Canara Bank

Canara Bank

1. a. EXECUTIVE SUMMARY

The project is entitled “A study on The Management of Non-Performing Assets in the

Canara Bank’s Loan Portfolio” is done at the Canara Bank, Donimalai Township, Mysore

(Dist), Karnataka State.

INTRODUCTION:

An efficient financial management is becoming inevitable for every manager in today’s

corporate world. From a traditional aspect of raising funds whenever needed the

importance has shifted to day to day financial decision making and problem solving.

When initially the stress was on the internal analysis of the firm, procurement of funds,

management of assets and allocation of capital, the present importance has shifted to

decision making within the firm. With the modern aspect of finance function the

responsibilities of the finance manager has also increased. In the process of making

optional decision, he makes use of certain analytical tools in the analysis, planning and

control activities of the firm. Financial analysis is an essential prerequisite for making

sound financial decisions.

This study is intended to probe into the management of non performing assets in the

Canara Bank’s Loan Portfolio, for the period of 2004-2005 to 2007-2008. The study is

completely based on the analysis and interpretation of the published accounts of the bank

and personal interview of the senior officials of the bank.

OBJECTIVES OF THE STUDY:

To evaluate the Canara Bank’s asset quality.

To identify the effectiveness of the risk management system, undertaken by the

bank.

SCOPE OF THE STUDY:

The scope of the study here was confined to the organization only.

The study covers to find out the strategy required to reduce the NPAs.

The Oxford College of Engineering, Bangalore, MBA Programme

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http://en.wikipedia.org/wiki/Image:Canara_Bank_Logo.jpg

Canara Bank

METHODOLOGY OF THE STUDY:

Primary data.

Secondary data.

DATA ANALYSIS AND INTERPRETATION:

When the data collected is completed the data is processed and the relevant information is

obtained. The data collected is analyzed using various statistical tools like frequency

distribution, charts and percentage analysis.

DURATION OF THE STUDY:

This study is intended to probe into the management of non performing assets in the

Canara Bank’s Loan Portfolio, for the period of 2005-2006 to 2006-2007.

FINDINGS:

The Net NPA ratio of the Canara Bank declined from 1.88% as at March 31 st

2007 to 1.12% as at March 31st 2008.

Canara Bank has recovered its NPA which is amounted to Rs.865 crore during

2007-2008.

The Net NPA of the Canara Bank declined from Rs.1454 crore as on 31 st March

2008.

The Net NPA percentage of Canara Bank has reduced by over 19% during

2007-2008.


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Canara Bank

RECOMMENDATIONS:

Canara Bank should concentrate more on credit appraisal, monitoring, credit risk

management and recoveries.

Settlement is a better option for the banks wrestling with the problem of non-

performing assets.

Credit scoring allows lenders to determine whether or not you fit the profile of

the type of customers they are looking for.

Banks concerned should continuously monitor loans to identify accounts that

have potential to become non-performing.

CONCLUSION:

Securitization Act will surely help banks in reduction of NPA to a great extent.

Preventing fresh flow of NPAs to a great extent.

Exchange of credit information among banks would be of immense help to avoid

possible NPAs.


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Canara Bank

1. b. GENERAL INTRODUCTION:

INDUSTRY PROFILE

Banking in one form or another was in existence even in ancient times. The writings of

Manu (the maker of old Hindu Law) and Kautilya (the Minister of Chandragupta

Maurya) contained references to banking.

However, banking as a kind of business i.e., modern banking is of recent origin. It came

into existence only after the industrial revolution. After the industrial revolution, with the

increase in the size of industrial and business units, joint stock company people with

small means to become shareholders of big industrial and business enterprises. Still, there

were certain sections of public who were not prepared to invest their money on the shares

of joint stock companies. However they were willing to part with a little surplus money,

if they were assured of the repayment of their money with a little interest thereon. So

naturally, there arose the need for formation of financial institutions that could collect the

surplus funds of people on terms acceptable to them and make them available to the

needy for productive purpose. Accordingly a large number of financial institutions called

joint stock banks were set up after industrial revolution. As such joint banks or modern

banks are of recent development.

MEANING OF BANKS:

A banking company in India has been defined in the Banking Companies Act 1949 as

“One which transacts the business of banking which means the accepting of the purpose

of sending or investment of deposits of money form the public repayable on demand or

otherwise and withdrawable by cheque, draft order or otherwise”.

STRUCTURE OF BANKING SYSTEM IN INDIA:

Indian Banking System has been categories into two:

1. Scheduled Banks.

i. State Co-operative.


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Canara Bank

ii. Commercial Banks.

2. Non-Scheduled Banks:

Central Co-operative Banks and Primary Credit Societies.

Commercial Banks.

Commercial Banks are further divided into Indian Banks and Foreign

Banks.

Indian Banks are further divided into:

1. Public Sector Banks.

2. SBI and its Subsidies.

3. Other Nationalized Banks.

4. Regional Rural Banks.

ACTIVITIES OF BANKS:

I. Activities of Commercial Banks.

II. Activities of Central Banks.

I. Activities of Commercial Banks:

The activities undertaken by commercial banks be subdivided into:

a. Primary Functions.

b. Subsidiary Functions.

a. Primary Functions:

i. Acceptance of deposits: It is very important for banks as it forms the basis

of all other activities of banks. It accepts various types of deposits. They

are current deposit, saving deposit, fixed deposit and recurring deposits.

ii. Lending of Funds: It is also the most important function of Commercial

Banks as it fetches the major portions of the income of the banks.

Banks lend money by the way of loans, overdrafts, cash credit and

discounting of bills.


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Canara Bank

b. Subsidiary Functions:

i. Agency Functions: The services rendered by banks as agent of their customers

are called agency services. They are:

Banks collect cheque, bank draft, bills, interest, dividends etc on

behalf of the customer.

Banks sells and purchases securities on behalf of the customers.

Banks arranges for remittance of funds from one place to another

place.

Banks acts as trustees, executors, representatives of their customers.

ii. General Utility Services: Services rendered by banks to their customers as

well as the general public are called as general utility services.

Banks accept precious articles, documents etc for safe custody.

Banks helps exporters and importers in foreign trade.

Banks issue travellers cheque, letter of credit, circular notes etc.

Banks acts as a reference and supply information about the financial

standing of the customers to others.

II. Activities of the Central Bank:

A. Monopoly of Note issue.

B. Banker, Agent, Advisor to the government.

C. Custodian of cash reserves of the banks.

D. Lender of the last resort.

FUNCTIONS AND IMPORTANCE’S OF BANKS:

The importance of banks in the modern economy cannot be denied. Banks play a

significant role in the economic development. Banks perform a number of functions.

They are:

1. Banks mobilize the small scattered and ideal savings of the people, and make

them available for productive purpose. In the sort, they aid the process of capital

formation.


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Canara Bank

2. By accepting the savings of the people, banks provide safety and security to the

surplus money of the depositors.

3. Banks provide a convenient and economical method of payment. The cheque

system introduced by banks is convenient form making payments. Again the use

of cheque economies the time and trouble involved in settlement of business

obligations.

4. Banks provide a convenient and economical means of transfer of funds from one

place to another. Banks drafts are commonly used for remittances of funds from

one place to another.

5. Banks helps the movement of capital from regions where it is no very useful to

regions where it can be more usefully employed, by moving funds, banks

increases the utility of funds. Again by moving funds from one place to another,

banks contribute to the economic development of backward regions.

6. Banks influence the rates of interest in the money markets. Through the supply of

money (i.e. bank money or bank deposits) banks expert a powerful influence on

the interest rates in the money market.

7. Banks help trade and commerce industry and agriculture by meeting their

financial requirements. But for the financial assistance provided by the banks, the

pace of growth of trade and commerce industry and agriculture would have been

very slow.

8. Banks direct the flow of funds into production channels. While lending money,

they discriminate in favor of essential activities and against non essential

activities. Thus they encourage the development of right types of activities which

the society desires.

9. Banks always make it a point to help the industries, the prudent, the punctual and

the honest and discourage the dishonest, the spendthrift, the gambler the lair and

the knave (i.e. the rouge). Thus banks act as public conservators of commercial

virtues.

10. Banks serves as the best financial intermediaries between the saver (i.e. the

depositors or lenders) and the investor (i.e. the borrowers or the entrepreneurs).


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Canara Bank

SERVICE PROFILE OF THE CANARA BANK: The bank has many financial services and different schemes. Important among them are

as follows:

DOMESTIC PRODUCTS

SAVING BANK DEPOSITS: For individuals & non-trading organizations / institutions.

CURRENT ACCOUNT: For business operations – trades, businessmen, corporate

bodies.

FIXED DEPOSITS: Secured way to high returns – individuals and institutions.

KAMADHENU DEPOSITS: Re-investment money multiplier plan.

CANBANK AUTO – RENEWAL: Higher return in a shorter plan.

CANFLEXI DEPOSITS: A combination of savings & fixed deposits – high return &

instant liquidity.

ASHRAYA DEPOSITS: Respecting Indian values for senior citizens.

RECURRING DEPOSITS SCHEME: Inculcating saving, a rewarding & recurring

habit.

FLOATING RATE DEPOSITS SCHEME (FRDS): Insures against interest rate

fluctuations.

LOAN PRODUCTS

HOUSING LOAN SCHEME: Purchase of a ready built house / flat construction of

house, purchase of a site and construction of house thereon, for undertaking repairs,


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Canara Bank

renovations, upgradation, and creation of additional amenities and for taking over of the

HL liability from other recognized housing finance companies and banks.

HOME IMPROVEMENT LOANS: Furnishing the house / flat along with bank’s home

loans / independently.

CANMOBILE: Facilities purchase of new / used cards / jeeps of all make. The scheme

also covers finance for purchase of brand new two wheelers.

CANCARRY: Provided credit worthy individuals, professional and salaried class for

buying consumer durables and household articles.

CANCASH: Offer assistance for meeting unforeseen contingencies.

Finance is granted against approved shares, bonds and debentures held by the clients.

CANBUDGET: Fulfills the financial needs of confirmed employees of reputed PSU’s,

joint stock companies, central / state / semi – government employees and lecturers /

professors / assistant professors of colleges / universities and research institutes.

CANRENT: Provides loans to property owners whenever the property is leased / rented

out to PSU’s central / state / semi – government undertakings. Reputed corporate banks.

Financial institutions, Insurance companies and MNCs.

CANMORTGAGE: Designed to meet the financial requirements against security of

equitable mortgagee of property (land & building) to professional, businessman, salaried

persons and individuals.

VIDYASAGAR EDUCATIONAL LOAN SCHEME: Renders financial assistance for

needy and meritous students for pursuing all type of studies (professionals / general) in

India and Abroad.


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Canara Bank

LOAN SCHEME TO TRADERS / BUSINESS ENTERPRISES: With hassle – free

and minimum terms and conditions, the scheme cater to the needs of traders and other

business enterprises for smooth flow of business activities.

CANMAHILA: Exclusive loan scheme for women clientele.

AGRI – LOAN SCHEME: Various loan schemes for agri-clinic, minor, irrigation, farm

development / machinery, plantation crops fishers and for agro-exports.

SSI LOAN SCHEME: A host of schemed available for technology up gradation fund in

textile and jute industries, credit linked capital subsidy stand by credit for capital

expenditure and margin money scheme of KVIC.

OTHER PRIORITY SCHEME: These include loan for retail traders, small business,

professional / self employed, medical practitioners and loan for solar water heating /

home lighting system.

CREDIT CARD OPERATIONS

The first Indian card issuers to bay ISO 9002 certification, CANCARD today as a

distinct recognition in the domestic as well as international market.

All verstors of CANCARD namely, CANCARD visa, classic, visa-corporate,

master card and visa – international gold are issued through all CANARA BANK

branches & 24 CANCARD service centers located at major cities across the

country.

Four Indian Banks are in affiliation with the bank for issue of CANCARD

VISACARD.

Launched DEBIT CARD on November 4, 2003, a value added and tech based

product for its niche clients.


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Canara Bank

CUSTOMER CENTRIC ETHOS

CANARA BANK was the first to articulate the directive principles of good

banking, detailing banker’s duties and customers rights.

First bank to get ISO certification for one of its branches in Bangalore in the year

of 1995-1996.

Recommendations of the Goiporia Committee on Customer Service have been

implemented by the bank.

The bank has Computerized Information Facilitation Centers (CIFCs) at all circles

to look exclusively into customer in a single window framework.

A 24 hour tele - contact facility is also available for customers to air their

grievances at corporate as well as circles levels.


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Canara Bank

COMPANY PROFILE OF THE CANARA BANK:

HISTORICAL TREND:

Canara Bank established in 1906 with the name of Canara Bank Hindu Permanent Fund in Mangalore, India, by Ammembal Subba Rao Pai, is one of the oldest and major commercial bank of India. Its name was changed to Canara Bank Limited in 1910. The bank, along with 13 other major commercial banks of India, was nationalized on 19th July, 1969, by the Government of India. Currently (2008), the bank has 2508 branches spread all over India. The bank also has international presence in several centers, including London, Hong Kong, Moscow, Shanghai, Doha, and Dubai. In terms of business it is the largest nationalized commercial bank in India with a total business of about Rs.2000 billion (about US $43 billion).

