in this institute for the year 2008-2010. As a part of the university curriculum, the student has completed the project titled NPA MANAGEMENT OF J&K BANK. The project report is prepared by the student under the guidance of our course coordinator. (Programme coordinator) Director Date: Place:

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EXECUTIVE SUMMARY

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EXECUTIVE SUMMARYOBJECTIVE OF THE RESEARCH:1. To know various types of Loan products and there Management Of

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J&K Bank Ltd. To Know the Non Performing Assets Of the bank To know the methods of provisions regarding NPA. To know the methods employed by the bank to recover Non Performing Assets. To know about the management of NPA. To get acquainted of banking activities.

SOURCE OF INFORMATION: PRIMARY SOURCE: Through structured questions. Face to face interview.

SECONDARY SOURCE: Records maintained by the bank. Websites.8

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RESEARCH METHODOLOGY:The study pertains to behavior aspects such as their perception, attitude and expectations towards the Loan products and provided by Jammu & Kashmir bank Ltd. An exploratory research design was adopted to conduct the study.

DATA USED:Both primary and secondary data was used .Bank broaches, diaries, books, other written material and banks website were used to collect secondary data.

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RECOMMENDATIONS:1. Marketing side of the bank needs improvement. 2. Much improvement is needed in HRD Department. The employees should be trained about new business trends and their motivation level should be improved. 3. The bank should come out with new and innovative methods to recovered NPA and should motivate customers to pay there dues in time. 4. There should be no delay in customer service. 5. The bank should provide easy and quick financial facilities to small scale industries, retailers.

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TABLE OF CONTENTSS.NO. 1. 2. 3. 4. 5. Chapters Introduction to the Bank 1O-15 Bank at Glance 16-18 Organizational Hierarchy& Board of Directors 19-22 Types of Loans And Advances 23-30 NPA Management Introduction Assets classification Provisioning Norms Recovery Conclusion Conclusion Bibliography and References 46 31-43 Page

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CHAPTER ONE

INTRODUCTIONTO

THE JAMMU KASHMIR12

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BANK LTD.

COMPANY PROFLEFounded 1938 Headquarters Jammu & Kashmir, India No. of Locations > 500 branches/offices Financial, Commercial Industry banks Employees 6833 Moneylenders have been part of Indian society since ancient times. Modern banking in India began some 200 years ago. First Bank in India was established under the name and style of bank of Calcutta in 1806(a presidency Bank).In 1840 Bombay presidency Bank and in 1843 Madras presidency Bank came into exisentance. In 1921, these three presidency Banks were merged as imperial Bank of India. In 1955, imperial Bank was renamed as State Bank of India.

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Aimed this scenario, entire banking in the State of Jammu and Kashmir was performed by traditional moneylenders and that too at exorbitant interest rates. At the same time some banks like Punjab National Bank, Grindalays Bank and imperial Bank of India functioned in the State to a limited extent. The role of these banks was reduced to the people of the State owing to the statutory limitations. Under this Scenario banks could not ameliorate the financial social position of the people of the State. To overcome this crisis, the then Maharaja of the State, His Highness Maharaja Hari Singh, conceived the idea to establish a bank to help people of the State to come out of the economic backwardness. The scheme of forming the bank was formulated by an eminent banker sir Sorabji N.Pochkanwala, the then Managing Director of Central Bank of India. The outcome of the efforts of Sir Sorabji resulted in the establishedment of the Jammu & Kashmir Bank Limited on October 1, 1938.And the Bank formally commenced its business on July 4, and 1939.The bank opened its first branch at Residency Road, Srinagar. Encouraged by the support of public, it opened its another branch at Jammu. By 1946, the number of branches of the bank went up to 12. Precisely, banking in the State of Jammu & Kashmir actually began in 1939, when Jammu & Kashmir Bank started its operation. Since then, with the continuous changes taking place in the financial services scenario, the banking in Jammu & Kashmir went under tremendous. Besides exhibiting its

Commercial character, the bank has been meeting the social obligation of the people of the State too. The Jammu & Kashmir Bank is the first of its nature and composition as a State owned bank in the country. The State government besides contributing half of the issued capital also appointed the bank as bankers for general banking and treasury business of the State government. In its formative years, the bank had to coup up several serious problems, particularly around the time of independence, when two of its branches at Muzaffarabad and Mirpur fell to the other side in 1947.However, the State14

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government came with assistance of Rs 6.00 lacto meet the claims. Following the extension of Central laws to the State of Jammu & Kashmir, the Bank was defined as a government companies Act 1956. The real growth of its operations and business started after 1969, the area of nationalization of major banks, when the union government announced control on banking. It began to emerge from its regional shell, opening branches beyond the State boundaries and emerged as a leading bank. In 1971, the bank was included in the second schedule of the RBI Act 1934.It had its first full time chairman following social control measures in banks in the country. Five years later (in 1976) it was declared an A Class bank. By the end of 1980, its branches numbered 212 with aggregate deposits of Rs. 191.67 corer and advance of Rs. 61.67crores. The bank became pioneer in the finance of road transport, horticulture and hostels to promote tourism and extended finance to the artisans to promote traditional handicrafts. In fact the bank was the first commercial Indian bank to introduce schemes for financing fruit crops on standing trees in the State of Jammu & Kashmir, a policy that was subsequently emulated by other banks elsewhere in the country. The bank expanded its area of operation and widened its credit base by financing schemes like integrated Rural Development Programmers (IRDP), SEEDY, PMRY, NRY and other self-employed programmers sponsored by the State and Central Governments. In 1976, Bank became the first and the only bank, which was permitted by the Reserve Bank of India to sponsor two regional banks, namely, Kamraz Rural Bank and Jammu Rural bank. The bank has also been entrusted with lead bank responsibility in eight of the fourteen districts and governorship of the State Level Bankers committee in J&K State. The bank has played a key role in the economic development of the State in particular and the country in general. In the last ten turbulent years, it was the only commercial bank to sustain economic and business activity as most of the nationalized banks in the State downed their shutters. During this difficult period, it was the J&K Bank alone that supported various aimed at alleviating poverty and generating self-employment opportunities. With a substantial increase in its capital base, the bank participating more extensively in financing of infrastructure projects. A number of leading corporate and blue chip companies as well as prominent public sector undertakings of the Indian15

