NILESH Project

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A

PROJECT REPORT

ONNPA ANALYSIS

AT

PUNJAB NATIONAL BANK, Nashik road.

-: Submitted By:-

PATIL BHUSHAN BANSILAL

MBA-II (finance)

-: The Research Guide:-

Prof. D. D. Walke

For The Academic Year

2008-2009

NDMVPS Institute of Management Research and Technology, Nasik

2008-2009

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CHAPTER 1. Introduction

1.1 Need of the Project

The project forms a very vital aspect during the curriculum of MBA. At the end of the first

year students are required to undergo a summer training program of 60 days.

This training is an integral part of MBA course and its importance lies in the fact that it

gives the students their first exposure to an organization.

The training undertaken in Punjab National bank is with a few objectives

They are

1. to get the opportunity or real life business experience

2. To be able to apply theoretical knowledge obtained at the institute practically in actual

business environment3. To have a comprehensive understanding of the company

4. To get acquainted with real organizational problems, perceptions and challenges.

5. To get an opportunity to interact with dynamic managers and all other dyamic levels of the

organization and again knowledge through their real life experiences.

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1.2 Selection of the Topic

The topic selected for the project is NPA analysis

Why?

Any bank whether corporate or national in order to earn profits. Grant loans and advances

with a risk of having them defaulted. Default means customers incapability for non-payment of

loan or any installment. For the bank it also proves to be a NPA.

Thus, I thought the default analysis is a very essential point of banking sector and that had

to be studied. So, I selected this crucial topic.

Punjab National bank provided me the opportunity to undertake the study.

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1.3 Objectives of the study

Every bank faces a cutthroat and for its survival in the market, has to satisfy its customers

by providing them quality services. But this involves a major risk.

The main objectives of the study are:

1. To study the organizational structure of Punjab National bank

2. To study the various kind of loans granted by Punjab National bank

3. To study the various documents required for a loan.

4. To study the concept default and various reasons for default.

5. To study the concept NPA and its effects.

6. To study the strategies to reduce the defaults.

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1.4 Methodology of the study

Project methodology includes various steps. There should be a systematic way of collecting

data and presentation of project report. Methodology is a systematic way of solving a problem. It

includes the research methods and logics behind these methods. Collecting data analyzing the

same conducted the main study.

Data collection -

The data available for the project was in the form of concrete facts, figures as well as

verbal information regarding the facts and figures.

Primary data collection -

The primary or basic information was collected by the help of discussions with the branch

manager, the staff and the departmental head of the loan section the basic concepts like NPA,

default, MPBF, etc. Were explained by them, which helped to analyze and collect secondary data.

Moreover a questionnaire was prepared and a sample of 10 was selected (the customers).T

data was collected which helped to analyze the defaulters from customers viewpoint. The questio

included viz. loan taken from Punjab National bank (i.e. amount, rate of interest), Purpose of loan, an

reason for default.

Secondary data collection

Secondary data was the main source of getting information. The default cases studied and

analyzed were in the form of record files with the bank.

Moreover, balance sheet of past 3 year viz. 05-06, 06-07, 07-08. Proved to be a concrete

source to get the exact figure for loans and NPA. The balance sheet also proved to be of help in

getting the profile of the bank.

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1.5 Scope and Limitations of the Study

1. The project was conducted in a short span of 2 months which it self acts as constraint. Moreover

it also puts pressure for data collection and analysis of the data.

2. It is based on the study of only one nationalized bank.

3. The study reveals the reasons only from the point of view of the bank and not the view of the

customers.

4. As per the banks policy there are restrictions on disclosing some information data.

5. The MIS system is very confidential and hence all the bank records were not fully accessible.

6. Approximate values are used for the analyzing. Hence the results also reveal the approximate

values.

7. As per default is from the customers it was not advisable by the managers to interview thecustomers.

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1.6 Utility of The Study

Utility to ME

The major benefit was that I got to work to work and got some practical experience atPunjab National bank. It also helped me to complete part of my syllabus for MBA curriculum as

instructed by the university.

The project also helped me to know the meaning of various concepts used in banking field i.e.

NPA, Default, MPBF, etc.

It helped me to know how the loan applications for projects are prepared for approaching for loan,

various documents required for the said purpose.

These entire things will certainly helped me in future course as banks play a crucial role in the day

today working in any business or service one undertakes.

Utility to the Organization

This project will help the organization to have an overall view of the defaulters and the

non-performing assets. It will help them to know the reasons and the steps that they have taken and

of course they could have taken to deal with defaulters.

It will help them to find out where they lag so that can avoid such mistakes. This project will bring

the true picture of all the major default cases and their reasons under one which otherwise are

segregated.

Chapter 2. Profile of the Punjab National Bank, Nashik Road

2.1. History of the organization

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Punjab National Bank (PNB) was established in 1895 at Lahore. PNB has the distinction of being

the first Indian bank to have been started solely with Indian capital. In 1969, Punjab National Bank

was nationalized along with 13 other banks.