ORGANISATION STRUCTURE:

The bank has fourteen wings in the Head Office, Bangalore.

1. Personnel Wing

2. Corporate Credit Wing

3. Risk Management Wing

4. Priority Credit Wing

5. Inspection Wing

6. Department of Information Technology Wing

7. Marketing and Customer Relationship

8. Planning and Development Wing

9. Recovery Wing

10. General Administration Wing


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http://en.wikipedia.org/wiki/Dubai

http://en.wikipedia.org/wiki/Doha

http://en.wikipedia.org/wiki/Shanghai

http://en.wikipedia.org/wiki/Moscow

http://en.wikipedia.org/wiki/Hong_Kong

http://en.wikipedia.org/wiki/London

http://en.wikipedia.org/wiki/Government_of_India

http://en.wikipedia.org/wiki/1969

http://en.wikipedia.org/wiki/19th_July

http://en.wikipedia.org/wiki/19th_July


http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Commercial_bank

http://en.wikipedia.org/wiki/Ammembal_Subba_Rao_Pai

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Mangalore



Canara Bank

11. Financial Management Wing

12. Treasury and International Operation Wing

13. Retail Banking and Subsidiaries Wing

14. Vigilance Wing

OFFICE AND BRANCHES: Canara bank has a network of 2415 branches, spread over

22states/ 4 union territories of the country and overseas branch @ London which are

administrated through

Head Office at Bangalore

13 Circles offices / International Division

35 Regional offices

2441 Branches

BRANCHES ABORAD:

CANARA BANK established its International Division in 1976, to supervise the

functioning of it various foreign department to give the required thrust to Foreign

Exchange business, particularly export and to meet the requirements of NRI’s.

Though small in size the Bank’s presence abroad has brought in considerable foreign

business, particularly NRI deposits.

The presence of bank is shown under.

CANARA BANK, London, UK (Branch)

Indo Hong Kong International Finance Co Ltd Hong Kong (Subsidiary)

AL Razouki International Exchange company , Dubai, UAE


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Canara Bank

According to the latest information, both the CANARA BANK and State Bank of India

have come into a mutual agreement as to both the banks will be operating as a one unit

in the Moscow.

CORPORATE VISION:

To top as a World Class Bank with best practices in the realms of asset portfolio,

Customer orientation, Product Innovation, Profitability an enhanced value for stake

holders.

To set new standards in IT application, Customer responsiveness, Asset quality and

profitability, culminating in higher stoke holder value.

To scale new peaks in respect of IT based banking, efficient service delivery market

leadership in profitability.

CORPORATE MISSION:

Augmenting low cost deposits.

Toning up asset quality.

Accent on cost control.

Thrust on retail banking.

Customer centric focus.

Product innovation and marketing.

Leveraging IT for comprehensive MIS.

Maximize stockholder’s value.

CORPORATE OBJECTIVE:


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Canara Bank

E- Efficiency.

P- Profitability and Productivity.

O- Organization Effectiveness.

C- Customers centric

H- Hi Tech Banking

ACHIVEMENTS:

The Bank has already carved a niche in providing IT – based services. Computerized

branches, for 65% of the branches & 81% of aggregated business provided a wide array

of services such as Network ATM’s, any where Banking , Tele Banking & Remote

Access Terminals etc.,

The Bank was the first to launch networked ATM’s & obtain ISO certification.

CANARA BANK shares are listed & Bangalore, Mumbai & National Stock Exchanges.

Establish well-developed quality circles have participated in many National &

International level competitions and have returned with handsome prizes.

Has set up its own Apex level Training colleges to its employees and thereby

takes care of the knowledge, skills and attitudinal development of employees.

Has also taken initiative in the environmental concerns.

PERRFORMACE HIGHLIGHTS OF 2007-2008

Canara Bank has posted net profit of s.581 cr for the half year ended September

2007 as against Rs.419 cr during the corresponding previous half year, registered

a growth rate of 38.60%.

The Bank operating profit registered an increase of Rs.548 cr (57.81%) to reach

Rs.1496 crore, up from Rs.948 cr for the first half of the preceding financial.


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Canara Bank

Return of assets a standard measure of profitability improved from 1.08%

(annualized) at a September 2004 to 1.28% (annualized) as at September 2007.

Number of branches moved up to 2441 from 2416 as at September 2004, besides

248 extension counter.

Global deposits of the Bank aggregated to as Rs.75, 396crore as against Rs.67734

crore a year ago, year growth being 11.31%.

MATURITY CLASSIFICATION OF VARIOUS ASSETS AND LIABILITIES:

In respects of the certain Assets and liabilities, CANARA BANK have undertaking a

behavior study, embedded options in the basis of past of past data, based on which the

bank is in a position to decide on the maturities of the asset and liabilities.

2. a. RESEARCH DESIGN

A study on the Management of Non Performing Assets in the Canara Bank’s Loan

Portfolio is done at the Canara Bank Donimalai Township, Sandur (TQ), Bellary (Dist),

Karnataka State.

The type of research used for the collection & analysis of the data is “Historical Research

Method”.

The main source of data for this study is the past records prepared by the bank. The focus

of the study is to determine the non-performing assets of the bank since its inception & to

identify the ways in which the performance especially the non-performing assets of the

Canara Bank can be improved.

The data regarding bank history & profile are collected through “Exploratory Research

Design” particularly through the study of secondary sources and discussions with

individuals.

Data Collection Method


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Canara Bank

Discussion with the manager & officers of the bank to get general information about the

bank & its activities.

Having face to face discussions with the bank officials

By taking guidance from bank guide & departmental guide.

Secondary Data

Collection of data through bank annual reports, bank manuals and other relevant

documents.

Collection of data through the literature provided by the bank.

Research Measuring Tool:

The tools used for data collection are:

1. Personal Interview

2. Secondary Sources

1. Personal Interview:

In this, discussions more held directly with the manager & officials to get the clear-cut

information about the topic and data to be collected for the purpose of analysis.

2. Secondary Sources:

Annual company reports, Balance Sheets, Profit & Loss account are used to collect the

data.

b. 1. SATATEMENT OF THE PROBLEM:

A crucial issue which is engaging the constant attention of the banking industry is the

alarmingly high level of non performing assets (NPA). Another major anxiety before the

banking industry is the high transaction cost of carrying non performing assets in their

books. The resolution of the NPA problem requires greater accountability on the part of

the corporate, greater disclosure in the case of defaults, an efficient credit information

sharing system and an appropriate legal frame work pertaining to the banking system so


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Canara Bank

that court procedures can be stream lined and actual recoveries made within an

acceptable time frame.

So the project titled “A study on the Management of Non Performing Assets in the

Canara Bank’s Loan Portfolio” looks in to the implications of high NPAs and suggests

effective recovery measures for resolving problem loans and thus making the banks

NPAs level healthy. It also compares the position of the Canara Bank with other public

sector banks in terms of their NPAs in the last three years and also to study the

management of total assets and advances of the Canara Bank among other public sector

banks.

b. 2. OBJECTIVES OF THE STUDY:

To evaluate the Canara Bank’s asset quality.

To compare the position of the Canara Bank with other public sector banks in

terms of their NPAs.

To study the management of total assets and advances of the Canara Bank.

To identify the effectiveness of the risk management system, undertaken by the

bank.

To analyze sector wise non-performing assets.

To offer useful suggestions to reduce the NPA in banks.

b. 3. SCOPE OF THE STUDY:

The scope of the study here was confined to the organization only.

The study covers to find out the strategy required to reduce the NPAs.

The concentration is given only in understanding the NPAs growth with the

reference of Canara Bank.

The data is purely based on the secondary data collected from website and

journal.

The scope is limited to drawn conclusions from analysis and interpretations of the

primary and secondary data of the Canara Bank.


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Canara Bank

b. 4. METHODOLOGY:

Introduction

The quality of the project work depends on the methodology adopted for the study.

Methodology, in turn, depends on the nature of the project work. The use of proper

methodology is an essential part of any research. In order to conduct the study

scientifically, suitable methods & measures are to be followed.

Research Design

The type of research used for the collection & analysis of the data is “Historical Research

Method”.

The main source of data for this study is the past records prepared by the bank. The focus

of the study is to determine the non-performing assets of the bank since its inception & to

identify the ways in which the performance especially the non-performing assets of the

Canara Bank can be improved.

The data regarding bank history & profile are collected through “Exploratory Research

Design” particularly through the study of secondary sources and discussions with

individuals.

Data Collection Method

Discussion with the manager & officers of the bank to get general information about the

bank & its activities.

Having face to face discussions with the bank officials

By taking guidance from bank guide & departmental guide.

Secondary Data

Collection of data through bank annual reports, bank manuals and other relevant

documents.

Collection of data through the literature provided by the bank.

Research Measuring Tool:


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Canara Bank

The tools used for data collection are:

1. Personal Interview

2. Secondary Sources

1. Personal Interview:

In this, discussions were held directly with the manager & officials to get the clear-cut

information about the topic and data to be collected for the purpose of analysis.

2. Secondary Sources:

Annual company reports, Balance Sheets, Profit & Loss account are used to collect the

data.

b. 5. LIMITATIONS OF THE STUDY:

The study is mainly based on the secondary data provided by the bank. As such it

is subject to the limitations of the secondary data.

The study is based only on NPAs with respect to loans.

The study is based on the data given by the officials and reports of the bank. The

confidentiality of some facts and figures is a limitation.

The non-availability of relevant information is one of the limitations.

The study is done only for the limited past 3 years.


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Canara Bank

3. THEORITICAL OVERVIEW

NPA ITS IMPACT AND MAGNITUDE:

MEANING OF NPA:

An asset is classified as non- performing asset (NPA) if dues in the form of principal and

interest are not paid by the borrower for a period of 180 days. How ever with effect from

March 2004, default status would be given to a borrower if dues are not paid for 90 days.

If any advance or credit facilities granted by bank to a borrower becomes non-

performing, then the bank will have to treat all the advances / credit facilities granted to

that borrower as non-performing without having any regard to the fact that there may

still exit certain advances / credit facilities having performing status.

A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the

interest and / or installment of installment of principal has remained ‘Past Due’ for a

specified period of time.

An amount due under any credit facility is treated as "past due" when it has not been paid

within 30 days from the due date. Due to the improvement in the payment and settlement


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Canara Bank

systems, recovery climate, up gradation of technology in the banking system, etc., it was

decided to dispense with 'past due' concept, with effect from March 31, 2001.

Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where

i. Interest and /or installment of principal remain overdue for a period of more than

180 days in respect of a Term Loan,

ii. The account remains 'out of order' for a period of more than 180 days, in respect

of an overdraft/ cash Credit(OD/CC),

iii. The bill remains overdue for a period of more than 180 days in the case of bills

purchased and discounted,

iv. Interest and/ or installment of principal remains overdue for two harvest seasons

but for a period not exceeding two half years in the case of an advance granted for

agricultural purpose, and

v. Any amount to be received remains overdue for a period of more than 180 days in

respect of other accounts.

’90 days’ overdue norm’

With a view to moving towards international best practices and to ensure greater

transparency, it has been decided to adopt the '90 days overdue' norm for identification of

NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31,

2004, a non-performing asset (NPA) shell be a loan or an advance where;

i. Interest and /or installment of principal remain overdue for a period of more than

90 days in respect of a Term Loan,

ii. The account remains 'out of order' for a period of more than 90 days, in respect of

an overdraft/ cash Credit(OD/CC),

iii. The bill remains overdue for a period of more than 90 days in the case of bills

purchased and discounted,


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iv. Interest and/ or installment of principal remains overdue for two harvest seasons

but for a period not exceeding two half years in the case of an advance granted for

agricultural purpose, and

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

respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, bank has been advised to

move over to charging of interest at monthly rests, by April 1, 2002. However, the date of

classification of an advance as NPA should not be changed on account of charging of

interest at monthly rests. Banks should, therefore, continue to classify an account as NPA

only if the interest charged during any quarter is not serviced fully with 180 days from

the end of the quarter with effect from April 1, 2002 and 90 days from the end of the

quarter with effect from March 31, 2004.

‘Out of Order’ Status

An account should be treated as ‘Out of Order’ if the outstanding balance remains

continuously in excess of the sanctioned limit / drawing power. In cases where the

outstanding balance in the principal operating account is less than the sanctioned limit /

drawing power, but there are no credits continuously for 180 days (to be reduced to 90

days, with effect from March 31, 2004) as on the date of Balance Sheet or credits are not

enough to cover the interest debited the same period, these accounts should be treated as

‘out of order’.

‘Overdue’

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the

due date fixed by the bank.