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Governments have become part of its clientele. The financial of the bank are very strong. The banks debt instruments have been highly rated by CRISIL (Credit Rating Information Service of India Limited), which has reaffirmed its P1+rating of the banks certificate of deposits, including strong degree of safety with regards to timely payments. The bank is governed by the companies act and banking regulation act of India .It is regulated by the Reserve Bank of India and Security and Exchange Board Of India (SEBI).At the end of May 2006, the bank had 517 branches spread from Kashmir to Kanyakumari with 98%of its business computerized. The bank has been playing a vital role in the development of the economy of the state and bolstering industry, trade, commerce and agriculture in the state. The bank has put a commendable performance in all aspects of banking .The performance of J&K Bank, its growth, profitability, diversification of product portfolio, modernization of its operations and its achievements in other areas have made it one of top most banks of the country. Sri Sohan Lal Kothari was the first manager of the bank and the then chief Minister major general Roy Bahadur Dewan Bishan Das was appointed as the foundation stone of the Residency road Srinagar branch building. Since 1977 the bank has been responsible for payment of civil pension and receipt of various states taxes. Findings overall performances of the bank good, the RBI issued a license to the J&K Bank to deal in all types of foreign exchange presence in 1980. The bank installs first ATM in valley connected globally to all master card networks ATMs.All the branches of the bank are connected through VSAT on 10-08-2001 the bank took over the Srinagar branch of standard chattered Grindlays bank. The bank inaugurated its new corporate headquarter building at M.A road Srinagar-on 2 september 2001. J&K Bank is today one of the feasted grooving bank of India with a network of 517 branches offices spread across the country offering world class banking products and service to its customers. Today the bank has the status of value driven organization and is always working towards building trust with shareholders, employees, customers, borrowers etc.for which it has adopted strategy directed to developing a sound foundation of relationship and trust aimed at achieving excellence which of course comes from the womb of good corporate governance.16

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The J&K Bank has recorded an outstanding achievement in the key areas of operations. The total deposits as on 31-03-2008 were Rs. 28593.263 crores against Rs.25194.2947 crores for the fiscal year 2007-2008. Thus deposits have shown a growth of 13.49%.The reserves and surplus of the bank grove by 13.8% from Rs 2232.335 cr. of the previous year to Rs 1960.241 cr. on ending March 2007. Other borrowing of the bank increased from Rs. 620.189 Cr. To 751.78 Cr. Other liabilities for the fiscal year 2007-2008 ending 31 March stood at Rs 1102.015cr against Rs. 832.31 cr. for the previous year. The Bank has made the total investment of Rs. 857.766 cr. on 31 March 2008 the advances have increased from Rs.1707.799 cr. as on 31 March 2007 to Rs. 1888.26118 cr. as on 31 March 2008 showing a growth of 10.5% over the previous year. The fixed assets of the bank amount for Rs.19.2 cr. and other assets are worth Rs 48.6 cr. The J&K Bank has the total cash and balance with RBI Rs.321.996677 cr. and balance with banks and money at C&S notice is Rs. 121.727.cr as on 31-08-2008. In the state of Jammu and Kashmir, the J&K Bank has been the major contributor in providing credit to poor artisans, retailers, small business, agriculture and other allied activities, small scale industries and technically qualified entrepreneurs. In these sectors with Rs 137.89 cr. in agriculture sector, Rs 145.38 cr. in industries sector and Rs 241.09 cr.in service sector. J&K Bank having a strong network of 410 branches across the state has made total advances of Rs 5941.02 cr in J&K State as on ending March 2006 as against its total deposits of Rs 12236.98 cr.Thus achieving a current deposit ratio of 48.55%. Maintaining a progressive outlook, the J&K Bank is keeping pace with the changing technology. The bank continues to leverage information technology as strategic tool for its business operators.17

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The IT strategy emphasizes enhanced level of customer service through 24x7 hours availability, multi channel banking and cost efficient through optimal use of electronic channels, wider market reach and opportunities for cross selling. Currently more than 90.5% of the banks business is computerized. The J&K Bank is the first bank to launch ATM cum debit card in Kashmir. The bank launched ATM cum Debit card J&K Bank global access card in collaboration with the master card international. The bank has grown the number of ATMs to 182 at the end of March 2006. The bank has launched the three variant types of credit cards with different limits with an interest free credit facility for 20 to 50 days at accept at 125000 mercantile establishments across the globe. The customers have the access to their money for all the 365 days of a year and 24 hours per day. The credit and debit cards of the bank are accept of cash with draws at 7000 ATMs in India and 1 million ATMs across the globe. To maximize value to its customers, the innovation in products and improving the quality and speed of the services in the Hall Mark of banks business strategy. The bank has launched several unique financial and deposit products like education loans, car loans, consumer loans,

Flexi deposit recurring plus and Mehandi deposits schemes to meet the needs of customers. The bank has recently won the prestigious Asian banking awards 2004 for Customer convenience programmmes. The awards is given each to recognize and honor the bank in Asia pacific region for outstanding innovating and world-class products services, projects and programmers. J&K Bank has embarked on brand strategy exercise and engaged removed consultants to work on business development possibility and engaged over all processes that could be improved in the future to enhance the overall profitability of the bank.18

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This would increase branding of the banks products in order to increase the value for its customers. And now with the right kind of leadership efforts of dedicated employees and State of art technology, the J&K Bank is on the path of growth and success building trust profit, peace and property.