1895: PNB established in Lahore.

1904: PNB established branches in Karachi and Peshawar.

1939: PNB acquired Bhagwandas Bank.

1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but

continued to operate in Pakistan.

1961: PNB acquired Universal Bank of India.

1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).

September 1965: After the Indo-Pak war the government of Pakistan seized all the offices

in Pakistan of Indian banks, including PNB's headoffice, which may have moved to

Karachi. PNB also had one or more branches in East Pakistan (Bangladesh).

1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.

1969: The Government of India (GOI) nationalized PNB and 13 other major commercial

banks, on July 19, 1969.

1976 or 1978: PNB opened a branch in London.

1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank

of India after the branch was involved in a fraud scandal.

1986: PNB acquired Hindustan Commercial Bank in a rescue.

1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.

1998: PNB set up a representative office in Almaty, Kazakhstan.

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2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. Rao

Bahadur T.M. Appu Nedungadi, author of Kundalatha, one of the earliest novels in

Malayalam, had established the bank in 1899. It was incorporated in 1913, and in

1965 had acquired selected assets and deposits of the Coimbatore National Bank. At

the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the

result that its shareholders received no payment for their shares. PNB also opnened a

representative office in London.

2004: PNB established a branch in Kabul, Afghanistan. PNB also opened a

representative office in Shanghai. 2005: PNB opened a representative office in Dubai.

2007: PNB established PNBIL - Punjab National Bank (International) - in the UK,

with two offices, one in London, and one in South Hall, Middlesex.

2008: PNB opened a branch in Hong Kong

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2.2 Recognition: 2007-08

The Banker, a London based magazine, ranked PNB at 255 thplace, amongst top 1000

banks in the world (2007).

Forbess Global 2000, an elite list of worlds giants and fast growing companies rated

PNB at 1166thposition as compared to 1308th in the year 2007.

Bank was bestowed Golden Peacock Award for excellence in corporate governance by

the Institute of Directors for the FY 2006-07.

Bank was bestowed Amity Corporate Excellence Award by Amity University, Noida.

Bank has got National Award for excellence in lending to Micro Enterprises.

In recognition of the banks effort towards financial inclusion, Dr. k C Chakrabarty,

CMD was awarded Skoch Challenger Award 2008 Inclusion Leader of the year for

Financial Inclusion

In recognition of Banks efforts to offer low cost technological solutions for better

customer experience bank has been awarded:

0 o CIO 100 Award (2007) by IDG Media Pvt. Ltd;

1 o PCQuest Best IT Implementation Award (2007)

2 o Computer Associates Excellence Award (2007).

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2.3 Profile

With its presence virtually in all the important centers of the country, Punjab National

Bank offers a wide variety of banking services which include corporate and personal

banking, industrial finance, agricultural finance, financing of trade and international banking.

Among the clients of the Bank are Indian conglomerates, medium and small industrial units,

exporters, non-resident Indians and multinational companies. The large presence and vast

resource base have helped the Bank to build strong links with trade and industry.

Punjab National Bank is serving over 3.5 crore customers through 4540 Offices

including 421 extension counters - largest amongst Nationalized Banks.

Punjab National Bank with 112 year tradition of sound and prudent banking is one

among 300 global companies and seven Indian companies which are expected to emerge as

challengers to Worlds leading blue chip companies. While among top 1000 world banks,

The Banker, the leading magazine in London, has placed PNB at the 248th position, the

bank features at 1308th position among Forbess Global 2000 list of global giants and fast

growing companies.

At the same time, the bank has been conscious of its social responsibilities by

financing agriculture and allied activities and small scale industries (SSI). Considering the

importance of small scale industries bank has established 31 specialized branches to finance

exclusively such industries.

Strong correspondent banking relationship which Punjab National Bank maintains

with over 200 leading international banks all over the world enhances its capabilities tohandle transactions world-wide. Besides, bank has Rupee Drawing Arrangements with 15

exchange companies in the Gulf and one in Singapore. Bank is a member of the SWIFT and

over 150 branches of the bank are connected through its computer-based terminal at Mumbai.

With its state-of-art dealing rooms and well-trained dealers, the bank offers efficient forex

dealing operations in India.

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The bank has been focusing on expanding its operations outside India and has

identified some of the emerging economies which offer large business potential. Bank has set

up representative offices at Almaty: Kazakhistan, Shanghai: China and in London. Besides,

Bank has opened a full fledged Branch in Kabul, Afghanistan.

Keeping in tune with changing times and to provide its customers more efficient and

speedy service, the Bank has taken major initiative in the field of computerization. All the

Branches of the Bank have been computerized. The Bank has also launched aggressively the

concept of "Any Time, Any Where Banking" through the introduction of Centralized

Banking Solution (CBS) and over 2409 offices have already been brought under its ambit.