Asset Type Percentage of Provision

Sub standard (age up to 18 months) 10%

Doubtful 1 (age up to 2.5 years) 20%

Doubtful 2 (age 4.5 years) 30%


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Canara Bank

Doubtful 3 (age above 4.5 years) 50%

Loss Asset 100%

INCOME RECOGNITION-POLICY:

The policy of income recognition has to be objective and based on the record of recovery.

Internationally income from non-performing assets (NPA) is not recognized on accrual

basis but is booked as income only when it is actually received. Therefore, the banks

should not charge and take to income account interest on any NPA.

However, interest on advances against term deposits, NSCs, VIPs, KVPs, and Life

policies may be taken to income account on the due date, provided adequate margin is

available in the accounts.

Fees and commissions earned by the banks as a result of re-negotiations or rescheduling

of outstanding debts should be recognized on an accrual basis over the period of time

covered by the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances should

not to be taken to income account unless the interest has been realized.

REVERSAL OF INCOME:

If any advance, including bills purchased and discounted, becomes NPA as at the close of

any year, interest accrued and credited to income account in the corresponding previous

year, should be reversed or provided for if the same is not realized. This will apply to

Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should cease

to accrue in the current period and should be reversed or provided for with respect to past

periods, if uncollected.

THE CONCEPT OF GROSS NPA:

Income recognition is not possible once an account becomes NPA. Interest accrued on

non performing loan accounts is debited to the respective account and credited to the

interest suspense account instead of the profit and loss account. Usually no debits are


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permitted in non performing asset expect unavoidable expenditure like litigation

expenses, insurance etc. Hence the balance outstanding in an NPA account includes:

1. Balance as on date of becoming an NPA.

2. Interest accrued but not realized.

On balance sheet date banks make provisions for loan losses. This provision is calculated

not on the balance outstanding but on the net balance, balance net of the amount kept in

the interest suspense account. This book balance of the net of the interest suspense

account is known as Gross NPA.

But in cases where guarantee claim is received from credit guarantee corporations like

ECGC, before making the provision for loan losses, such claim received is also netted

from the gross NPA. The terminology net NPA indicates the balance in interest suspense

account.

For evaluation RBI and other rating agencies rely on purpose usually the net NPA

balance.

Thus Gross NPA means, balance outstanding minus balance in interest suspense account.

Net NPA means: Gross NPA minus balance claim received amount and provision

outstanding in that account.

IMPACT OF NPA:

At the Macro level, NPAs have chocked off the supply line of Credit of the potential

lenders thereby having a deleterious effect on capital formation and arresting the

economic activity in the country.

At the Micro level, unsustainable level of NPAs has eroded current profits of banks and

FIs. They have led to reduction of interest income and increase in provisions and have

restricted and recycling of funds leading to various Asset Liability mismatches. Besides

this, it has led to erosion in their capital base and reduction in competitiveness.

The problem of NPA is not a matter of concern to banks and FIs alone. It is the matter of

grave concern to the country and any bottleneck in the smooth flow of credit is bound to

create adverse repercussions in the economy. The mounting menace of NPAs has raised


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the cost of credit, made Indian business man uncompetitive as compared to their

counterparts in other countries.

It has made banks more adverse to risks and squeezed genuine Small and Medium

Enterprises (SMEs) from accessing competitive credit and has throttled their enterprising

spirits as well, to a great extent.

Due to their crippling effect on the operation of the banks, Asset quality has been

considered as one of the most important parameters in the measurement of bank’s

performance under the CAMELS Supervisory Rating System of RBI.

THE MAGNITUDE:

Non-Performing Asset (NPA) has emerged since over a decade as an alarming threat to

the banking industry in our country sending distressing signals on the sustainability and

endurability of the affected banks. The positive results of the chain of measures affected

under banking reforms by the Government of India and RBI in terms of the two

Narasimhan Committee Reports in this surging threat. Despite various correctional steps

administered to solve and end this problem, concrete results are eluding. It is a sweeping

and all pervasive virus confronted universally on banking and financial institutions. The

severity of the problem is however acutely suffered by Nationalized Banks, followed by

the SBI group, and the all India Financial Institutions. As at 31.03.2004 the aggregate

gross NPA of all scheduled commercial banks amounted to Rs.63883 crore. Table No.1

gives the figures of net NPA for the last three years. The ratio of net non-performing

assets to net advances also declined during 2005-06. Majority of the banks, this ratio is

less than 4 percent. Punjab and Sind Bank has the highest ratio with 9.62 percent

followed by Dena Bank of India with 9.4 percent. 4 banks reported “nil” ratio during

2005-2006.

Further it is revealed that commercial banks in general suffer a tendency to understate

their NPA figures. There is the practice of ‘ever-greening’ of advances, through subtle

techniques. As per report appearing in a national daily the banking industry has under –

estimated its non-performing assets (NPAs) by whopping Rs.3862.10 Crore as on March

1997. The industry is also estimated to have under-provided to the extent of Rs. 1,412.29


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Crore. The worst offender is the public sector banking industry. Nineteen nationalized

banks have underestimated their NPAs by Rs. 3,029.29 Crore. Such deception of NPA

statistics is executed through the following ways.

Failure to identity an NPA as per stipulated guidelines: There were instances of

‘sub-standard’ assets being classified as ‘standard’.

Wrong classification of an NPA: Classifying a ‘loss’ asset as a ‘doubtful’ or

‘sub-standard’ asset, classifying a ‘doubtful’ asset as a ‘sub-standard’ asset.

Classifying an account of a credit customer as ‘substandard’ and other accounts

of the same credit customer as ‘standard’, throwing prudential norms to the

winds.

REASONS FOR NPAs:

In Priority Sector Advances:

1. Directed and pre-approved natures of loans sanctioned under sponsored

programmes.

2. Mis-utilization of loans and subsidies.

3. Diversion of funds.

4. Absence of security.

5. Lack of effective follow-up (Post sanction supervision and control)

6. Absence of Bankruptcy and fore-closure loans.

7. Decrepit legal system.

8. Cost in-effective legal recovery measures.

9. Difficulty in execution of Decrees obtained.

In Non-Priority Sector Advances:

1. Inadequate credit appraisal.

2. Demand recession.

3. Industrial sickness and labor problems.

4. Slow Legal system.

5. Diversion of funds.


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6. Willful default.

7. Technology Obsolescence.

8. Managerial inefficiency.

9. Political compulsion and corruption.

WRITING OFF NPAs:

In terms of section 43(D) of the Income Tax Act 1961, income by way of interest in

relation to such categories of bad and doubtful debts as may be prescribed having regard

to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in

the previous year in which it is credited to the bank’s profit and loss account or received,

whichever earlier.

This stipulation is not applicable to provisioning required to be made as indicated above.

In other words, amounts set aside for aside for making provision for NPAs as above are

not eligible for tax deductions.

Therefore the banks should either make full provision as per the guidelines or write-off

such advances and claim such tax benefits as are applicable, by evolving appropriate

methodology in consultation with their auditors / tax consultants. Recoveries made in

such accounts should be offered for tax purposes as per the rules.

WRITE-OFF AT HEAD OFFICE LEVEL:

Banks may write-off advances at Head Office Level, even though the relative advances

are still outstanding in the branch books. However, it is necessary that provision is made

as per the classification accorded to the respective accounts. In other words, if an advance

is a loss asset, 100 percent provision will have to be made there for.

DEBT RECOVERY TRIBUNAL:

Any person aggrieved by any measure taken by secured creditor or his authorized officer

may file an appeal to Debts Recovery Tribunal, within 45days from date on which such

measure was taken. That is action of taking possession of asset, takeover of management


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of business of borrower, appointing person to manage secured asset etc. is taken by the

creditor.

When a borrower files an appeal, the appeal cannot be entertained unless, the borrower

deposits 75% of the amount claimed in the notice by secured creditor. The DRT can

waive or reduce the amount required to be deposited. The amount is not required to be

deposited at the time of filing appeal, but appeal will not heard till the amount is

deposited. The borrower while filing the appeal should also file an application requesting

the Debt Recovery Tribunal to admit the appeal without deposit of any amount. If the

DRT orders partial deposit of the amount and the same is not deposited, appeal can be

dismissed.

The 75% deposit is only required if the appeal is filed by the borrower. If some other

aggrieved person (e.g. guarantor, shareholder) files it the deposit is not required.

If a person is aggrieved by the order of the DRT, it can file an appeal to the Appellate

Tribunal within 30days from the date of receipt of the DRT order.

If the DRT or Appellate Tribunal holds that possessions of assets by the secured creditor

was wrongful and directs the secured creditor to return asset to concerned borrower, the

borrower shall be entitled to compensation and costs as may be determined by DRT or

Appellate Tribunal.

SECURITIZATION ACT:

With the enactment of the Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act 2002, banks can issue notices to the defaulters to

pay up the dues and the borrowers will have to clear their dues within 60days. Once the

borrower receives a notice from the concerned bank and the financial institution, the

secured assets mentioned in the notice cannot be sold or transferred without the consent

of the lenders. The main purpose of this notice is to inform the borrower that either the

sum due to the bank or financial institution be paid by the borrower or else the former

will take action by way of taking over the possession of assets. Besides assets, bank can

also takeover the management of the company. Thus the bankers under the


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aforementioned Act will have the much needed authority to either sell the defaulting

companies or charge their management.

OVERALL BANKING AND NPA

BANKING REFORMS IN INDIA:

The Nationalization of the major commercial banks in the year 1969 and 1980 had

brought radical changes in the banking system in India. It had brought about major shifts

in the priorities in the banking operations. Branch expansion policies of banks were tuned

upto meet the banking needs of the people in rural and semi urban centers. For

accelerating the socio-economic and rural development process several Governments

sponsored programs were launched and lending in the priority sector, irrational lending

under socio political pressures, mounting levels of bad debts, branch expansion at non

viable centers etc. gradually started affecting the financial health of the banking sector in

the country. Commercial banks were not following uniform accounting policies

camouflaged the true financial position of banks. Quality of loan asset was not a concern

and a high proportion of loan assets started becoming non performing. Most of the banks

were under capitalized and some of them even with negative worth. Thus there was a

compelling need for a change and various policy corrections had to be taken with the

view of strengthening the economy. Thus the Government of India was forced to initiate

a process of reforming the financial sector which banks constitute a dominant part.

The reforms process includes:

1. Introduction of prudential norms.

2. Transparency in balance sheets.

3. Deregulation of interest rates.

4. Partial deviation from directed lending.

5. Upgradation of technology.

6. Entry of new private sector banks.

NARASIMHAM COMMITTEE:


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The first phase of banking sector reforms was initiated in the year 1992 in pursuance of

recommendations of the committee on financial sector reforms headed by Narasimham

Committee.

As per the recommendations of Narasimham Committee, The Reserve Bank of India

introduced in a phased manner, prudential norms for income recognition, asset

classification, and provisioning in the year 1998 Narasimham Committee-II came out

with more stringent norms for the industry. The prudential norms were revised from time

to time to fall in line with the best accounting practices and for transparency in published

accounts.

It is widely recognized that as a result of these reforms, the Indian Banking System is

becoming increasingly mature in terms of the transformation of business processes and

the appetite for risk management.

Deregulation, technological upgradation and increased market integration have been the

key factors driving change in the financial sector.

EMERGING BANKING TRENDS:

During the current financial year, the focus of non-going reforms in the banking sector

was on soft interest rates regime, increasing operational efficiency of banks,

strengthening regulatory mechanisms and on technological up-gradation. As a step

towards a softer interest rate regime, RBI in its Annual Policy Statement had advised

banks to introduced flexible interest rate system for new deposits, announce a maximum

spread over PLR for all advances other than consumer credit and to review the present

maximum spread over PLR and reduce them wherever they are unreasonably high.

A BRIEF HISTORY OF NPA:

The concept of Asset Quality on the books of Public Sector Banks (PSBs) and Financial

Institutions (FIs) came into being when Reserve Bank of India (RBI) introduced

prudential norms on the recommendations of the Narasimham Committee in the year

1992-1993. The Committee recommended that an asset may be treated as Non-


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Performing Asset (NPA), if interest or installment of principal remains overdue for a

period exceeding 180days and that banks and FIs should not take into their income

account, the interest accrued on such Non-Performing Assets, unless it is actually

received or recovered. The Committee also recommended that Assets be classified into

four categories namely Standard, Sub-standard, Doubtful and Loss Assets and that certain

specified percentage of the same be held as provision there against. Before the reform

process, banks were booking income on an accrual basis and their balance sheets did not

reflect their true specified financial health. Thus the profit, capital and reserves were

overstated by them.

After 10years of NPA terror in the banking industry, “Now the Banks Have Teeth”, a

new law lightens the burden of bad loans for Indian Banks. The law that has been the

catalyst for the bad loan clean up passed India’s Parliament in November 2002. It allows

lenders to more easily foreclose on debtors assets or even demand a change in

management. Within weeks of the law’s passage, banks saw a flood of loans once

deemed unrecoverable being repaid in double time. The Act is The Securitization and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Also

know as the Securitization Act). This Act enables the setting up of asset management

companies for addressing the problems of non-performing assets of banks and FIs.