CHAPER TWO

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BANK AT GLANCE

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BANK AT A GLANCEPROFILE: Incorporated in 1938 as a limited liability company. Governed by companies Act and Banking regulation Act of India. Regulated by the Reserve bank of India and SEBI. Listed on National Stock Exchange (NSE) and Bombay Stock exchange (BSE). 53 per cent owned by the Govt. of J&K. Rated P1+by standard and poor-CRISIL connecting highest degree of safety. Four decades of uninterrupted profitability and dividends.SHAREHOLDING PATTERN (AS ON OCTOBER 24, 2008):

Unique characteristics: one of a kind Private sector Bank despite Government holding 53% of equity. Sole bankers and lender of last resort to the Govt.of J&K.21

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Plan and non plan funds, taxes and non-taxes revenues, routed through the bank. Salaries of Govt officials disbursed by the bank. Only Private sector designed as agent of RBI for banking business. Collect taxes pertaining to Central Board of Direct Taxes in J&K.

INFRASTRUCTURE. GLOBAL STANDARDS The fastest growing Bank with 510 branches across the country. Over 98 per cent of the business computerized. Banking, Tele-banking and SWIFT facilities available. Internet Banking, SMS and Mobile Bank provided. ATMs connected globally to all Master card Networked ATMs. Mobile ATM Service available-first of its kind in Northern India. J&K bank Global Access Debit card cirrus and Maestro enabled. Own Credit card. Live on RTGS System of RBI. FINANCIAL SERVICES PORTFOLIO: ONE STOP FOR ALL FINANCIAL NEEDS. Insurance joint venture with MetLife international. Distributor of : Life Insurance products of MetLife (India) Pvt. Ltd. Non-life insurance products of Bajaj Allianz General Insurance Co.Ltd Providing depository Services. Offering Stocks Barking Service. Collection Agent for utility Services provided by State and private sector.22

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NEW BUSINESS INITIATIVES: SHAPING OURSELVES TO SERVE BETTER. To meet the growing needs of the economy, in tune with the competitive banking innovative financial products. Monetizing the Banks branch network. Third party products distribution. Investment Banking. Offshore Banking.

CHAPTER THREE

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ORGANISATIONA L HIERARCHY & BOARD OF DIRECTORS

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BRIEF PROFILE OF DIRECTORS: HASEEB AHAMD DRABOO (CHAIRMAN & CHIEF EXECUTIVE) Haseeb Ahmad Draboo, Chairman and Chief Executive of the bank is a professional economist who has been on the board of directors of the bank since 11th July 2003. Possessing a diverse skill set and wide ranging experience, he started his professional career with a perspective planning division of the planning commission. Later, he worked as consultant to the economic advisory of the Prime Minister. His final stint with policy making was with the 10th finance commission. At present, he continues to work as the economic advisor the Government of Jammu and Kashmir, a position he has held January 2003. he is credited with having conceptualized wide-ranging economic and physical reforms of the Govt. he has been inducted by the planning commission to its working group on resources for the 11th five year plan. MS VERMA: M.S. Verma serves on the Board of a number of a number of public and private sector companies and is associated with several educational and research institutions in a advisory capacity. He is Vice-President of the governing body of the National Council of Applied Economic Research and member of the Board of Governors of the Institution of Economic growth, University of Delhi. G.P. GUPTA: G.P. Gupta a post graduate in commerce, having combined stints in both academic and public sector, is also the Ex-Chairman and Managing Director, IDBI, and has served on several distinguished positions such as Chairman, UTI, Chairman, SIDBI, Chairman, National Stock Exchange of India Ltd., Member Life Insurance corporation of India , Director, ExportImport Bank of India, Director, Infrastructure Development Finance Company Ltd., Director, Indian Airlines Ltd., Director, Discount & Finance House of India Ltd., Director, Securities Trading Corporation Of India Ltd., Council Member, Indian Institute of Bankers and President, Entrepreneurship Development Institute of India Ahmadabad.25

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B.B. VYAS (IAS): Bharat Bushan Vyas belongs to the 1986 batch of Indian Administrative Services. During his probation he was awarded Gold Medal by Lal Bhadur Shastri National Academy of Administration, Mussoorie for best all round performance. Mr. Vyas has held several distinguished positions both in State and Centeral Governments. In the Government of J&K, Mr. Vyas worked as District Megistrate/ Deputy Commissioner of Poonch, Udhampur districts. He is presently holding the position of Commissioner/ Secretary to Government Finance Department. EXECUTIVE DIRECTORS: ABDUL RAUF FAZILI MUSHTAQ AHMAD B.L. DOGRA UMAR KHURSHEED TRAMBOO SECRETARY TO BOARD: PARVEZ AHMAD EXECUTIVE DIRECTORS: A.R. FAZILI..(Business Operations)26

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MUSHTAQ AHMAD(Corporate Functions) PRESIDENTS: ABDUL MAJID MIR(Chief Financial Officer) ALOK KUMAR MEHTA.(Chief Peoples Officer) MANZOOR AHAMD SHAH...(Chief Strategist/Chief Tech. Officer) NISAR AHAMD KOUL...(Chief Credit Officer)