PNB also offers Internet Banking services in the country for Corporates as well as

individuals. Internet Banking services are available through all Branches of the Bank

networked under CBS. Providing 24 hours, 365 days banking right from the PC of the user,

Internet Banking offers world class banking facilities like anytime, anywhere access to

account, complete details of transactions, and statement of account, online information of

deposits, loans overdraft account etc. PNB has recently introduced Online Payment

Facility for railway reservation through IRCTC Payment Gateway Project and Online Utility

Bill Payment Services which allows Internet Banking account holders to pay their telephone,

mobile, electricity, insurance and other bills anytime from anywhere from their desktop

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13

Awards & Achievements of Punjab National

Bank in Recent Times

1.

"Best IT Team of the Year Award"

at the IDRBT Banking Technology awards for the

year 2005-06.

2. SKOTCH Challenger Award for Change Management for the year 2005-06

3. Best IT User in Banking & Financial

Services Industry - 2004

by NASSCOM in partnership with Economic

Times

4. Golden Peacock Awardfor Excellence in Corporate Governance - 2005 by

Institute of Directors

5. FICCI's Rural Development Award for Excellence in Rural Development - 2005

6. Skotch Challenger Award for

Exemplary use of Technologyfor becoming a pioneer in Public Banks - 2005

7. Golden Peacock National Training -

2004 & 2005by Institute of Directors

8. National Award for Excellence in SSI

Lending

Ranked 2nd for 4 consecutive years - 2002, 2003,

2004 & 2005

9. Banking Technology Awards 2004

Runner up in 'Best IT Team of the

Year Award 2005'

Jointly Adjudged by IBA, Finacle & TFCI

10. Money Outlook Award - 2004 Runner up in 'Best Bank (public Sector) of the

year Award' -2005

11. Niryat Bandhu Gold Trophy

for excellence in export performance for 3

consecutive years 2001, 2002 & 2003

by Federation of Indian Exporters Organization

(FIEO)

12. 21st Amongst Top 500 Companiesby the leading Financial Daily The Economic

Times, June 2005

13. 9th amongst India's Top 50 Most

Trusted Service Brands

A.C Nielson Survey, The Economic Times Dec

2004

14. 3rd Rank amongst Banking Sector in

India

323rd Rank in the World

The Bankers' Almanac, January 2006

15. 368 amongst Top 1000 Global Banks The Banker, London July 2005


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Vision

To evolve and position the bank as a world class progressive, cost effective and

customer friendly institution providing comprehensive financial and related services;

integrating frontiers of technology and serving various segments of society especially the

weaker sections; committed to excellence in serving the public and also excelling in

corporate values.

Mission

To provide excellent professional services and improve its position as a leader in the

field of financial and related services; build and maintain a team of motivated and committed

workforce with high work ethos use latest technology aimed at customer satisfaction and act

as a an effective catalyst for socio-economic development.

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2.4 Organization Chart

The organization chart of Punjab national bank showing the hierarchy from top to the

bottom is show as under.

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Chairman

Vice Chairman

Circle officers

Branch Manager

Ravivar karanja

Branch Manager

Nashik road

Branch Manager

sharanpur road

Officers

Clerical staff

Sub Staff

Branch Manager

Mahatma nagar


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CHAPTER 3. Banking Concepts

3.1 Loans and Advances

Loan and advances is a major service provided by the banks. The major portion of the

bank deposits is employed by the way of loans and advances, which is the most profitable

employment of its funds.

Loans may be provided for a short-term, long-term and medium term. The loans may

be provided against some security, guarantee etc. the borrower may use these funds for

starting a new venture, housing purpose, for expansion for personal purpose. Normally these

loans are paid in installments.

Therefore the loan can be classified as

1. personal loans

2. Housing loans

3. Term loans

a. Short term

b. Medium term

c. Long term

4. Loan against hypothecation5. Loan against FDR etc.

Before granting a loan to any borrower bank has to scrutinize the project or the various

documents. If this is not taken due care of the asset may turn into a bad debts thus resulting

into losses for the bank i.e. a default.

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Documents Required for Loan

Various document required to be submitted to the bank while submitting a loan

application as per the size and type of the borrower.

1. Passport size photograph

2. Residence address proof / election card / ration card / electricity bill.

3. Salary slips of last 3 months.

4. Balance sheet and profit & loss a/c for last 3 years duly certified by a C.A.

5. Last 3 years income tax returns with computation of income tax and its challans.

6. Degree certificate of professionals.

7. Shop act license.

8. BSF, CST registration.9. Stock list.

10. List of debtors and creditors.

11. Income certificates.

12. 10 cheques.

13. Registered Government Contracted letter.

14. SSI registration.

15. Lasted 7/12 extract.

16. Undertaking from the employer for deductions of loans, installment from salary of

borrowers.

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17. Undertaking of the company of the Government Institutions for payment in favors of

Punjab National bank A/C of.