INDIAN BANKING AND NPA:

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk

by the banks concerned. What is needed is having adequate preventive measures in place

namely, fixing pre-sanctioning appraisal responsibility and having an effective post-

disbursement supervision. Banks concerned should continuously monitor loans to identity

accounts that have potential to become non-performing.

The core banking business is of mobilizing the deposits and utilizing it for lending to

industry. Lending business is generally encouraged because it has the effect of funds

being transferred from the system to productive purposes which results into economic

growth. However lending also carries credit risk, which arises from the failure of

borrower to fulfill its contractual obligations either during the course of a transaction or


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on a future obligation. The history of financial institutions also reveals the fact that the

biggest banking failures were due to credit risk.

Due to this, banks are restricting their lending operations to secured avenues only with

adequate collateral on which to fall back upon in a situation of default.

GLOBAL NPA:

The core banking is of mobilizing the deposits and utilizing it for lending to industry.

Lending business is generally encouraged because it has the effect of funds being

transferred from the system to productive purposes which results into economic growth.

However lending also carries credit risk, which arises from the failure of borrower to

fulfill its contractual obligations either during the course of a transaction or on a future

obligation. A question that arises is how much risk can a bank afford to take? Recent

happenings in the business world – Enron, WorldCom, Xerox, Global Crossing do not

give much confidence to banks. In case after case, these giant corporates became

bankrupt and failed to provide investors with clearer and more complete information

thereby introducing a degree of risk that many investors could neither anticipate nor

welcome. The history of financial institutions also reveals the fact that the biggest

banking failures were due to credit risk.

Due to this, banks are restricting their lending operations to secured avenues only with

adequate collateral on which to fall back upon in a situation of default.

It needs to be recognized that prudential norms in respect of loan classification vary

widely across countries. A country follows varied approaches, from the subjective to the

prescriptive. Illustratively, in the United Kingdom, supervisors do not require banks to

adopt any particular form of loan classification and either is there any recommendation

on the number of classification categories that banks should employ. Other countries,

such as, the United States follow a more prescriptive approach, wherein loans are

classified into several categories based on a set of criteria ranging from payment

experience to the environment in which the debtor evolves. The adoption of such a

system points to the usefulness of a structured approach those facilities the supervisor’s

ability to analyze and compare banks loan portfolios.


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India is a better bet than China for investors to pump money into non-performing assets

(NPAs) restructuring as it has better environment for recovery, according to consulting

firm Price water House Coopers (PwC).

WARNING: STANDARD & POOR:

Standard & Poor’s and The Credit Rating Information Services of India Ltd., (CRISIL)

estimate that India’s schedule commercial banks require between US$11billion-

US$13billion in new capital to support losses embedded in impaired assets. The

significant capital shortfall estimated recognizes the existing moderate reported capital

position of Indian banks, the inadequate loan loss reserves maintained by the banks to

absorb likely losses.

The weak capital position of the Indian banking system is largely a reflection of growing

asset-quality problems stemming from weak underwriting and credit management

system, and the vulnerabilities of the Indian banking sector to the impact of globalization

on the country’s key industry sectors. The asset-quality position also has suffered from

regulations with respect to lending to priority sectors. “The capital shortfall calculated

assumes a significantly higher system non-performing loan level to that reported under

Indian regulatory standards,” said Peter Sikora, associate director, Financial Services

Rating, Standard & Poor’s, together with CRISIL are, however, of the view that non

performing loan levels for Indian banks will be significantly higher at 20%-25% if more

conservative classification standards are adopted and restructured, and ever greened loans

are included as impaired assets.

LENDING BEHAVIOUR OF BANKS:

Due to the excess liquidity in the banking system, banks are now giving credit to even

non-priority sectors in an aggressive manner. Now banks give credit more to

unproductive purposes, like car loans, housing loans, consumer durables loans and

personal loans. This reckless lending paves the way to repayment irregularities and more

of NPA in the banking system. But on the others side economy has become buoyant and

the borrowers are now in a position to repay the loans even if it is an unproductive loan.


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Banks have improved their credit appraisal system. NPA percentage in City Bank’s Car

Loan Portfolio is zero, because of the sophisticated credit appraisal system followed by

the bank. Banks now give priority to ‘businesses’ and lending schemes also follow the

path.

CLASSIFICATION OF ASSETS:

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:

a) Sub-Standard Assets.

b) Doubtful Assets.

c) Loss Assets.

SUB-STANDARD ASSETS:

A sub-standard asset was one, which was classified as NPA for a period not exceeding

two years. With effect from 31March 2001, a sub-standard asset is one, which has

remained NPA for a period less than or equal to 18 months. In such cases, the current net

worth of the borrower / guarantor or the current market value of the security charged is

not enough is not enough recovery of the dues to the banks in full. In other words, such

an asset will have well defined credit weakness that jeopardize the liquidation of the debt

and are characterized by the distinct possibility that the banks will sustain some loss, if

deficiencies are not corrected. With effect from 31March 2005, a sub-standard asset

would be one, which has remained NPA for a period less than or equal to 12 months.

DOUBTFUL ASSETS:

A doubtful asset was one, which remained NPA for a period exceeding two years. With

effect from 31March 2001, as asset is to be classified as doubtful, if it has remained NPA

for a period exceeding 18 months. A loan classified as doubtful has all the weaknesses

inherent in assets that were classified as sub-standard, with the added characteristic that


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the weaknesses make collection or liquidation in full, - on the basis of currently know

facts, conditions and values – highly questionable and improbable.

With effect from 31March, 2005, an asset to be classified as doubtful if it remained in the

sub-standard category for 12 months.

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.

It should be noted that the above classification is only for the purpose of computing the

amount of provision that should be made with respect to bank advances and certainly not

for the presentation of advances in the bank balance sheet. The Third Schedule to the

Banking Regulation Act 1949, solely governs presentation of advances in the balance

sheet. Banks have started issuing notices under The Securitization Act,2002 directing the

defaulter to either pay back the dues to the bank or else give the possession of the secured

assets mentioned in the notice. However, there is a potential threat to recovery if there is

substantial erosion in the value of security given by the borrower or if borrower has

committed fraud. Under such a situation it will be prudent to directly classify the

advances as a doubtful or loss asset, as appropriate.

RBI GUIDELINES FOR CLASSIFICATION OF ASSETS:

Broadly speaking, classification of assets into above categories should be done taking

into account the degree of well-defined credit weaknesses and the extent of dependence

on collateral security for realization of dues.

Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value accounts. The

banks may fix a minimum cut off point to decide what would constitute a high value

account depending upon their respective business levels. The cut off point should be valid


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for the entire accounting year. Responsibility and validation levels for ensuring proper

asset classification may be fixed by the banks. The system should ensure that doubts in

asset classification due to any reason are settled through specified internal channels

within one month from the date on which the account would have been classified as NPA

as per extent guidelines.

UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAs:

If arrears of interest and principal are paid by the borrower in the case of loan accounts

classified as NPAs, the account should no longer be treated as non-performing and may

be classified as ‘standard’ accounts.

Asset Classification to be borrower-wise and not facility-wise:

i. It is difficult to envisage a situation when only one facility to borrower becomes a

problem credit and not others. Therefore, all the facilities granted by a bank to a

borrower will have to be treated as NPAs and not the particular facility or part

thereof which has become irregular.

ii. If the debts arising out of development of letter of credit or invoked guarantees

are parked in a separate account, the balance outstanding in that account for

should be treated as a part of the borrower’s principal operating account for the

purpose of application of prudential norms on income recognition, asset

classification and provisioning.

Accounts where there is erosion in the value of Security:

i. A NPA need not go through the various stages of classification in cases of

serious credit impairment and such assets should be straightaway classified as

doubtful or loss asset as appropriate. Erosion in the value of security can be

reckoned as significant when the realizable value of the security is less than

50 percent of the value assessed by the bank or accepted by RBI at the time of

last inspection, as the case may be. Such NPAs may be straightaway classified

under doubtful category and provisioning should be made as applicable to

doubtful assets.


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ii. If the realizable value of the security, as assessed by the bank / approved

valuers / RBI is less than 10 percent of the outstanding in the borrowal

accounts, the existence of security should be ignored and the asset should be

straight away classified as loss asset. It may be either written off or fully

provided for by the bank.

RESTRCTURING / RESCHEDULING OF LOANS:

A standard asset where the terms of the loan agreement regarding interest and principal

have been renegotiated or rescheduled after commencement of production should be

classified as sub-standard and should remain in such category for at least one year of

satisfactory performance under the renegotiated or rescheduled terms. In the case of

sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the

quality of advance automatically unless there is satisfactory performance under the

rescheduled / renegotiated terms. Following representations from banks that the

foregoing stipulations deter the banks from restructuring of standard and sub-standard

loan assets were reviewed in March 2001. In the context of restructuring of the accounts,

the following stages at which the restructuring / rescheduling / renegotiation of the terms

of loan agreement could take place can be identified:

a) Before commencement of commercial production.

b) After commencement of commercial production but before the asset has been

classified as sub-standard.

c) After commencement of commercial production and after the asset has been

classified as sub-standard.

PROVISIONING REQUIREMENTS:

As and when an asset is classified as an NPA, the bank has to further sub-classify it into

sub-standard, loss and doubtful assets. Based on this classification, bank makes the

necessary provision against these assets.

Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank

advances where the recovery is doubtful. Banks are also required to comply with such


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guidelines in making adequate provision to the satisfaction of its auditors before

declaring any dividends on its shares.

In case of loss assets, guidelines specifically require that full provision for the amount

outstanding should be made by the concerned bank. This is justified on the grounds that

such an asset is considered uncollectible and cannot be classified as bankable asset.

Asset Type Percentage of Provision

Sub-Standard (age upto 18 months) 10%

Doubtful 1 (age upto 2.5years) 20%

Doubtful 2 (age 4-5years) 30%

Doubtful 3 (age above 4-5years) 50%

Loss Asset 100%

THE NPA PROBLEM:

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk

by the banks concerned. What is needed is having adequate preventive measures in place

namely, fixing pre-sanctioning appraisal responsibility and having an effective post-

disbursement supervision. Banks concerned should continuously monitor loans to

identify accounts that have potential to become non-performing.

The performance in terms of profitability is a benchmark for any business enterprise

including the banking industry. However, increasing NPAs have a direct impact on banks

profitability as legally banks are not allowed to book income on such accounts and at the

same time banks are forced t make provision on such assets as per the RBI guidelines.

Also, with increasing deposits made by the public in the banking system, the banking

industry cannot afford defaults by borrowers since NPAs affects the repayment capacity

of banks.

Further, RBI successfully creates excess liquidity in the system through various rate cuts

and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non

performing assets.

CREDIT APPRAISAL SYSTEM:


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Prevention of standard assets from migrating to non performing status is most important

in NPA management. This depends on the style of Credit Management Mechanism

available in banks. The quality of credit appraisal and the effectiveness of post credit

appraisal and effectiveness of post credit follow up influences the asset quality of the

banks in a big way.

At Pre-Credit Stage:

1. Extensive enquiry about the character and the credit worthiness of the borrower.

2. Viability of the project to be financed is meticulously studied.

3. Adequate coverage of collateral is ensured to the extent possible.

4. Financial statement of the borrower is obtained and poor analysis of their

financial strength is done.

5. Apart from the published financial statements independent enquires are made with

previous bankers.

6. Pre-Credit inspection of the assets to finance is made.

At Post-Credit Stage:

1. Operations in the account are closely monitored.

2. Unit visit is done at irregular intervals.

3. Asset verification is done on a regular basis.

4. Borrowers submit control returns regularly.

5. Accounts are periodically to evaluate the financial health of the unit.

6. Early warning signals are properly attended to.

7. Close contract with the borrower is maintained.

8. Potential NPAs are kept under special watch list.

9. Potentially viable units are restructured.

10. Repayment program of accounts with temporary cash flow problem is

rescheduled.

Immediate legal action is initiated in cases where the default is willful and the

intention of the borrower is bad.


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CREDIT MONITORING:

Credit Monitoring System is for:

1. Preventing the slippage of quality assets through the monitoring of standard

assets.

2. Upgradation of quality of impaired loan asset through recoveries by means of

legal or otherwise.

3. Upgradation of loan assets through nursing in deserving and viable cases.

WARNING SIGNALS:

1. Default in servicing periodic installments and interest.

2. Accumulation of stock & non-movement of stock.

3. Operating loss / net loss.

4. Slow turnover of debtors & fall in level of sundry creditors.

5. Return of outward bills for collection / return of cheque.

6. Labor troubles.

7. High turnover of key personnel.

8. Loss of critically important customers.

9. Court cases against the unit.

10. Avoidance of contacts with the bank.

11. Delayed submission of financial statements.

12. Disputes among partners / promoters.

CREDIT RISK AND NPA:

Quite often credit risk management (CRM) is confused with managing non-performing

assets (NPAs). However there is an appreciable difference between the two. NPAs are a

result of past action whose effects are realized in the present. i.e. they represent credit risk

that has already materialized and default has already taken place.