AJIT SINGH..(Chief Regulatory Officer) RAJ KUMAR(Chief Consultant) Treasury

VICE PRESIDENTS: GHULAM MOHAMMAD RESHI(Assist Monitoring and Information) GHULAM AHMAD REGOO... (Finance and Risk Management) GHULAM AHMAD BEIGH.(Strategy and Business Development) MOHAMMAD BASHIR-UL-ISLAM...(Treasury Operations) SUMAN DURASWAL..(Retail Credit) PARVEZ AHMAD(Company Secretary)27

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MUKHTAR AHMAD KAWOOSA..(Insurance)

CHAPTER FOUR

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FINANCIAL PRODUCTS

FINANCIAL PRODUCTS:LOAN PRODUCTS:29

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PERSONAL LOAN: With the changing times, the luxuries of yesteryears have become basic necessities of today ensuring that you dont miss out living a quality for yourselves and your family. Our whole suite of personal finance products helps you in owning all basic necessities of life and proudly so be it having your own sweet home, renovating and refurbishing it with items like: TV, refrigerator, washing machine etc. or bring a proud owner of a stylish car, we have a loan product for every such need. CONSUMPTION LOAN: Eligibility: Permanent employees of central/state Govt., public sector undertakings, autonomous bodies, institutions, having at least 3 years of active remaining services. Amount of Loan: Maximum Rs.7.00 Lakh or 30 times gross monthly salary Gross deductions including installments of the proposed loan not exceed 60% of the gross income. Margin: Nil Repayment period: The loan along with interest would be repayable in 84 monthly installments beginning one month after the disbursement of the loan. HOME LOAN: Eligibility: Professionals and self-employed like Doctors, engineers, chartered accounts, advocated with minimum standing of 3 years. Employees of Govt./ semi-governments departments, public sector undertakings with minimum 3 years service. Purpose:

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Purchase with construction of house/flat renovation/additions/alterations of existing house, purchase of land Margin: For construction/purchase of house: 15% For renovation: 25%

Repayment period: Upto 20 years including 9 months moratorium by equal monthly installments. Rate of interest: Repayment Period 5 years 5 to 10 years 10 to15 years Above 15 years Floating ROI Upto Above 2 Lakh 2 Lakh 11.5% 13.25% 11.75% 14% 12.75% 14.25% 13% 14.75% Fixed ROI Upto 2 Lakh 12% 13% 13% 13% Above 2 Lakh 14.25% 15% 15% 15%

CAR LOAN: Eligibility: Employees of Govt./semi-Government departments, autonomous bodies, public sector undertakings, individual, firms, limited companies having a minimum 5 years active service. Security: Hypothecation of vehicle, third party guarantee of one person, Quantum of Finance: Maximum 10 Lakh. Margin: 20% of the cost of the vehicle.

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Repayment: 7 years in equal monthly installments Rate of Interest: 12 % upto 4 Lakh 13.50 % above 4 Lakh

EDUCATION LOAN: For bright students with a good academic background and pursuing graduation/post graduation courses in Science/Arts/Commerce, Medicine, Surgery, Hotel Management, Design, Architecture, Biochemistry, Veterinary Science, ICWA, CA, CFA, Computer Certificate Courses/leading to Diploma/Degree, MCA, MBA, MS etc. Eligibility: Should have secured admission to professional/technical courses in domestic/foreign universities/institutions through entrance test/selection process. Margin: Upto 5 Lakh: Above 5 Lakh i) Studies in India: ii) Studies Abroad: 5% 1532

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Repayment: Moratorium: Course period + one year or Six months after getting Job Whichever is earlier? The loan is to be repaid in 5 to 7 years after moratorium period. Rate of Interest: 2.5 to 5 Lakh 5 to 10 Lakh 10 to 20 Lakh 11.5% 12.5% 14.5%

J&K BANK DASTKAR FINANCE: J&K Bank in its endeavor to promote trade, industry and to preserve the traditional arts and crafts of the state devised a scheme aimed at the financial needs of the artisan community aptly called JK Bank Dastkaar Finance. The scheme provides easy and soft credit to craftsmen engaged in the trade and helps them to set up their own ventures, weeding out the middlemen responsible for their exploitation. Keeping in view the specific production cycle associated with this trade the loan comprises of a term loan and working capital components. The disbursement is phased in quarterly installments and aligned to the status of WIP (work in Progress). This ensures proper end use, quality control and timely completion of work. The weavers/ artisans are allowed a reasonable time for the Repayment of the bank finance. To make the credit hassle free, no Collateral /third party guarantee is required. The product has been designed on the banks philosophy of confidence based lending as opposed to collateral based lending. There is no requirement of any collateral security under this product. The legal documentation has been kept at bare minimum with only two documents to be executed for disbursement of the loan. In order to increase the reach of this product the database of the weavers/ artisans available with various trade associations is being utilized besides identification of people by concerned branches of the bank.