18. Agreement with company / appointment letter for distributors, stockiest etc.

19. Purchase order / sales order.

20. Quotation for machinery / vehicle.

21. Development agreement / GPA.

22. Project report.

23. Valuation report.

24. Concern letter.

For partnership firm Registered partnership deeds.

For Pvt Ltd. And public Ltd Memorandum of association, Article

of association, resolution.

For trust trust deed resolutions, permission from charity

commissioner.

For co-operative societies registration certificate resolution

permission form DDR office.

Procedure for Granting Loan

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In loan account the entire amount sanctioned is debited to the borrowers account Interest

is also debited to the a/c. It is the credit repayment made on installment basis. Following

procedure is adopted for sanctioning of loans.

1. pre sanction survey and inspection-

Loan facility is available on the basis of security offered or on the basis of period of

which it is required. Security offered by the customers may be fixed asset, plant and

machinery, equipment, house etc.

Depending upon the purpose of loan, the banker conducts a pre-sanction survey and

inspection.

During this survey bankers inspect the security offered by seeing the location of factory,

business premises, inspect documents and letter of goods etc. such survey helps the bank to

know about the customers.

2. Preparation of loan application

The loan application has to be prepared and handed over to the banker by the borrower.

In a loan application the following details are to be furnished -

1. Name of the borrower

2. Occupation

3. Purpose of loan

4. Period of loan

5. How borrower proposes to repay the loan

6. Projection of cash generations over the loan period

7. P&L A/c, B/S, for the period of loan in the form of projection

8. Details of security offered.

3. Appraisal

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Loan applications have to evaluated and appraised to decide whether they can be

sanctioned of rejected. The loan department in the bank does this work.

During appraisal the loan department concerned applies various methods of scrutiny to find

out the details given in the application are true and the projections hold good. Thus market

information, sales forecast, etc. would be independently assessed

4. Sanctioning

The loan department scrutinizes the loan application and decides whether the loan is

to be sanctioned or not.

Norms for sanctioning the proposal are indicated by RBI

5. Preparation of sanction letter-

Sanction letter contains the following points-

1. Name of the borrower

2. Limits sanctioned

3. Period of loan

4. Security offered buy the borrower

5. Terms of repayment

6. Margin to be maintained

7. Rate of interest

8. Stock statements to be submitted at periodical intervals

The borrower is informed about these aspects and a copy of the letter is sent to be

borrower.

6. Acceptance of terms and conditions by the borrower

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Normally the borrower is in continuous touch with the bank though be has banded

over the proposal to the bank. They accept terms lay down by the bank. They are not

requested to inform the bank in writing of having accepted the terms.

7. Preparation of loan documents -

a. Demand promissory note

It is an important document and a common document for the bank. The

borrower accepts his liability regarding the funds lend by the banker through this

document.

It contains data of execution, place of execution, name of the payee, the loan

amount, rate of interest, address of the borrower etc.

b. Loan agreement

These are standard printed documents running into a No. of pages. They contain all

legal aspects regarding the rights of both the parties and liabilities of the borrower.

8. Disbursement of loan

When the loan is sanctioned at the time of disbursement of loan of loan a/c is opened

in the name of the borrower. The loan a/c opened is debited and savings a/c is credited for

equivalent sum.

9. Periodical inspection and supervision

After the loan is disbursed borrower utilizes the loan amount to generate the funds

and profits so that he can repay the loan. Therefore bank inspects the keep supervision

whether the loan amount is been utilized in a productive way or not.

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3.4 Non Performing Assets

3.4.1 Concept of NPA

The concept of non-performing assets refers to which ceases to generate income. In

case of banks, all loans and advances are its assets, which can be classified into performing

and non-performing assets. RBI has advised the banks not to charge interest on those loans

and advances classified as non-performing asset.

Definition-

A non-performing asset has been defined to be a credit facility in respect of which

the interest and/or installment of principle has remained overdue for a specified period oftime.

3.4.2 What is NPA?

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;

1. Interest and /or installment of principal remain overdue for a period of more than 90 days

in respect of a Term Loan,

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

overdraft/ cash Credit(OD/CC),

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

and discounted,

4. 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

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

of other accounts.

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Chapter 4 Non Performing Assets

4.1 Introduction of NPA

Over a long period of time the performance of urban co-operative banks (UCBs) has

been deteriorating due to non recovery of interest and installment on loan portfolio.

After the deregulation of Indian economy the government has announced a number of

reform measures on the basis of recommendations of Narsimham committee to make banking

sector economically viable and competitively strong.

The RBI introduced the concept of NPA and certain norms with effect from 1 st April

1992.

These norms were introduced not only to know the true financial picture in the

financial statements but also to take corrective action for improving the performance in the

recent years.