On the other hand, managing credit risk is a much more forward-looking approach and is

mainly concerned with managing the quality of credit portfolio before default takes place.


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In other words, an attempt is made to avoid possible default by properly managing credit

risk.

Considering the current global recession and unreliable information in financial

statements, there is high credit risk in the banking and lending business.

CREDIT INFORMATION BUREAU (CIB):

It is in this context that the facility of Credit Information Bureau (CIB) becomes

relevant. A CIB provides an institutional mechanism for sharing of credit information on

borrowers and potential borrowers among banks and FIs. It acts as a facilitator for credit

dispensation and helps mitigate the credit risk involved in lending. Based on cross-

country experiences, initiatives have been taken in India to establish a credit information

bureau. The Bureaus established in these countries collect information on both individual

borrowers (retail segment) and the corporate sector.

EXCESS LIQUIDITY:

Now banks are faced with the problem of increasing liquidity in the system. Further, RBI

is increasing the liquidity in the system through various rate cuts. Banks can get rid of its

excess liquidity by increasing its lending but, often shy away from such an option due to

the high risk of default.

In order to promote certain prudential norms for healthy banking practices, most of the

developed economies require all banks to maintain minimum liquid and cash reserves

broadly classified in to Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio

(SLR).

Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in

the form of Cash Reserve or by way of current account with the RBI, computed as a

certain percentage of its demand and time liabilities. The objective is to ensure the safety

and liquidity of the deposits with the banks.


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On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking

company shall maintain in India in the form of cash, gold or unencumbered approved

securities, an amount which shall not, at the close of business on any day be less than

such percentage of the total of its demand and time liabilities in India as on the last

Friday of the second proceeding fortnight, as the RBI may specify from time to time.

A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in

RBI’s vaults and further infuses greater funds into a system. However, almost all the

banks are facing the problem of bad loans, burgeoning non-performing assets, thinning

margins, etc. As a result of which, banks are little reluctant in granting loans to

corporates.

As such, through in its monetary policy RBI announces rate cut but, such news are no

longer warmly greeted by the bankers.

HIGH COST OF FUNDS DUE TO NPA:

Quite often genuine borrowers face the difficulties in raising funds from banks due to

mounting NPAs. Either the bank is reluctant in providing the requisite funds to the

genuine borrowers or if the funds are provided, they come at a very high cost to

compensate the lender’s losses caused due to high level of NPAs.

Therefore, quite often corporates prefer to arise funds through commercial papers (CPs)

where the interest rate on working capital charged by banks is higher.

The main purpose of this notice is to inform the borrower that either the sum due to the

bank or financial institution be paid by the borrower or else the former will take action by

way of taking over the management of the company. Thus the bankers under the

aforementioned Act will have the much needed authority to sell the assets of the

defaulting companies or charge their management.

But the protection under the said Act only provides a partial solution. What banks should

ensure is that they should move with speed and charged with momentum in disposing off

the assets. This is because as uncertainty increases with the passage of time, there is all

possibility that the recoverable value of asset also reduces and it cannot fetch good price.


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MEASURES FOR NPA CONTAINMENT:

MEASURES TO TACKLE NPAs:

Seeing the gravity of the situation, RBI has taken several constructive steps for arresting

the incidence of NPAs. It has also created a regulatory environment to facilitate the

recovery of existing NPAs of banks.

1. Lok Adalats: Lok Adalats have been set up for recovery of dues in accounts

falling in the doubtful and loss category with outstanding balance up to Rs.5lakh,

by way of compromise settlements. This mechanism has, proved to be quite

effective for speedy justice and recovery of small loans.

2. Debt Recovery Tribunals: DRTs which have been set up by the Government to

facilitate to speedy recovery by banks / DFIs, have not been able to make much

impact on loan recovery due to a variety of reasons like inadequate number, lack

of infrastructure, under-staffing and frequent adjournment of cases. It is essential

that the DRT mechanism is strengthened and DRTs are vested with a proper

enforcement mechanism to enforce their orders. Non-observance of any order

passed by the Tribunal should amount to contempt proceedings. The DRTs could

also be empowered to sell the assets of the debtor companies and forward the

proceeds to the Winding-up Court for distribution among the lenders. Also,

DRTs could be set up in more centers preferably in district headquarters with

more presiding officers. 22 DRTs have been set up in the country during the half

last a decade.

DRTs have not been able to deliver, as they got swamped under the burden

of large number of cases filed with since their inception.

3. Corporate Debt Restructuring: Corporate Debt Restructuring (CDR)

mechanism is an additional safeguard to protect the interest of the creditors and

revive potentially viable units. The CDR system was set up, in accordance with

the guidelines of RBI evolved in consultation with Government of India. The

objective of the CDR system is to ensure a timely and transparent mechanism for

restructuring of corporate debts of viable entities and to minimize the losses to

the creditors and other stakeholders through an orderly and co-ordinated re-


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structuring programme. With CDR, banks can arrest fresh slippage of performing

assets into the magnitude of assets. Under the system standard, sub-standard and

doubtful assets can be restructured. The CDR mechanism is based upon effective

co-ordinate among banks.

4. Asset Reconstruction Companies (ARCs): One of the most effective ways of

removing NPAs from the books of the banks / DFIs would be to move these out

to a separate agency which would buy the assets and make its own efforts for

recovery. On this front, the SRES Act has provided a frame work for setting up to

Asset Reconstruction Companies (ARCs) in India. A pilot company called Asset

Reconstruction Company (India) Ltd (ARCIL) has been set up under the joint

sponsorship of IDBI, ICICI Bank, SBI and other banks which is likely to provide

an effective mechanism for banks to deal with the defaulting companies. RBI has

already issued final guidelines on the regulatory frame work for ARCs in April,

2003.

However, the success of ARCs will again depend upon the legal frame work

which has to be addressed first. Legal provisions are required for transfer of the

existing loan portfolio to the ARCs without the consent of the borrowers, for

exercise of the power of private foreclosure by ARCs, authorizing ARCs to take

recourse to the Debt Recovery Tribunals and granting exemption to ARCs from

income-tax in order to mobilize resources by issue of bonds and exemption to

ARCs from payment of stamp duty on conveyance / transfer of loans assets.

5. Reduction in NPAs: The problem of the existing NPAs is currently being

tackled in several ways. Efforts are made through negotiations and discussions

with the borrowers to bring them around to settle the dues. Such settlements in

the form of One-time settlement (OTS) and Negotiated Settlement (NS) are now

being increasingly used by banks to reduce the level of NPAs. Under these

schemes banks focus on maximum payment under the settlements being received

up-front, and balance within the same financial year for quicker realization of

locked up proceeds. However, despite such efforts made by the lenders, many

defaulting borrowers exhibit reluctance to co-operate, leaving the banks no


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option but, to seek the legal route. Here lies the importance of a transparent legal

system. Reforms in the existing legal system will go a long way in reducing the

level and growth of NPAs in the banking system.

6. Legal Reforms: The legal frame work sets standards of behavior for market

participants, details the rights and responsibilities of transacting parties, assures

that completed transactions are legally binding and also provides the regulators

with the necessary teeth to enforce standards and ensure compliance and

adherence to law. Thus the legal frame work is a key element for limiting moral

hazards in Indian Banking. As the problem of NPAs is closely linked with the

issue of legal reforms the Government has taken up initiatives to align the legal

set-up with the requirements of the banking system. As early as in 1999 the

Andhyarujina Committee set up by Government of India to formulate specific

proposals to give effect to the suggestions made by the Narasimham Committee

(1998) recommended amending the Recovery of Debts due to the Banks and

Financial Institutions Act 1993 and Sick Industrial Companies Act, 1995. It also

recommended a new legislation for banks and Financial Institutions to take

possession and sale of securities without the intervention of the Court, in respect

of both immovable property and movable assets which resulted in the enactment

of SRFAESI Act 2002. The Committee also considered securitization as an

instrument to tackle the NPA problem.

7. Securitization: Securitization enables risk sharing and trading of loans where the

bad assets of banks can be securitized and sold at a discount. The lending

institution’s NPAs are hence removed from their balance sheets and are instead

funded by investors through negotiable financial instruments. The security is

backed by the expected cash flows from the assets. With securitization the NPAs

in a bank’s balance sheet can be cash upfront, which could be put to productive

use.

High incidence of stamp duties makes securitization transactions unviable.

Under statutory assignment, securitization involves transfer of debt, which can be

effected only by means of an instrument in writing. Every instrument by which


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property, whether movable or immovable, is transferred attracts as valorem stamp

duty. Also, stamp duties being a state subject, vary from State to State.

How they are bad for the economy?

NPAs constitute a real economic cost to the nation in that they reflect the application of

scarce capital and credit funds to unproductive uses. The money locked up in NPAs are

not available for productive use and to the extent that banks seek, to make provisions for

NPAs or to write them off, it is a charge on their profit.

To be able to do so, banks have to charge their productive and diligent customers a higher

rate of interest. It thus becomes a tax on efficiency. It is the customer who uses credit

efficiently that subsidizes the inefficiency represented by NPAs. This also raises the

transaction costs in the system thus denying the diligent credit customers the benefits of

lower rates, which would help them to be more efficient and competitive. NPAs, in short,

are not just a problem for the banks. They are bad for the economy.

RISK MANAGEMENT:

Banking and risk are inseparable and risk management assumes significance as the banks

have to take considerable risks. Analysis of risks also assumes importance as it

determines the pricing for the products. As banking is subject to several types of risks

like market risk, credit risk, liquidity risk, default risk, interest rate risk, investment risk,

transaction risk, forex risk, etc., proper perception and evaluation of risk is extremely

important and any short comings on this score can play havoc on the financial decision.

It has been seen that in banks managing NPAs has been a reactive response rather than a

proactive function. In a market driven environment, volatility and risk have increased

considerably in any credit dispensation. Hence, a proper perception and evaluation of risk

becomes essential along with market intelligence about the industry concerned.

EFFECTIVE APPRAISAL AND MONITORING OF LOANS:


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In the present liberalized environment, globalization has a far reaching impact on the

fortunes of the domestic industry and the bankers have to be alert and equip themselves

with the knowledge of the knowledge of the latest global trends and also study on an

ongoing basis its implications on the industries financed by them. Thus, the appraisal and

monitoring mechanism for loans needs to be revamped for control of NPAs. Banks need

a robust end-to-end credit process. A robust credit process begins with an in depth

appraisal focused on risks inherent in a loan proposal. Along with appraisal close

monitoring of the loan account is equally important. It is a well-known fact that loans

often go bad due to poor monitoring. An account does not become an NPA over night.

Systems should be in place such that the banker should be alert to catch signals of an

account turning into NPA and quickly react, analyze, and take corrective action.

Banks should have a proper system in place to ensure that to the extent possible the assets

are performing and do not turn into NPAs. In cases where the problems are of a short

term nature and borrowers agree to clear the overdues with in a short time period,

temporary deferment is generally granted by the banks. In cases where the company

requires longer time, depending upon the problems faced and the expected future cash

flows, the proposals are considered for restructuring / re-phasement of the dues.

All cases should be reviewed regularly and on the basis of review, ‘stress cases’ are

identified which require more closer and effective monitoring. For these cases it becomes

imperative to keep a close watch on the working of the company by taking up regular

visits, calling for progress reports with greater frequency, engaging the services of

concurrent auditors / technical consultants to exercise proper supervision and to obtain

independent report / assessment.

ASSETS RECOVERY BRANCH:

Assets Recovery Branches are specified branches for recovering NPA. The personnel in

the branches are professionally competent to deal with defaulters and ensure repayment.

It is meant for shifting the work of “high problem loans recovery” of main branches to


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specialized branches. It gives time to other branches to concentrate more upon branch’s

business development activities.

90 DAYS OVERDUE EFFECT:

As a facilitating measure for smooth transition to 90 days norm, banks have been advised

to move over to charging of interest at monthly rests, by April 1, 2002. However, the date

of classification of an advance as NPA should not be changed on account of changing of

interest at monthly rests. Banks should, therefore, continue to classify an account as NPA

only if the interest charged during any quarter is not serviced fully within 180 days from

the end of the quarter with effect from April 1, 2002 and 90 days from the end of the

quarter with effect from March 31, 2004.

There are two aspects to the adoption of the ’90 days’ overdue norm for identification of

NPAs. The negative aspect is that NPAs will increase in the short term. But the positive

aspect is that banks will be become pro-active in detecting smoke signals about an

account becoming bad and accordingly initiate remedial steps.