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JK BANK ZAFRAN FINANCE SCHEME: Kashmiri Saffron the most expensive spice in the world has a unique aroma and flavour. It is considered worlds best because of its scientifically proven superior quality, hence commanding a price much higher than the saffron from any other part of the world. Saffron is extensively used for culinary and colouring purposes. Besides, because of its medicinal qualities, it is an important ingredient for both traditional (Ayurvedic and Unani) and allopathic medicines. Its demand in the markets, both domestic and international, is growing. Saffron is a niche-economy, involving hundreds of Kashmiri families. Still, the recent decline in saffron production is going to affect this segment of state economy. In 2003-04, around 6.98 metric tonne of saffron was exported while as the exports declined to 5.19 metric tons in 2004-05. With a view of preserving this prized spice, J&K Bank tailored a specific product named JK Bank Zafran Finance. Its purpose is to provide adequate, timely and need-based finance to saffron growers. The scheme is for all saffron growers, especially the smaller and marginal ones including even the contract farmers engaging in or intending to start its cultivation. The quantum of finance is proportionate to the land holding of a grower. The product also provides an additional finance for post harvest and packaging. A Product that covers the entire plantation and production costs including plant material, agricultural machinery, labour etc. this scheme is provided to Saffron growers. The disbursement is done in two phases; 60% in the first year and 40% in the second, when the growers are in need of funds. The repayment of the advance is scheduled within the four year growing cycle of saffron. Refinancing facility can be availed for fresh plantation of the crop. The documentation has been simplified and kept minimum to make it hassle-free. With a view of preserving this prized spice, J&K Bank tailored a specific product named JK Bank Saffron Finance. Its purpose is to provide adequate, timely and need-based finance to saffron growers. The scheme is for all saffron growers, especially the smaller and marginal ones including even the contract farmers engaging in or intending to start its cultivation. The quantum of finance is proportionate to the land holding of a grower. The product also provides an additional finance for post harvest and packaging.

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Other such products like Khatamband Craftsmen Finance for Khatamband Craftsmen and Ghiri Finance for taking complete care of the expenses involved in procurement processing sale and export of walnut kernels. AGRICULTURE AND ALLIED FINANCE: Agriculture is the mainstay of our economy but unfortunately being financed mainly from outside of the banking sector. Our rural finance strategy envisages extending the frontier of formal finance ton incorporate agriculture along with other rural economies on principles of sustainability, efficiency and significant outrage. Rate of Interest: Upto .50 Lakh: 12.5% .50 to 2.00 Lakh 13.5% 2.00 to 5.00 Lakh 14.0% 5.00 to 20.00 Lakh 14.5% J K BANK ALL - PURPOSE AGRI-TERM LOAN: The product aptly named as All-Purpose Agri-Term Loan has been designed in a way that lays special emphasis on small and marginal farmers and provide sufficient and, more importantly, timely finances to the farmers engaged in all types of agricultural and allied activities. The product aims to cater to the needs of small farmers within very little land holdings in the rural and semi-urban areas of the state. The product is given to the people engaged in any kind agriculture and allied activities. Horticulture, Sericulture, Animal Husbandry, Plantation and Fisheries can be financed through this product. The objective has been to provide easy finance to needy farmers through regular channels of finance and to wean them away from the exploitative circle created by the non-banking intermediaries. For that purpose, the product has been devised in such a way that hitherto un-banked customers get an easy access to banking services through simple and affordable documentation process. A maximum credit of Rs 1.00 Lakh,35

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depending upon the Agri-activity to be financed is provided but multiple activities can also be considered for finance. The product is offered at affordable interest rates. Rate of Interest: Upto .50 Lakh: Above .50 Lakh 13.0% 14.0%

APPLE ADVANCE SCHEME: Apple, the king of Kashmir fruit, lies at the heart of horticultural economy of J&K state. Every year hundreds of truckloads of apple reach the markets of Delhi, Punjab, Jaipur, Bangalore, Chennai and Ahmadabad. The potential yearly returns on the fruit, as per some of the findings, stand at somewhere between Rs. 2000 to 2500 crores. Almost 2.5 million people of the state are directly or indirectly associated with the apple business. J&K Banks specially designed product named as Apple Advance has struck at the root of this exploitative system that thrived on scant or untimely fund availability and at times even lack of finance through formal channels. Last year, after a detailed study of the apple economy, a need-based, time specific product was introduced. The product incorporated all the critical inputs necessary to make our financial intervention effective and growerfriendly. Apple Advance was introduced to meet the comprehensive requirements of the apple growers with distinctive features like reduced margins, higher scale of finance that includes production and post harvest maintenance, auto renewal of limits and most importantly very easy and hassle free documentation. With an effective product monitoring mechanism in place, the scale of finance was increased from Rs 1.50 Lakh per acre from Rs 40,000 per acre. Regular revision of scales of finance is carried out to match the rising production and marketing costs. The objectives that guided the customization of the product included the easy access, simplified documentation, `avoiding redundancies, shortened process time and flexible fund limit. Even for the growers who have just leased orchards can avail finance under the scheme. With hypothecation of fruit crop and Third Party Guarantee of 2 persons as36

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security and no emphasis on collaterals, the borrower is also allowed withdrawals up to 50% of the previous years limit till the bank renews the sanction for the next year. The process has been made extremely easy and hassle free to ensure that comprehensive requirements of Apple growers to take care of Production & Marketing Costs are fulfilled adequately and in time. Simplified legal documentation has been made to expedite the loan processing. Rate of Interest: Upto .50 Lakh: 12.5% .50 to 2.00 Lakh 13.5% 2.00 to 5.00 Lakh 14.0% 5.00 to 20.00 Lakh 14.5%

BUSINESS LOAN: Right from financing the contractors, providing credit to transporters, funding the working capital of shopkeepers, providing financial solution to business men to corporate, SME and infrastructure finance, our regular loan products cater to all kinds of business of industrial activities in the state and rest of country. Rate of Interest: Upto .50 Lakh: 13.0% .50 to 2.00 Lakh 14.0% 2.00 to 5.00 Lakh 14.5% 5.00 to 20.00 Lakh 15.0% MICRO-FINANCE:

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J&K Bank is working on empowering people and demonstrating that people with lesser means can be reached profitably. For us, at J&K Bank, empowerment is the process of enhancing the capacity of individuals or groups make choices and to transform those choices into desired actions and outcomes. One of the many of such products is our craft development loan which caters to the needs of our highly talented and skilled artisans engaged in Wood Craving, Paper Mache, Namdasazi, Copper Smithy, Willow Wicker and Kangri making etc. Likewise all our other such products have been designed keeping in view the seasonal and craft specific requirements.