Mounting NPAs are adversely affecting the profitability, liquidity and solvency

position of banking sector. Hence in the context of global competition it is a paramount task

for the banks to manage their NPAs more efficiently so that they can change their character

from non performing assets to performing assets.

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4.2 Classification of Assets

Assets can be classified as

1. Standard Assets

A standard asset is an asset, which is not a non-performing asset. A standard asset is

one, which does not carry more that normal risk attached to the business. Such an asset is not

a non-performing asset and is performing advance or a standard asset.

2. Sub Standard Asset

A sub standard asset is one which has remained a NPA for a period less than or equal

to 18 months.

3. Doubtful assets

An asset is classified as doubtful asset if it has remained an NPA for a period

exceeding 18 months.

4. Loss Assets-

A loss asset is one where loss has been identified by the bank or the internal or theexternal auditors or the RBI inspectors but the amount has not been written off wholly.

4.3 Effects of NPAs

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The NPA problem is on of the foremost formidable problems that have shaken the

entire Banking Industry. The high level of NPAs in banks and financial institutions has

been a matter of grave concern to the public as bank credit is the catalyst to the economic

growth of the country and any bottleneck in the smooth flow of credit, one cause for which is

the mounting NPAs is bound to create adverse repercussions in the economy.

The efficiency of a bank is not always reflected only by the size of its balance sheet but by

the level of return on its assets. NPAs do not generate interest provisions for such NPAs from

their current profits

1. Effect on Profitability:

a) They erode current profits through provisioning requirements.

b). They result in reduced interest income.

c) They require higher provisioning requirements affecting profits and capacity to increase

good quality risk assets in future.

d) They limit recycling of funds.

e) Bank has to spend for making efforts for recovery such as expenses on notice; follow-up

and filing of civil suit & because of this expenses profit get reduced.

f) This decline in profit has a bearings on variables like the capital to risk-weighted asset

ratio (CRAR) with the dip in profit it becomes difficult for the

bank to raise Tier I capital This is because Tier I capital consist of statutory and capital

reserve that are essentially built from profit.

g) In the face of declining profit, in order to maintain the stipulated CRAR, the bank may

have to raise Tier 2 capitals through bond issue the interest cost then will be higher.

2. Narrow banking :

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a) Narrow banking means only operation with the existing assets base & not expanding the

business. If NPAs are high RBI may ask a bank to do only narrow banking.

b) RBI may impose adverse restrictions on business of bank if NPA percentage is very high.

For Example Restriction on opening new branches, Expansion of international operations

may be curtain.

3.Effects on Efficiency:

a) When NPAs are very high all productivity ration of the bank such as ROI (Return on

Investment.) Productivity per employee and profitability rations are adversely affected.

b) The most important business implication of the NPAs is that it leads to the credit risk

management assuming priority over other aspects of banks functioning. The banks

whole machinery would thus be pre-occupied with recovery procedures rather that

concentrating on expanding business.

c) Implications can be psychological like play safe attitude and risk aversion, lower moral

and disinclination to take decisions at all levels of staff in the bank.

6. Effect on reputation of the bank:

The lesser appreciated implications are reputation risks arising out of grater

disclosures on quantum and movement of NPAs, provisions etc. High NPA diversely

affected the image of bank and banks capacity to generate further business is reduced.

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4.4 Calculation of NPA

4.4.1 Format for calculating NPA

Sr.

No.

Particular Amount

Rs.

1 Gross advances 0000.00

2 Gross NPA 00.00

3 Gross NPA as a % of gross advances 0.00%

4 Deductions

I. BAL. In interest suspense A/c 00.00

II. DICGC/ECGC claims received and held pending

adjustments

0.00

III. Part payment received and kept in suspense a/c 00.005 Net advances ( 1 4 ) 0000.00

6 Net NPA 00.00

7 Net NPA as a % of net advances 0.00

4.4.2 The NPA of the Bank.

The Net NPA is calculated on the basis of net advances in the 1 st year the NPA was

0.0%. The Punjab national bank is able to maintain drop in the NPA.

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The overall NPA for the bank is as follows (for the past 5 years). The figures are the

cumulative NPA figures for the last 5 years.

(Rs. In Crs.)

Year NPA (Gross) NPA (Net)

2008 3319 754

2007 3391 7262006 3138 210

2005 3740 119

2004 4670 449

NPA IN % OF NET ADVANCES

YEAR GROSS NET

2008 2.74% 0.64%

2007 3.4% 0.76%2006 4.0% 0.29%

2005 5.8% 0.20%

2004 9.35% 0.98%

The NPA for Punjab national bank Nasik road branch for the past 5 years. The figures

are as follows.

(Rs. In Lakhs)

YEAR GROSS NPA NET NPA

2004 145.93 14.03

2005 113.00 3.62

2006 89.55 6.28

2007 89.23 19.12

2008 82.97 18.48

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4.5 Reasons for Default

Default means the incapability of the borrower to make the repayment. The default

may arise due to various reasons.