PROBLEM LOAN IDENTIFICATION:

IDENTIFICATION OF ACCOUNT:

i. Term loan if interest / installments are overdue for four months & above.

ii. Check on overdue, cash credit account if it is out of order continuously for four

months.

iii. In other loans if overdue four months & more.

REASONS FOR NON PERFORMANCE IN LOAN ASSETS:

1. Antiquated legal system in the country & the defaulter taking shelter under this.

2. Even DRT cases are not getting settled the way it was envisaged when tribunals

were set up.


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3. Most of the NPAs have the cover of collaterals by way of EM of landed

properties. But real estate market is depressed & thus impacted recoveries. Many

large corporate borrowers have turned “wish defaulters” taking shelters under

BIFR umbrella.

4. NBFCs are in doldrums, their recoveries are adversely affected & strictures on

accepting deposits has caused further resource crunch ultimately defaulting the

banks, top priority being repayment of deposits. The bank has the highest

exposure under this sector where the incidence of non performance is higher.

5. Textile industry is plagued by high cost of production & low returns, & is running

in loss and many units are being closed down.

6. The bank got fairly good exposure in real estate. The depressed real estate market

has resulted in poor recovery rate in almost the entire segment.

7. In agriculture sector poor recovery has been due to various factors-recovery &

RPDS advances has been affected by the sharp fall in rubber prices. Through out

the country aqua culture miserably failed due to reasons beyond the control of the

borrowers we are not an exception.

8. Poor recovery in schematic loans is mainly due to willful default by the

borrowers.

9. Default in share loans has been due to setback in securities market & sharp

decline in the values of equities.

RECOVERY ROUTE:

i. Lok Adalat.

ii. Compromise route is the most effective and time consuming procedure,

due to the delay in obtaining a favorable decree, further delay in the

execution of the decree, the securities available to bank may get

depreciated or alleviated.

COMPROMISE ROUTE IS POSSIBLE IN THE FOLLOWING CASES:

1. When all the remedies other than filing a suit are exhausted.


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2. Activity of the borrower closed / become unviable due to reasons beyond his

control & overdue mounting up due to application of application of interest /

penal interest & other charges & the recovery of the debt has become doubtful.

3. Legal position of the bank is weak.

4. Values of the primary / collateral securities are inadequate.

5. Not a willful defaulter.

RECOVERY MANAGEMENT – SSUGGESTIONS FOR IMPROVEMENT:

1. Recovery camps to be conducted at centers identified as having higher

concentration of irregular loans in the times of revenue recovery camps.

2. Across the table decisions on compromise proposals submitted at the recovery

campus. Officials from corporate office who attend such campus to be delegated

with powers to arrive at decisions as above.

3. Asset recovery cells to be strengthened with additional professional man power.

4. At branches where concentration of NPA is more, one of the members of the

award staff who is well versed with locality and the borrowers should be spared

from other works of the office and asked to facilitate recoveries through personal

visits and assisting the recovery officers in the unit / borrower visits. Conveyance

expenses incurred by such staff members to be reimbursed.

ASSET RECOVERY DEPARTMENT:

1. Asset Recovery Department will conduct a study of banks exposure in different

sectors, types of advances and other various parameters vis a vis the NPA

position and the findings will be communicated to all field functionaries for

initiating corrective action.

2. Efforts shall be taken by branches to speed up the disposal of non-banking

assets at the possession of the bank.

The real effect of the continuing menace of NPA will have a cascading effect on

the bottom line because of the higher and higher provisions required on such

accounts. Therefore the management of NPA calls for a short term and long term


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strategy. Prevention from further deterioration and recovery of the existing NPAs

alone are the two alternatives for us to come out of the present problems.

DEALING PROBLEMS LOANS:

ASSETS COMING UNDER SMALL VALUE SEGMENTS:

1. Accounts with net balance up to Rs.5000 are identified as small value assets

and considering the huge volume of such accounts, we had taken decision to

shed such assets coming under priority sector. (Loss and doubtful category

only) and regional heads are given delegation to write-off such assets.

2. Now its felt that small value band can be extended upto Rs.10000. Similarly,

non priority sector, small loans identified as loss or doubtful will also have to

be shed to give administrative efficiency upto larger NPAs.

3. Recovery policies in this segment shall be more flexible and functionaries at

regional office shall be given complete freedom in the settlement of such

accounts. Most of the accounts under this category come under priority sector

and primary / collateral securities are not generally available and many

borrowers are not even available for contact, there is no such scope for legal

action also. Hence recovery done by means of:

Personal contacts.

Persuasion.

Compromise.

Revenue recovery.

2. Salvage operations are to be intensified for effecting recoveries under loss

asset categories and also in cases where we have already shed assets.

3. Incentive schemes for motivating members of staff are to be built in the

recovery policy of the bank.

Considering the above facts, the department suggests the following measures for

the optimum recovery in the small value band upto Rs.10000.00

1. No legal actions to be initiated against borrowers coming under the small valued

band.


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2. In cases of failure of letter personal contact and persuasion fall, go for

compromise.

3. Services of approved recovery agents can be considered very discreetly in the

recovery of small value accounts.

4. If all the above efforts fall the regional heads can use their discretion for

shedding such assets.

5. The decision of compromise and shedding of loss / doubtful assets will be done

through committee approach at the regional offices.

6. In case of doubtful / loss assets category and assets already written off, members

of the staff can be given incentives including reimbursement of actual

experiences incurred restricted to a certain percentage of recovery.

SUB-STANDARD ASSETS:

This segment is more effort elastic in terms of recovery and hence the bank’s recovery

policy is to be tuned up for maximizing the recoveries from the sub-standard efforts.

NPA RECOVERY ACTION PLAN:

1. Send simple reminder letters in installments / interest debited are not serviced on

due dates.

2. If no results are forthcoming from the reminders, meet the borrower in person and

persuade them to settle the accounts in persons.

3. Officials from the assets recovery cell at the regional office to compulsorily meet

the borrower with Rs.5lakhs and evaluate the reasons for non performance of

account and suggest / evolve methods to improve the quality.

4. In cases of sick but viable industries units prospects for rehabilitation are to

looked into and nursing programme to be evolved.

5. If the accounts have become NPA due to cash flow problem the repayment

programme must be rescheduled according to the revised cash flow projections.

This will enable the bank to maintain asset quality at the same level for 2 years, if


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the asset quality can be upgrade after two years, if the repayment is coming as per

the redrawn schedule.

6. If the borrower is co-operative the settlement through compromise route to be

considered.

DOUBTFUL ASSETS:

Slippage of assets from sub-standard category to doubtful necessitates higher provisions

requirements. Depending on the age of the asset, 20% to 50% provision has to made on

such assets on the secured portion and 100% provision is required on the unsecured

provision. Recovery of the doubtful assets in the normal course is difficult; the following

strategies can be adopted in handing doubtful assets:

1. Borrowers are to be met in person to get the accounts settled through persuasion.

2. Ensure that the securities charged to the bank are in tact and are not alienated.

3. Securities are to be inspected at periodic intervals and correct value properly

recorded.

4. Legal remedy is the last resort.

5. Most of the accounts coming under this category are either suit filed or RR

initiated. In case of suit filed accounts, cases are to be closely followed up with

the advocated to ensure that the decree is obtained within a reasonable time.

LOSS ASSETS:

CHANCES OF RECOVERY IN MOST OF THESE CASES ARE VERY REMOTE:

1. If recovery in the normal course is difficult, we may have to resort to legal

remedies against the borrowers, guarantor, co-obligate, and efforts shall be made

to bring them to a compromise table for the settlement of the accounts.

2. In case of accounts coming under priority sector, recovery through the RR route is

to be resorted to.

3. As per loss assets are concerned we have made 100% provision for loan losses.

Hence there will not be any further impact on bottom line. If these assets are shed,


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notionally from the books of the bank. Such notional write-off will help in

cleansing the balance sheet.

4. Even after write-off the branches can continue the recovery efforts thus made and

can improve the bottom line of the bank.

5. Recovery through legal action is time consuming.

4. ANALYSIS & INTERPRETATIONS OF DATA

FINANCIAL ANALYSIS:

The term financial analysis refers to the process of determining financial strengths and

weakness of the firm by establishing strategic relationship between the items of balance

sheet, profit and loss account other operative data.

The purpose of financial analysis is to diagnose the information contained in financial

statements so as to judge the profitability and financial soundness of the firm.


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NON PERFORMING ASSETS RATIO:

NET NPA RATIO:

It is the most important ratio which measures the NPA as a percentage of advances.

CANARA BANK PROGRESS AT A GLANCE

(Amt in Crore)

2003-04 2004-05 2005-06

No. of branches 2409 2424 2469

Capital 578 410 410

Reserves 2894 3739 4842

Deposits 64030 72095 86345

% Growth 8.4 12.6 19.77

Non-Resident Deposits 11358 12482 12909

Foreign Business Turnover 59333 65676 47347


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Canara Bank

Advances (Net) 33127 40472 47639

% Growth 19.02 22.17 17.71

Advances to Priority Sector 10536 14604 19580

Agriculture 3888 5407 6545

Small Scale Industries 3366 3884 4971

Advances under DIR Scheme 18 21 38

Advances to SC/ST 478 598 758

Export Credit 3672 4429 5497

Deposit Accounts (in Millions) 23 23 22.48

Borrowal Accounts (in Millions) 2.38 2.64 2.88

Total No. of Staff 47796 47566 47613

Total Income 7799 8170 9080

Total Expenditure 6143 6173 6221

Operating Profit 1656 1997 2859

Net Profit 741 1019 1338

IMPORTANT RATIOS (%)

Capital Adequacy Ratio 11.88 12.5 12.66

Return on Assets (RoA) 1.03 1.24 1.34

Earning Per Share (Rs) 12.83 20.56 32.63

Book Value (Rs) 57.84 98.14 125.14

Net NPA Ratio 3.89 3.59 2.89


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Priority Credit to Net Credit 41 42 44

Business per Employee (Rs.in crore) 2.15 2.5 3

Profit per Employee (Rs in Lakh) 1.64 2.26 2.97

TABLE: 1

Table showing Net NPA Ratio% from 2003-04 to 2005-06

2003-2004 2004-2005 2005-2006

3.89 3.59 2.89

GRAPH: 1

Graph showing Net NPA Ratio% from 2003-04 to 2005-06


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Canara Bank

Interpretation

Prudent asset management was accorded greater emphasis during the year 2005-2006.

Gross NPA of the bank as at March 2006 stood higher at Rs.3127 crore. Primary due to

the introduction of new 90 day norms. As a result Gross NPA ratio of the bank stood at

6.33% compared to 5.96% a year ago. While Net NPA of the bank stood at Rs.1378

crore, Net NPA ratio came down to 2.89% from 3.59% asset March 2005. On the

recovery front, the banks performance under cash recovery stood at Rs.606 crore

compared to Rs.563 crore a year before. During the year 7107 recovery meets were

conducted by the bank leading to statement of 21201 accounts involving compromise

amount of Rs.274.77 crore and resulting in recovery of Rs.187.46 crore.

TABLE: 2

Table showing Capital Adequacy Ratio from 2003-04 to 2005-06

2003-2004 2004-2005 2005-2006

11.88 12.50 12.66

GRAPH: 2

Graph showing Capital Adequacy Ratio from 2003-04 to 2005-06


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Canara Bank

Interpretation

The banks owned funds, as at March 2005 aggregated to Rs.1531 crore as against

Rs.4024 crore as while the banks capital stood at 410 crore. In order to further argument

its capital base, the bank raised their 2nd capital worth Rs.250 crore during 2005-06.

Capital to Risk weighted Asset Ratio (CRAR) of the bank improved further to 12.66% as

at March 2005 from 12.05% as at March 2005. A dividend of 50% amounting to Rs.205

crore, has been proposed by BOD for the year ended March 2006 including an interim

dividend of 25% declared after the finalization of account for first half of 2005-06 and

fully complying with RBI guidelines on dividend declaration policy. This is as against

distributed as dividend for the year 2004-2005.

TABLE: 3

Table showing Return on Assets (RoAs) from 2003-04 to 2005-06

2003-2004 2004-2005 2005-2006

1.03 1.24 1.34

GRAPH: 3

Graph showing Return on Assets (RoAs) from 2003-04 to 2005-06


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Canara Bank

Interpretation:

This ratio correlates between the total assets and the net profit. The return on total assets

(also return on capital employed or return on investment) is defined as Net Income

(Profit) divided by average total assets. A return of 10 percentages is considered as ideal

ratio. As such, if the actual ratio is equal or more than 10 percentage, it indicates the

higher productivity of the total resources / assets and vice verse in adverse cases.

TABLE: 4

Table showing Earning per Share (EPS) from 2003-04 to 2005-06

2003-2004 2004-2005 2005-2006

12.83 20.56 32.63

GRAPH: 4

Graph showing Earning per Share (EPS) from 2003-04 to 2005-06


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Canara Bank

Interpretation:

The ratio measures the profit available to the equity holders on a per share basis. It is

found out by dividing the amount of profit after tax by the number of shares. The earning

per share of the bank has increased drastically in the year 2005-2006 i.e. 32.63 compare

to 2003-2004 i.e. 12.83, which is good sign of the bank.