CHAPTER FIVE38

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NPA MANAGEMENT

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IntroductionBanks derive their major source of income by way of interest on advances and investments .Interest is charged to the asset and then recovered from the party /borrower concerned. Thus income is booked initially on accrual basis. However, if the bank is not able to get/recover interest from the counterparty within reasonable time, then the income should not be accounted for or recognized, till it is actually received. Thus, accounting for interest is changed to a mercantile one. The interest in this situation becomes a non performing one. We are going to see the classification of assets into four main categories and their sub-groups. We shall then proceed to discuss the provisioning norms based on the classifications as well as provisioning have been made fairly objective over a period of time.

ASSET CLASSIFICATIONIn august 1991, a high level committee, headed by Mr M.Narsimham was appointed to examine various aspects of our financial system. One of the important recommendation of Narsimham committee was that balance sheet of the banks should be transparent and comply with international accounting standards .The committee recommended that banks should adopt uniform accounting practices in regard to income recognition and bad debts provisioning. In particular, income recognition of non- performing assets should not be an accrual basis but on record of recovery. The committee also suggested that provisioning should depend upon a proper classification of assets, which in turn should be based on objective criteria. Following these, the Reserve bank of India issued guidelines/instructions to banks in April, 1992 for classifications of assets. Initially an advance was treated as non-performing one, if the interest/installments remain unpaid for 90 days. Narsimham committee also recommended that the assets should be classified into four broad categories and provisioning should be done based on the classification of assets. The four categories are as follows (a) standard assets (b) sub-standard assets, (c) Doubtful assets, and (d) loss assets.40

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An asset becomes non-performing when it ceases to generate income for the bank. From 31 march, 2004 an advance (other than agriculture advance) is classified as NPA, where (a) Interest or installments remain overdue for more than 90 days in respect of a term loan (b) The account remains out of order in respect of an overdraft/cash credit for more than 90 days. (c) A bill remains overdue for more than 90 days in case of bill purchased/discounted. (d) Any amount to be received remains overdue for more than 90 days

In case of agriculture advance, I) A loan granted to a short duration crop will be treated as NPA, if the installment or interest there on remains overdue for two crop seasons and ii) a loan granted for long duration crops will be treated as NPA, if the installment or interest remain unpaid one crop season. (Long duration crop would be the ones for which the crop season is longer than one year.) Ones the account becomes NPA, it goes through a process of ageing where asset classification shall progressively deteriorate. The first stage of NPA is sub-standard asset. The account continues to be sub-standard for a period of twelve months, as per the present norms The asset would be classified as Doubtful one, if it remains substandard for 12 months. Under doubtful category, there are three sub-categories viz. Doubtful-I, Doubtful-II, doubtful-III. For a period of 12 months it remains in Doubtful-I, for the next 24 months, It remains in Doubtful-II and then migrates to Doubtful-III category. A loss asset is one where loss has been identified, but the amount has not been fully written off. Such asset is considered as uncollectible, unrealizable. The position of classification is summarized below: Standard Asset : not NPA. Sub-standard Asset : Twelve months period after becoming NPA Doubtful Asset : Substandard for 12months or more. Loss Asset : Asset becomes uncollectible/ unrealizable.

PROVISIONING NORMS41

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A non per-forming asset causes two fold impact on the profitability of the bank. On one hand, the bank ceases to interest on these assets and thus is deprived of its legitimate income from the assets. On the other hand, the bank is required to make provisions for this asset, depending on the classification /category of the asset and Value of security, if any. This makes a further dent in the profitability of the bank. The Reserve Bank of India introduced the system of the asset classifications and provisioning In with international practices for the first time in 1993. The norms underwent several changes during the last 12 years. We peruse the current norms, which are applicable as on 31 march, 2005. Depending on the age of a NPA, the classifications of the asset changes. With passage of time, probability of recovery diminishes and hence requirement for provisioning goes up. Some consideration / weight age is given to value of the security as well as, while deciding the provision. To begin with sub-standard assets are divided into two sub classes viz. Secured and Unsecured ones. Unsecured asset are those, where the realizable value of security is not more than 10% of the outstanding dues. For sub-standard secured assets _ denotes by code 21 provision is to be made at 10% of the outstanding dues. In the case of sub-standard unsecured assets denoted by code 22 provision requirement would be 20% of the outstanding dues.