1. The borrower may will default without reason.

2. Default due to death of the borrower.

3. Bills pending with the debtors or govt. of the borrower.

4. Absconding.

5. Default due to financial crisis in the business of the borrower.

6. Shut down of the business of the borrower, etc.

These reasons or defaults are not in control of the bank. They are external and bank

cant predict them. It may sometimes so happen that the bank while issuing a loan may prove

to be negligent while scrutiny of the documents or the borrowers financial position or in

deciding upon the limit of sanctioning of a loan. This may also lead to a default.

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Loans are assets to the bank. The major profit is earned by way of interests on such

loans. But in case of default no income is generated from such lending. Therefore they are

also turned as non-performing assets.

We can say that the loss that is shown in the balance sheets stating loss from NPA is

nothing but the loss from non-performing assets, which if wouldnt have been defaulted

would, definitely would have added to the profits of the bank.

Therefore it is very important from banks point of view to take proper care while

issuing a loan or while lending funds.

Chapter 5 NPA analysis

Loans and advances

(Rs. In Lacks)

Year Deposit Loans

2004 2724 1476

2005 2948 1726

2006 3150 1964

2007 3496 2414

2008 3963 2845

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deposits & advances

0

500

1000

1500

2000

25003000

3500

4000

4500

2004 2005 2006 2007 2008

year

amountinlakhs

deposits

advances

NPAS

(Rs. In Lacks)

Year Amount

2004 145

2005 113

2006 892007 89

2008 82

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NPA

0

20

40

60

80

100

120

140

160

2004 2005 2006 2007 2008

NPA

The graph above gives about the total amount of Defaulter of the bank during past

five years. The amount of default has decrease as the years have passed over. There has been

a drastic decrease in the 2004 to 2006. There after it went stable & further decrease.

Year 2005-2006

(Rs. In Lacks)

Type of loan Amount

Hypothecation Loan 512

Term Loan 476

Personal Loan 87

Educational Loan 38

Housing Loan 114

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0

100

200

300

400

500

600

Hypo

.

Term

Person

al

Educ

atio

nal

Ho

usin

g

Amountin

Lak

loan

This chart shows that for the year 2005-2006 maximum loan was being granted as the

hypothecation loan. The minimum being granted for educational loan. The term loan is near

to hypothecation loan and much higher than housing & personal loan

SECTORIAL ANALYSIS OF DEFAULT

(Rs. In Lacks)

Type of loan Amount

Hypothecation Loan 36.19

Term Loan 21.81

Personal Loan 9.45Educational Loan 3.02

Housing Loan 19.18

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36.19

21.81

9.45

3.02

19.18

This is shows the amount of NPA in various sectors of loan. It shows the

Hypothecation loan having maximum defaulter.

Proportion of Default

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1964

89

Loan

default

This chart shows the total loan amount is 1964 and the default amount is 89(in lakhs)

which makes 4.53% app. Of the total loan amount of default during the year 2005-2006.

Case. 1

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Type of loan - Personal loan

Amount - Rs 1,00,000.

Rate of interest - 14.25%

Reason for default

The party had taken a loan for his personal use that being for purchasing a computer.

The asset being purchased and in some course of time the person lost his new job. Thus bank

loan was not repaid in time. The bank extended the time period for repayment, but the

payment still stands due. The bank thus took the pc in their charge. And this case stands

under the list of the defaulter.

Analysis

The client should have taken note of his job assurance before taking a loan. Also

expected from the banks scrutinized. As the job being new there is no assurance towards it.

Case 2

Type of loan - Hypothecation loan

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Amount - Rs 3,00,000.


Reason for default

The party ventured into a new project and needing funds for working capital applied

for the loan. Being into construction field there was not much data on which the bank could

analyze the project, as this field being unpredictable. Even with the availability of loan the

project failed due to financial crisis and thus came to standstill. The proprietor of the firm

later on joined one company in Mumbai and as on today is untraceable. Thus leading to

default.

Analysis

The above case clearly indicates that the individual was inexperienced in his field and did not

have much support from experienced businessman resulting into project failure. The proposal

scrutinized did not note all these facts; moreover there was improper financial planning by

individual.

5.4 Year 2006 - 2007

(Rs. In Lacks)

Type of loan Amount


Term Loan 508

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Personal Loan 98

Educational Loan 54

Housing Loan 191

0

100

200

300

400

500

600

700

Hypo

.

Term

Person

al

Educ

atio

nal

Housin

g

AmountinLak

loan


hypothecation loan. The minimum being granted for educational loan. The term loan is near

to hypothecation loan and much higher than housing & personal loan.


(Rs. In Lacks)

Type of loan Amount


Term Loan 30.30

Personal Loan 14.36

Educational Loan 2.35

Housing Loan 20.93

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30.3

14.362.35

20.93

19.18

This is shows the amount of NPA in various sectors of loan. It shows the Term loan

having maximum defaulter.