TABLE: 5Non-Performing Assets as Percentage of Advance – Public Sector BanksAs on March 31 in percent

Net NPA as % to Net Advances

Sl.No Name of the Banks 2004 2005 2006

I NATIONALISED BANKS1. Allahabad Bank 10.57 7.08 2.372. Andhra Bank 2.45 1.79 0.933. Bank of Baroda 5.06 3.72 2.99


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4. Bank of India 6.02 5.37 4.505. Bank of Maharastra 5.81 4.82 2.466. Canara Bank 3.89 3.59 2.897. Central Bank of India 7.98 7.02 5.578. Corporation Bank 2.31 1.65 1.809. Dena Bank 16.31 11.83 9.4010. Indian Bank 8.28 6.15 2.7111. Indian Overseas Bank 6.32 5.23 2.8512. Oriental Bank of Commerce 3.20 1.40 NIL 13. Punjab & Sind Bank 5.32 10.89 9.62 14. Punjab National Bank 11.70 3.86 0.9815. Syndicate Bank 4.52 4.29 2.5816. UCO Bank 5.45 4.36 3.6517. Union Bank of India 6.26 4.91 2.8718. United Bank of India 7.90 5.52 3.7519. Vijaya Bank 6.02 2.61 0.91

II State Bank of India [SBI] 5.63 4.50 3.48

III ASSOCIATES OF SBI State Bank of Bikaner & Jaipur 5.72 4.13 1.24 State Bank of Hyderabad 4.97 3.25 0.65 State Bank of Indore 3.58 2.66 NIL State Bank of Mysore 7.36 5.19 2.96 State Bank of Patiala 2.94 1.40 NIL State Bank of Saurashtra 4.95 3.53 NIL State Bank of Travancore 5.77 3.06 1.39

Interpretation: The ratio of net non-performing assets to net advances also declined during 2005-06. Majority of the banks, this ratio is less than 4 percent. Dena Bank has the highest ratio with 9.4 percent followed by Central Bank of India with 5.6 percent. 4 banks reported “nil” ratio during 2005-06. Net NPA ratio of the Canara Bank declined from 3.59% as at March 31st 2005 to 2.89% as at March 31st 2006. TABLE: 6

Public Sector Banks: Total Assets

As on March 31 Rs. in crore

TOTAL ASSETS

Sl.No. Name of the Bank 2004 2005 2006

I. NATIONALISED BANK 1 Allahabad Bank 24764 28051 34704 2 Andhra Bank 20937 24678 27009


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3 Bank of Baroda 70910 76425 85109 4 Bank of India 69806 76627 84860 5 Bank of Maharastra 21470 24905 32213 6 Canara Bank 72135 82055 99539 7 Central Bank of India 52614 57105 63345 8 Corporation Bank 23604 26272 29154 9 Dena Bank 18842 20162 22160 10 Indian Bank 30263 35375 39154

11 Indian Overseas Bank 35441 41155 4732212 Oriental Bank of Commerce 32237 33999 4100713 Punjab National Bank 72915 86222 10233214 Punjab & Sind Bank 13754 14491 1501115 Syndicate Bank 31756 34435 4722316 UCO Bank 31881 34914 4379817 Union Bank of India 44358 51060 5831718 United Bank of India 22776 24269 2584319 Vijaya Bank 16145 19072 24071 Total of 19 Nationalized Banks 674352 791272 922171

II. State Bank of India (SBI) 348228 375877 407815

III. ASSOCIATES OF SBI State Bank of Bikaner & Jaipur 15504 18038 20256 State Bank of Hyderabad 22121 26132 30646 State Bank of Indore 9846 11364 13044 State Bank of Mysore 10354 11336 13758 State Bank of Patiala 17373 21289 26897 State Bank of Saurashtra 9370 11453 12837 State Bank of Travancore 16493 19033 24003 Total of 7 Associates 101061 118645 141441 Total of SBI Group 449289 494522 549256 Total of Public Sector Banks 1123641 1285794 1471427

GRAPH: 5

Public Sector Banks: Total Assets


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Interpretation:

Total Assets of the Public Sector Banks (PSBs) increased from Rs.12,85,794 crore as on

31st March, 2005 to Rs.14,71,427 crore as on 31st March 2006 showing a growth rate of

14.4 percent which is higher than the growth rate of 11.2 percent of the previous year.

During the year 2005-06, 14 Banks reported higher growth rate than the average growth

rate of the group. Syndicate bank recorded the highest growth in total assets with 37.1

percent during 2005-06. Total Assets of the Canara Bank increased from Rs.82055 crore

as on 31st March 2005 to Rs.99539 crore as on 31st March 2006, showing a growth rate of

21.3% which is higher than the growth rate of 13.8 percent of the previous year.

TABLE: 7

Public Sector Banks: AdvancesAs on March 31st Rs. in crore

Sl.No Name of the Bank 2004 2005 2006


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I. NATIONALIZED BANKS 1 Allahabad Bank 10482 12544 15342 2 Andhra Bank 9678 11513 12885 3 Bank of Baroda 33663 35348 35601 4 Bank of India 38311 42633 45856 5 Bank of Maharastra 8255 9508 11732 6 Canara Bank 33127 40472 47639 7 Central Bank of India 21288 23159 22804 8 Corporation Bank 10987 12029 13890 9 Dena Bank 7523 8436 9412 10 Indian Bank 10908 12275 14126 11 Indian Overseas Bank 15162 17447 20295 12 Oriental Bank of Commerce 14158 15677 19681 13 Punjab & Sind Bank 5577 5892 6030 14 Punjab National Bank 34369 40228 47225 15 Syndicate Bank 14885 16305 20647 16 UCO Bank 12805 15923 20626 17 Union Bank of India 21883 25515

29426 18 United Bank of India 6823 7352 7963 19 Vijaya Bank 6197 7884 11045 Total of 19 Nationalized Banks 315581 360140 12225

II. State Bank of India (SBI) 120806 137758 157934 III. ASSOCIATES OF SBI 1 State Bank of Bikaner & Jaipur 5883 6778 8597 2 State Bank of Hyderabad 8423 9663 11814 3 State Bank of Indore 4285 5183 6406 4 State Bank of Mysore 4915 5261 6307 5 State Bank of Patiala 8679 10746 13086 6 State Bank of Saurashtra 4111 4649 5240 7 State Bank of Travancore 7436 9171 11132

TOTAL OF 7 ASSOCIATES [III] 43732 51446 62582 TOTAL OF STATE BANK

GROUP [II+III] 164538 189204 220516 TOTAL OF PUBLIC SECTOR BANKS [I+II+III] 480119 549344 632741

GRAPH: 6

Public Sector Banks: Advances


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Canara Bank

Interpretation:

The rate of growth in advances showed slight improvement during 2005-06 as compared

to previous year. Total advances increased to Rs.6,32,741 crore as on 31 st March, 2006

from Rs.5,49344 crore recording a growth rate of 15.2 percent as against the growth rate

of 14.4 percent of the previous year. In the case of nationalized banks there is a marginal

improvement in the credit disbursement from 14.1 percent during 2004-05 to 14.5 percent

during 2005-06. State Bank Group showed better growth in advances than the

nationalized banks group with a growth rate of 16.6 percent during 2005-06 as against

15.0 percent of the previous year. 17 banks recorded higher growth in advances than the

group average with Vijaya Bank in the top slot with 40.1 percent. Other banks, which

have showed impressive growth in advances were, UCO Bank (29.5 percent), State Bank

of Bikaner & Jaipur (26.9 percent), Syndicate Bank (26.6 percent) and Oriental Bank of

Commerce (25.5 percent). Central Bank of India recorded a declined growth in advances

with 1.5 percent during 2005-06. The total advances of the Canara Bank increased to

Rs.47639 crore as on 31st March, 2006 from Rs.40472 crore as on 31st March 2003

recorded a growth rate of 17.7 percent.

TABLE: 8 Public Sector Banks: Gross NPAAs on March 31st Rs.in crore

Gross NPA


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Canara Bank

Sl.No Name of the Bank 2004 2005 2006

I. NATIONALIZED BANKS 1 Allahabad Bank 2002 1842 1418 2 Andhra Bank 524 581 615 3 Bank of Baroda 4489 4168 3980 4 Bank of India 3722 3804 3734 5 Bank of Maharastra 906 958 954 6 Canara Bank 2112 2475 3127 7 Central Bank of India 3243 3244 3092 8 Corporation Bank 587 657 722 9 Dena Bank 1996 1617 1484 10 Indian Bank 2175 1630 1192 11 Indian Overseas Bank 1819 1896 1576 12 Oriental Bank of Commerce 952 1146 1211 13 Punjab & Sind Bank 1092 1247 1204 14 Punjab National Bank 4140 4980 4670 15 Syndicate Bank 1299 1420 1590 16 UCO Bank 1333 1366 1479 17 Union Bank of India 2420 2288 2347 18 United Bank of India 1216 959 764 19 Vijaya Bank 603 506 390 Total of 19 Nationalized Banks 36630 36884 35549


III. ASSOCIATES OF SBI State Bank of Bikaner & Jaipur 585 580 484 State Bank of Hyderabad 899 740 691 State Bank of Indore 320 295 266 State Bank of Mysore 625 562 515

State Bank of Patiala 628 531 503 State Bank of Saurashtra 443 354 200 State Bank of Travancore 728 635 662 Total of 7 Associates 4228 3697 3321

Total of SBI Group 19714 17203 15988

Total of Public Sector Banks 56344 54087 51537

GRAPH: 7

Public Sector Banks: Gross NPA


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Interpretation:

Various supportive policy measures coupled with consistent efforts on the part of the

banks helped to reduce the gross and net non-performing assets of the banks in absolute

terms as on 31st March, 2006. Gross NPA of PSBs declined from Rs. 54,087 crore to

Rs.51,537 crore and Net NPA came down from Rs.24,866 crore t Rs.18,859 crore as on

31st March,2005 and 2006 respectively. Gross NPA declined by 24.2 percent during

2005-2006. Seven Banks showed higher growth in Gross NPA than the previous Year.

Gross NPA of the Canara Bank increased from Rs.2475 crore to Rs.3127 crore as on 31 st

March 2006. Gross NPA increased by 26.3%.

TABLE: 9 Public Sector Banks: Net NPAAs on March 31st Rs. in Crore

Net NPA


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Canara Bank

Sl.No. Name of the Bank 2004 2005 2006

I. NATIONALIZED BANKS 1 Allahabad Bank 1160 887 363 2 Andhra Bank 237 206 120 3 Bank of Baroda 1913 1700 1761 4 Bank of India 2304 2286 2062 5 Bank of Maharastra 480 459 288 6 Canara Bank 4288 1454 1378 7 Central Bank of India 1699 1563 1271 8 Corporation Bank 253 198 250 9 Dena Bank 1227 997 884 10 Indian Bank 904 755 383 11 Indian Overseas Bank 958 912 578 12 Oriental Bank of Commerce 454 225 NIL 13 Punjab & Sind Bank 651 639 577 14 Punjab National Bank 1810 1527 449 15 Syndicate Bank 690 700 532 16 UCO Bank 724 697 753 17 Union Bank of India 1338 1253 845 18 United Bank of India 542 406 299 19 Vijaya Bank 373 206 100

Total of 19 Nationalized Banks 22005 17070 12893


III. ASSOCIATES OF SBI State Bank of Bikaner & Jaipur 342 282 107

State Bank of Hyderabad 417 315 77 State Bank of Indore 153 138 NIL State Bank of Mysore 362 273 186 State Bank of Patiala 255 161 NIL State Bank of Saurashtra 204 164 NIL State Bank of Travancore 425 280 154s Total of 7 Associates 2158 1613 524

Total of SBI Group 8968 7796 5966

Total of Public Sector Banks 30973 24866 18859

GRAPH: 8

Public Sector Banks: Net NPA


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Interpretation:

In the case of Net NPA, four banks (Oriental Bank of Commerce, State Bank of Indore,

State Bank of Patiala and State Bank of Saurashtra) reported “zero” NPAs. Two banks

(Banks of Baroda and UCO Bank) recorded higher growth in Net NPA during 2005-2006

than the previous year. Net NPA of the Canara Bank declined from Rs.1454 crore to

Rs.1378 crore as on 31st March 2006. Net NPA decreased by 5.2%.