As we have seen, doubtful category consists of three sub- categories doubtful-I, doubtful-II and doubtful-III, based on the age in the doubtful category. Doubtful-I category denoted by code 31- represents first 12 months in doubtful category. The provision category for this subcategory is 20% of realizable value of security (RVS) plus 100% Of the short of security. We shall take one example to clarify the position . Suppose, there is an asset of Rs 120 in the Doubtful I category and the realizable value of security (RVS) is Rs 90. Then the provision requirement would be (20% of Rs 90 + (120-90) i.e. Rs (18+30). Thus, provision requirement for this asset of Rs 120 in Doubtful-I category will be Rs 48. Doubtful-II category- denoted by code 32- represents the period of further 24 months in the doubtful category. This means, a NPA during 24 months to 48 months belongs to D-II category. Provisioning required in this category is 30% of the realizable value of security (RVS) plus 100% 0f the42

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shortfall in security. In the case of above mentioned example, if the asset was to belong to D-II category, the provisioning requirements would be as follows -30% of Rs 90 + (120-90) i.e. Rs (27+30). Thus provision requirement for the asset of Rs 120 in D-II category, with RVS of Rs 90, would be Rs 57. Accounts which are NPA for over 48 months (i.e. doubtful category for over 36 months) are classified under Doubtful-III- denoted by code 33category. Accounts in D-III category require 100% provisioning. In the above mentioned example, a provisioning of entire Rs120/- will be required in D-III category. Loss assets denoted by code 41- are uncollectible asset which does not have any security at all moves from sub-standard category to loss category. Provisioning requirement for Doubtful-III asset and loss asset is the same viz.100%.

CAUSES OF AN ASSET TURNING NPA(A)Internal (within control of bank). Improper selection of beneficiary. Defective appraisal. Lack of proper supervision. Stress on quantity rather than quality. High volume of transaction. Untrained staff. Contigency approach. Financing non-viable projects. Unscientific repayment schedule.

(B) Reasons beyond control of bank but with in control of borrower. Misutilisation.43

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Diversion of income generated. Delay in completion of project. Disposal of asset. Willful default. Inadequate knowledge. Misguidance by others. (c) Reasons beyond control of bank as well as borrower. Insufficent incremental income. Natural calamities Death/phy social disability. Change in Govt policy. Lack of Govt support. Lack of cooridination among agencies. Abject poverty/illiteracy. Social compulsion. Competition. Product obsolescence. Technology obsolescence.

Illustrative Symptoms bankers view point)

Of

Business

Failure(from

* Non-Submission/delayed submission of stock/Receivable statement and Quarterly/annual operating data. * Unsatisfactory operation/ cash drawings/return of bills. * Dishonor of bills, delay in retirement/return of bills. * Reduction in credit summations- due to opening of account with another bank. * Delay in payment to creditors/ invoking of guarantees by beneficiaries. * Constant use of c/c limit to the hilt. * Slow turn over /pling up of inventory. * Request for reduction of margin/stoppage of overvaluation of stock. * under-utilization of capacity/stoppage of production/closure of factory. * Continuous cash losses resulting in erosion of Tangible Net Worth. * Chronic default in payment of interest installments /statutory liabilities. * Failure to funds (for promoting allied concerns). * High rejection/scraps. *Large number of law suits against the company.44

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*Delay in implementation of the project. *Any major change in management pattern/ share holding.

Ramifications Of NPAsReduced profitability: Provisioning to be made to cover default / credit risk adversely affect. Dividend to be paid to the investors. Salary and other benefits to be given to the employees. Investments to be made in technology, infrastructure etc. Capital Adequacy Problem: only 1.25% of risk weight age Assets out of the entire provisioning made by a bank is included in tier II capital leading to . Reduced lending. . Reduced Profitability. . Overall reduced growth. Capital Account Convertibility: Tavapore committee recommended that CAC should not be introduced unless the NPAs of banks come down to less 5%. Asset Liability Management: sub standard Assets are taken in 3 to5 years time bucket and Doubtful/loss assets in more than 5years time bucket creating mismatch in the earlier (e.g. 29d- 3 m, 3 m- 6 m-1 year-3 year) Both for liquidity and an interest rate risks management Overall Image and Rating of the bank: . Increased risk perception about the bank relating to investment, lending, Refinance etc. Leading to increased cost of borrowing and reduced profitability. . Attracting penal action by RBI including refusal of license to open branches in India. . Difficulty in obtaining license to do business overseas. . CAMELSC Rating by Reserve Bank of India. Capital Adequacy Asset Quality Management Earnings Liquidity Systems Control & Compliance45

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Illustrative strategies For Reducing NPAs 1 Replacement /Rescheduling of Loans 2 Rehabilitation of Potentially viable units 3 Acquisition of sick units 4 Compromise and settlement with borrowers 5 Debt restructuring of corporate and SME Accounts 6 Enforcement of securities under SARFAESI ACT, 2002 7 Sale of financial assistance to assets reconstruction securitiesation companies

8 Sale of NPAs 9 Settlement of claims with DIGC/ECGC 10 Establishment of special loan Recovery Branches and posting competent staff to these branches 11 Legal Actions A Recovery through Debt Recovery Tribunals/lok Adalats B Certified Proceeding under State Recovery Acts C Filling of suits including summary suits in civil courts D criminal action against willful Defaulters 12 Write off MISELLANEOUS 1 Improving credit Appraisal, Monitoring supervision and Follow-up 2 Appointment of agents 3 Efficient credit information systems 4 Greater Accountability on the part of Borrower Particularly Corporate ILLUSTRATIVE STEPS WHICH MAY BE TAKEN BY THE CONTROLLING OFFICES OF COMMERCIAL BANKS FOR REDUCING NPAS Step 1 Study the problem of NPAs: Branch-wise, amount-wise and age-wise Step 2 Formulate a loan recovery policy and several strategies for reducing NPAs Step 3 Create special recovery cells at HO/ZO/RO/ other controlling offices46