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2414

89

Loan

default


which makes 3.68% appx. Of the total loan amount of default during the year 2006-2007.

The reason for default can be well explained and understood with the help

of few cases

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Case 1

Type of loan - Housing loan

Amount - Rs 3, 00,000.


Reason for default

The party had taken a loan against his insurance policy. The businessman died in

Dec.2006 It was a natural death. The insurance company refused to pay the amount as the

premiums were not duly paid. Therefore the bank could not recover the amount.

Analysis

This clearly shows improper scrutiny of the proposal, s the bank shouldnt have granted loan

against the security of insurance policy with the premiums outstanding. The bank should

have noticed that the client was negligent in his work and should have analyzed itself that

one whose premiums being outstanding will he be capable of paying the interest.

Case 2

Type of loan - Term loan

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Amount - Rs 5,00,000.


Reason for default

The party is a construction company and also works as a govt. contractor. The

company had taken a loan of Rs. 5,00,000 to complete the project undertaken. The govt. is to

pay a total sum of Rs. 15.40 lakhs as a consideration for the project undertaken. But the govt.

has shown its no capability to pay the dues on time.

The company therefore wrote a letter of request to the govt. to pay the due in the

name of Punjab national bank . But as on todays date no such payments have been received

from the govt. therefore causing a default.

Analysis

The bank had a proper scrutiny of the proposal. Bank considered as govt. being the debtors of

its client the payments would be made in either case. But it did not work. The businessman

had a proper financial planning, which can be said as the project undertaken was completed

neither of the two could be blamed as govt. is expected to make payments.

Year 2007 2008

(Rs. In Lacks)

Type of loan Amount

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Term Loan 726

Personal Loan 129

Educational Loan 68

Housing Loan 208

0

100

200

300

400

500

600

700

800

Hyp

o.

Term

Perso

na

Edu

catio

n

Housin

AmountinL

loan


term loan. The minimum being granted to education loan. The hypothecation loan is near to

term loan and much grater than housing and personal loan.


(Rs. In Lacks)

Type of loan Amount


Term Loan 27.39

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Personal Loan 12.43

Educational Loan 3.25

Housing Loan 20.32

19.58

27.3912.43

3.25

20.32

This is shows the amount of NPA in various sectors of loan. It shows the Term loanhaving maximum defaulter.


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2845

82

Loan

default


which makes 2.88% appx. Of the total loan amount of default during the year 2006-2007.

The reasons for default can be well explained and understood with the help

of few cases.

Case 1

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Amount - Rs 10,00,000.


Reason for default

The party had already taken a loan from MSFC (Maharashtra State Finance

Corporation). There was an increasing pressure to repay that loan. It was here where Punjab

national bank lended a helping hand by granting loan of Rs. 10 lakhs. The bank had no

sufficient security against the loan except for the request of getting the second charge over

the assets mortgaged with MSFC.

In due course of time the debtors showed there non-capability of payment, resulting the party

into financial crisis.

Analysis

From the above reason we can analyze that the Punjab national bank granted loan to

an inefficient businessman. The banks did not take notice that he had a loan from MSFC,

which was a big amount and financed to the one who was already in trouble without

sufficient security. This directly shows that no scrutiny was done on strict norms. Moreover it

also shows improper financial planning of the businessman.

Case 2


Amount - Rs 5,00,000.

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Reason for default

The party had taken the lan for the purpose of expanding its business. As on today the

total amount due from him is Rs. 5,62,539. (Including the interest) the party says that they

are facing financial crisis and thus has problems for the repayment of loans. But the bank

investigation says that the financial crisis is not to that grade that the loan can not be repaid

and thinks that the default may turn out to be willful. This case is taken into the court of law

and the results are still pending.

Analysis

This case is a willful default. The scrutinizers have done their job right, which can be

supported by the investigation report saying that the party can make payment even under

financial crisis. This case is truly a case where the client has improper financial planning as

he has not considered the risk he would face while going for expansion.

Case 3

Type of loan - Personal loan

Amount - Rs 5, 00,000.


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Reason for default

The party had taken a personal loan for purchase of car for a period of time. The party

had no contacts with the bank. The bank investigates the matter and found that he was

untraceable. Somebody else with no transfer certificate, insurance and other relevant

documents was using the car. The police was brought into the action but filed as the second

party had illegal supports.

Analysis

The basis problem here was that the bank had insufficient information about the

borrower i.e. his past record, contacts etc. the proposal scrutinizers did not gave due

importance to the non availability of such information and granted the loan without some

concrete base. Overall we say an improper scrutiny of the proposal.

New strategy

The bank, taking into consideration the defaults, has come up with a new concept viz.

Maximum Permissible Banking Finance (MPBF)

This system was applicable where the turnover is 1cr. And above earlier. But with the

growing success of it the bank has applied for all type of loan. The major advantage of this

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being that the risk factor is reduced and analysis of the parties activities can be properly

done.