TABLE: 10

Public Sector Banks Credit – Deposit Ratio


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Canara Bank

Name of the Bank 2004 2005 2006

NATIONALIZED BANKS [I]Allahabad Bank 46.25 49.26 48.74Andhra Bank 52.34 54.66 56.17Bank of Baroda 54.47 53.26 48.79Bank of India 64.29 66.15 64.58Bank of Maharastra 43.15 42.88 44.36Canara Bank 51.74 56.14 55.17Central Bank of India 45.16 45.26 40.79Corporation Bank 58.06 55.37 59.89Dena Bank 48.99 51.15 51.29Indian Bank 45.38 45.44 46.40Indian Overseas Bank 47.67 47.54 48.92Oriental Bank of Commerce 49.70 52.59 55.17Punjab & Sind Bank 44.68 44.56 44.00Punjab National Bank 53.60 53.06 53.72Syndicate Bank 52.14 53.18 48.48UCO Bank 47.69 50.80 52.56Union Bank of India 53.74 57.02 58.20United Bank of India 34.79 34.96 34.99Vijaya Bank 42.21 46.87 52.56Total of 19 Nationalized Banks [I] 51.10 52.32 51.92

State Bank of India (SBI) [II] 44.65 46.52 49.57

ASSOCIATES OF SBIState Bank of Bikaner & Jaipur 50.45 51.18 54.96State Bank of Hyderabad 48.40 46.91 48.70State Bank of Indore 54.11 56.23 61.49State Bank of Mysore 57.65 58.37 56.90State Bank of Patiala 62.24 60.14 58.23State Bank of Saurashtra 54.07 51.36 49.09State Bank of Travancore 55.24 57.58 56.45TOTAL OF 7 ASSOCIATES [III] 54.32 54.20 54.77

TOTAL OF STATE BANK GROUP [II+III] 46.87 48.39 50.94

TOTAL OF PUBLIC SECTOR BANKS 49.57 50.57 51.57


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GRAPH: 9

Public Sector Banks: Credit – Deposit Ratio

Interpretation:

Credit Deposit Ratio (C/D) of all Public Sector Banks improved marginally from 54.2

percent during 2004-05 to 54.8 percent 2005-06. 11 banks recorded higher C/D ratio than

the group’s average. Bank of India recorded the highest ratio with 64.6 percent followed

by State Bank of Mysore with 61.5 percent and Corporation Bank with 59.9 percent. The

lowest ratio of 34.9 percent was recovered by United Bank of India. Canara Bank

recorded higher credit deposit ratio than the group’s average with 55.17%.

TABLE: 11


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Comparative NPA Bank Figures- Public Sector Banks

Name of the Bank Net NPA Net NPA Variation in % Reduction2005-% 2006-% Net NPA % in Net NPA%

Allahabad Bank 7.08 2.37 4.71 66.53Andhra Bank 1.79 0.93 0.86 48.04Bank of Baroda 3.72 2.99 0.73 19.62Bank of India 5.37 4.50 0.87 16.20Bank of Maharastra 4.82 2.46 2.36 48.96Canara Bank 3.59 2.89 0.70 19.49Central Bank of India 7.02 5.57 1.45 20.65Corporation Bank 1.65 1.80 -0.15 0.00Dena Bank 11.83 9.40 2.43 20.54Indian Bank 6.15 2.71 3.44 55.93Indian Overseas Bank 5.23 2.85 2.38 45.51Oriental Bank of Commerce 1.40 NIL 1.40 100.00Punjab & Sind Bank 10.89 9.62 1.27 11.66Punjab National Bank 3.86 0.98 2.88 74.61Syndicate Bank 4.29 2.58 1.71 30.86UCO Bank 4.36 3.65 0.71 16.28Union Bank of India 4.91 2.87 2.04 41.55United Bank of India 5.52 3.75 1.77 32.06Vijaya Bank 2.61 0.91 1.70 65.13State Bank of India (SBI) 4.50 3.48 1.02 22.67State Bank of Bikaner& Jaipur 4.13 1.24 2.89 69.98State Bank of Hyderabad 3.25 0.65 2.60 80.00State Bank of Indore 2.66 NIL 2.66 100.00State Bank of Mysore 5.19 2.69 2.23 42.97State Bank of Patiala 1.49 NIL 1.49 100.00State Bank of Saurashtra 3.53 NIL 3.53 100.00State Bank of Travancore 3.06 1.39 1.67 54.58

Interpretation:

There is an increase of 90% in the ratio of Net NPA of the Corporation Bank in March

2006 than previous year. In the case of all other public sector banks the ratio declined

during March 2006. The Net NPA percentage of Canara Bank has reduced by over 19%.


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TABLE: 12

NPAs and Recoveries of Public Sector Banks (Rupees in Crore)

NPAs Recoveries

Name of the Bank (31.3.06) (31.3.2004) (31.3.2005) (31.3.2006)

State Bank of India 12,667 3,415 4,559 6,668State Bank of Bikaner & Jaipur 484 228 218 172State Bank of Hyderabad 691 273 415 425State Bank of Indore 266 123 166 142State Bank of Mysore 515 143 170 242State Bank of Patiala 503 157 239 260State Bank of Saurashtra 200 98 233 176State Bank of Travancore 662 309 235 225

TOTAL 15,988 4,746 6,235 8,310

Allahabad Bank 1,418 280 350 571Andhra Bank 615 168 155 180Bank of Baroda 3,980 836 731 1,039Bank of India 3,734 186 212 216Bank of Maharastra 954 941 1,067 1,144Canara Bank 3,127 596 782 865Central Bank of India 3,092 543 635 831Corporation Bank 722 85 143 107Dena Bank 1,484 259 549 673Indian Bank 1,192 1,035 561 1,039Indian Overseas Bank 1,576 356 360 526Oriental Bank of Commerce 1,211 388 492 436Punjab National Bank 4,670 531 500 706Punjab & Sind Bank 1,204 91 181 160Syndicate Bank 1,590 179 171 266Union Bank of India 2,347 357 339 716UCO Bank 1,479 564 373 357United Bank of India 764 263 294 340Vijaya Bank 390 177 182 246

TOTAL 35,549 7,835 8,077 10,418

Grand Total 51,537 12,581 14,312 18,728


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GRAPH: 10

NPAs and Recoveries of Public Sector Banks

Interpretation:

State Bank of India recorded the highest recovery of NPAs amounted to Rs.6.668 crore

during 2005-2006 followed by Bank of India Rs.1144 crore. Canara Bank has initiated

several steps for reduction of NPAs and achieved substantial cash recovery to the extent

of Rs.865 crore during the year 2005-2006. [Previous Year Rs.782 crore].


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TABLE: 13

NPA Financial Highlights- Canara Bank

As on As on As on As on

31.03.03 31.03.04 31.03.05 31.03.06

Gross NPA [Rs. in crore] 2150 2112 2475 3127

Percentage of Gross NPA 7.72% 6.22% 5.96% 6.33%

Net NPA [Rs. in crore] 1345 1288 1454 1378

Percentage of Net NPA 4 84% 3.89% 3.59% 2.89%

Provision for NPA [in cr] 399 385 476 1239


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GRAPH: 11

NPA Financial Highlights – Canara Bank

Interpretation:

During 2003-2004, the Canara Bank continued to accord top priority to its asset quality

and achieved considered success in bringing down volume of its impaired assets. Gross

NPA came down from Rs.2150 crore to Rs.2112 crore and as a percentage to total

advances from 7.72% to 6.22%. Net NPA of the bank declined from Rs.1345 crore at

March 2003 to Rs.1288 crore at March 2004, the Net NPA ratio coming from 4.81% to

3.89%. Provisions made during the year for NPA amounted to Rs.385 crore (previous

year Rs.399 crore).

During 2005-2006, Gross NPA increased from Rs.2475 crore to Rs.3127 crore and as a

percentage to total advances increased from 5.96% to 6.33%. Net NPA of the bank

declined from Rs.1454 crore at March 2005 to Rs.1378 crore at March 2006, the Net

NPA ratio coming from 3.59% to 2.89%. The provisions made during the year for NPA

amounted to Rs.1239 crore (Previous Year Rs.476 crore).


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5. FINDINGS AND CONCLUSIONS

SUMMERY OF FINDINGS:

The Net NPA ratio of the Canara Bank declined from 3.59% as at March 31 st

2005 to 2.89% as at March 31st 2006.

Total assets of the Canara Bank increased from Rs. 82055 crore as on 31st March

2005 to Rs.99539 crore as on 31st March 2006, showing a growth rate of 21.3%

which is higher than the growth rate of 13.8% of the previous year.

The total advances of the Canara Bank increased from Rs.47639 crore as on 31 st

March, 2006 from Rs.40472 crore recording a growth rate of 17.7%.

Gross NPA of the Canara Bank increased from Rs.2475 crore to Rs.3127 crore as

on 31st March 2006. Gross NPA increased by 26.3% during 2005-2006.

Net NPA of the Canara Bank declined from Rs.1454 crore to Rs.1378 crore as on

31st March 2006. Net NPA decreased by 5.2%.

Canara Bank has recorded a credit-deposit ratio of 55.17% which is higher than

the group’s average of public sector banks during 2005-2006.

The Net NPA percentage of Canara Bank has reduced by over 19% during 2005-

2006.

Canara Bank has recovered its NPA which is amounted to Rs.865 crore during

2005-2006 (Previous year Rs.782 crore).

The percentage of gross NPA of the Canara Bank during 2004-2006 is 6.33% and

the provisions made during the year amounted to Rs.1239 crore.

The Canara Bank has taken steps to implement an Integrated Risk Management

System, covering credit, operational and market risks.


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CONCLUSION:

NPA Act is a fine, comprehensive and an extra-ordinary piece of legislation. It is also a

reassuring sign of Government’s commitment to reforms. The Act empowers banks to

change or take over the management or even take possession of secured assets of the

borrowers and sell or lease out the assets. This is for the first time that the banks can take

over the immovable assets of the defaulting borrowers without the intervention of the

court. They can claim future receivables and supersede the Board of Directors of the

defaulting corporates. No court, other than Debt Recovery Tribunal, can entertain any

appeal against the action taken by Banks and Financial Institutions under this act.

When this Act was enacted, it was seen as a panacea to the entire problem of NPAs. The

banks were euphoric and they took action swiftly. Notices were flashed to defaulters.

Cash recovery became a reality. Banks have seized assets of number of borrowers.

The problem of bad loans could be due to bad intensions or bad financial management or

otherwise and also due to several external reasons. The main concern is the prevention of

further slippage of performing accounts into the non performing category in the first

instance.

Preventing fresh flow of NPAs is as important as the recovery of the existing heavy stock

of NPAs.

There can not be any quick fix or one short solution to solve the NPA problem. Once

recovery reforms are carried out, market for stressed assets are developed, this

Securitization Act will surely help banks in reduction of NPAs to a great extent. Passing

of the law cannot be considered to be synonymous with addressing the underlying

problem our legal system has so far failed to enforce contractual obligations and this is

hardly likely to cure this fundamental ill, unless more legal reforms are made and strictly

enforced in true letter and spirit. Banks should also be empowered to proceed against the


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personal assets of the directors of the defaulting units / companies / groups etc. to enable

the act to be more effective and proactive as well.

Exchange of credit information among banks would be of immense help to avoid possible

NPAs. The banking system ought to be so geared that a defaulter at one place is

recognized as a defaulter by the system. The system will have to provide a mechanism to

ensure that the unscrupulous borrowers are unable to play one bank against the other.

A ‘defaulter’s alert system’ should be introduced to track potential defaulters by diving

into their credit history and thus keeping such people aloof from the banking system.

The above steps if effectively implemented can result in reduced NPAs.


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6. SUGGESTIONS

The origin of the problem of burgeoning NPAs lies in the quality of managing

credit risk by the banks concerned. What is needed is having adequate preventive

measures in place namely, fixing pre-sanctioning appraisal responsibility and

having an effective post-disbursement supervision.

Banks concerned should continuously monitor loans to identify accounts that have

potential to become non-performing.

Banks should create a new model of banking business by giving loans to the

credit worthy and persons having clean credit history.

There is an ‘urgent’ need for banks to implement risk management systems of

global repute. Canara Bank should timely implement effective risk management

system.

Canara Bank should offer rescheduling of loans of those borrowers who were

struggling with high interest rates in a falling interest rate environment.

Canara Bank should concentrate more on credit appraisal, monitoring, credit risk

management and recoveries.

Finding out the real reason behind irregular repayments or defaults and if it is not

willful then offer good debt management advice to the borrower.

A credit checklist should be prepared for granting a loan and atleast five of the

checklist questions should be answered positively. It can help the banking

personnel to take adequate precaution before granting a loan.


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Settlement is a better option for the banks wrestling with the problem of non-

performing assets. While getting a court decree for taking over assets may be

easy, the real litigation starts at the time of execution.

While lending, lender wants to make sure that the borrower is both able and

willing to meet the repayments.

Credit scoring allows lenders to determine whether or not you fit the profile of the

type of customers they are looking for. It works by comparing your details such as

your previous credit history, job and salary with those of previous customers who

have paid on time. Your score is worked out using a computer-based ‘score card’

which awards your application points, according to the lender’s own criteria and

lending policy. Many see credit scoring as a quick, fair and best practice.


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