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Step 4 Identify Critical branches for recovery Step 5 Fix branch-wise and region/zone-wise targets for recovery and draw time bound action programmers for the branches/ROs/ZOs etc to enable them to achieve their respective targets Step 6 Select proper strategy (including combination of strategy) and techniques for solving the problem of each critical NPA on a case to case basis and common strategy and technique for other NPAs. Step7 Monitor implementation of the time bound action plan drawn Step8 Take corrective steps wherever necessary and change/modify the original plan, if necessary. THE SECURITISATION AND RECONSTRUCATION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INYEREST ACT,2002 A) Important Provision of the ACT Chapter 1: Preliminary Definition 1 Asset Reconstruction means acquisition by any securitization company or reconstruction company of any right or interest of any bank or financial institution for the purpose of realization of such financial assistance;

2 Borrower means any person who has been granted financial assistance by any bank or FI or who has given any guarantee or created any mortgage or pledge as Security for the financial assistance granted by any bank or FI and includes a person who becomes borrower of a securitization company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or FI in relation to such financial assistance 3 Debt has the same meaning as in sec 2(g) of RDDBFI Act1993. 4 Default means nonpayment of any principal debt or interest there on or any other amount payable by a borrower in any secured creditor consequent upon which the account of such borrower is classified as nonperforming assets. Sec2 (I) (j) 5 Financial Asset means debt or receivable and includes47

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A claim to any debt or receivable or part thereof whether secured or un secured. (ii) An debt or receivables secured by , mortgage of or charge on , immovable property; (iii) A mortgage charge ,hypothecation or pledge of immovable property; (iv) Any right or interest in the security , whether full or part under lying such debtor receivable (v) Any beneficial interest In property whether movable or immovable or in such debt receivables whether such interest is exiting , future, accruing, conditional or contingent (vi) Any financial assistance 6 Hypothecation means a charge in or upon any movable property , existing or future created by a borrower in favor of a secured creditor with delivery of position of the movable property to such creditor as a security for financial assistance and includes floating charges and crystallization of such charge into fixed charge on movable property 7 Non performing Assets means an asset or account of a borrower which has been classified by a bank or financial institution as sub standard ,doubtful or loss assets, in accordance with the directions or guidelines relating to asset classification issued by the regulatory /administering authority/body or by Reserve Bank as the case may be. 8 Obligor means a person liable to the originator whether under a contract or other wise to pay a financial asset or to discharge any obligation in respect of a financial asset, whether existing future, conditional or contingent and includes a borrower; 9 originator means the owner of the financial asset which is acquired by a securitization company or reconstruction company for the purpose of securitization or asset reconstruction 10 Securitization means acquisition of financial assets by any securitization company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise; 11secured creditor means any bank or FI or group of banks or FIs and includes: (i)Debenture trustee appointed by any bank or financial institution(i)

48

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(ii) Securitization company (sc) or reconstruction company (Rc) whether acting as such or its managing a trust set up for securitization /reconstruction; (iii) any other trustee holding securities on behalf of a bank or FI I whose favor security interest is created for due repayment by any borrower of any financial assistance. Chapter II: 1 Registration of securitization/ Reconstruction companies 2 Acquisition of right or interest in financial assets 3 Issue of Security By Security Reconstruction Company 4 Measures for asset reconstruction 5 other functions of security Reconstruction Company 6 Regulation of disputes. Chapter III: Enforcement of security interest 1 Notwithstanding anything u/s 69A in TPA 1882 without intervention of any court tribunal the secured creditor may enforce the security interest. 2 The secured creditor may issue a notice in writing to the borrower of NPA account with details of amount payable by him and the securities intended to be enforced in case of his failure to pay by the stipulated date and giving him 60days time to adjust his dues in full. 3 If the borrower makes any representation /raises any objection on receipt of notice the secured creditor shall communicate with in one week the reasons for its non acceptance Provided that such reasons communicated /likely to be communicated shall not confer any right upon the borrower to prefer an application to the DRT/ court of dist judge 4 If the borrower fails to repay in full within the specified period the creditor may do one or more of the followings: (i)Take possession of the secured assets of the borrower including the right to lease/assign/sell to realize the secured asset (ii) Take over the management of the business of borrower including the right to lease/assign/sell to realize the secured asset 5 All costs, charges and expenses incurred with connection of action taken u/s 13(4) shall be recovered first and the balance shall be paid to the entitled person from the money received by the secured creditor. Chapter IV: Central Registry 1 setting up central registry for registration of securitization and reconstruction of financial assets and creation of security interest S. 2049

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2 Filling of transactions of securitization and reconstruction of financial assets and creation of security interest S. 23 3 modification of security interest 4 Securitization Company or Reconstruction Company or secured creditor to report satisfaction of security interest.

5 Chapter: Offences and Penalties 1 Penalties: penalties upto Rs 5000 per day for every company secured creditor /their every officer in default in filling particulars u/s 23 or sending particulars u/s 24 or giving intimation u/s 25. 2 Penalties for non-compliance of directives of RBI by any securitization company/reconstruction company: Finance up to Rs 5lakhs and in case of a continuing offence with an additional fine, which may extend to Rs 10,000 per day during the period of default-s.no 28 3 Offence: Imprisonment upto 1 year or fine or both for contravening or attempting to contravening or a betting the contravention of the provisions of the ACT or of any rules made there under. S.no 29. ChapterVI: Miscellaneous 1 Provisions of the Act not apply in case of: (a) Lien on any good/money/ security. (b) Pledge of movables. (c) Creation of security in any aircraft/ vessel (d) Any conditional sale/ hire-purchase/lease/any other contract. Where no security interest has been created (e) Any right of unpaid seller. (F) Any properties not liable to attachment (excluding the properties specially charged with the debt recoverable under this Act) or sale under the first provision to S.no 60 (1) of CPC (g) Repayment of loans not exceeding Rs1lakh. (h) Agriculture land and (i) Amount of due