There are various methods for calculating the MPBF. They are as follows

Method I

Projected sales 00000

Less:

25% of the projected sales 0000

00000

Less:

5% margin of projected sales 0000

MPBF 00000

Method IIProjected sales 00000

Less:

20% of the projected sales 0000

00000

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MPBF 00000

(80% of projected sales)

Method III

Current asset 00000

Less:

Current liabilities 0000

Working capital 00000

Less:

25% margin of working capital 0000

MPBF 00000

This can be well explained with the help of an example

Projected sales - 1, 00, 00,000/-

Loan demanded - 60, 00,000/-

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Calculating of MPBF

Projected sales - 1, 00, 00,000/-

Less:

25% of the projected sales - 25, 00,000/-

Less:

5% margin of projected sales - 5, 00,000/-

MPBF - 70, 00,000/-

Here the MPBF suggested that a loan up to the amount of Rs. 70, 00,000/- can be

granted. But the loan demanded is Rs. 6000000/-. Therefore the bank can grant the said

amount with the pertaining terms and conditions.

If the loan demanded were supposed Rs. 80, 00,000/- then the loan up to the

maximum limit Rs. 70, 00,000/- would only be granted.

HOW TO REDUCE NPAS?

1. Arrest- slippage in existing standard assets.

2. Identify new / probable NPAs

3. List out high value NPA accounts.

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4. Examine security aspect.

5. Consider rescheduling in genuine cases.

6. Recovery planning: Distribute accounts among staff members/ Director/officers.

7. Meet the borrowers frequently

8. Review of NPAs Account :- Branch wise monthly statement

Opening Balance 0000

(+) Fresh Addition + 0000

Cash Recoveries - 0000

Closing Balance 0000

NPA = Cash Recoveries (3) Closing Balance (4)

9. Review accounts if interest is not served in the last month

10. Regular limits review on due date

11. Ensure there is no erosion in the value of security &

There is no threat to recovery for any reason.

Conclusion

The study and analysis done about helps us to know various aspects relating to

default of loans.

The findings above help us to analyze the study and draw proper conclusion. The conclusion

is in the form of points given below.

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1. The amount of deposits and loans has shown a drastic growth over the period of 5

years.

2. Bank has granted loans in various sectors i.e.

a. Term loan

b. Hypothecation loans.

c. Personal loans.

d. Housing loan.

e. Educational loan.

3. The major cased of NPA are of term loan and hypothecation loan.

4. The main reasons for the default being

a. Non payment from the debtors to the party

b. Financial crisis faced by the party

c. Death

5. The bank has now come up with a new concept i.e. MBPF.

6. The major advantage being reduction of risk for losses or default.

Questionnaire analysis

A questionnaire was prepared to analyze the default from the view point of the

customers of the clients. A simple of 10 was taken. The data was collected and analyzed as

follows

1. The major default was from the business class i.e. 55% and remaining from the service

class or servants class.

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2. The client falling under the NPA list was in the income group in range of Rs. 15000 to

5500.

3. The defaulters had no savings account in any other bank other than in Punjab National

Bank.

4. The client from Business sector had taken the loan basically for meeting their working

capital requirements and the % of clients (defaulters) who had taken the loan for new project

or venture was less. Moreover the clients under personal loan were around 30%

5. The clients outstanding amount in case of a term loan range from 3 to 10 lakhs.

6. The clients outstanding amount in case of a personal loan ranges from Rs 5 to 15 lakhs.

7. The clients outstanding amount in case of a personal loan was unable to repay the loan in

time due to financial problems / crisis faced by them.

The clients under term loan and hypothecation loan were unable to pay the loan in

time due to lake of payment to them by their debtors; some of them willfully defaulted due to

no reason.

Recommendations and Suggestions

1. The bank must take great care while granting of term loan, personal loan &

hypothecation loans.

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2. The scrutiny of the proposals should be done considering all the points and related

aspects.

3. The security and the financial position must be given due importance.

4. The system of MPBF is a good one. It must be followed to reduce the risk on losses.

5. After granting a loan the frequent follow-up must be taken by bank or frequent visit

must be given to the clients business unit.

6. The asset given as mortgage must be properly valued. Not overvalued or

undervalued.

BIBLIOGRAPHY

Following thing I refered to don the project:-

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1. Bare Banking Regulation Act 1949

2. Banking Theory, Law & Practice :- E.Gordon & K.Natraj

3. www.google.com

4. www.pnbi.com

5. www.rbi.org.in

Questionnaire

1. Basic information -

Name

Age

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Qualification

Add.

2. What was the amount of loan taken?

3. What was the interest rate at the time of taking policy?

4. Interest rate at the present.

5. What was the credit scheme taken by you?

6. Installments amount (EMI)

7. The installments are pending.

8. Why the non payment of the installments (reasons)?

NILESH Project

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