Final Report

NPA Management in Karnataka Vikas Grameena Bank

EXECUTIVE SUMMARY

Prologue

A strong banking sector is important for flourishing economy. The failure of the

banking sector may have an adverse impact on other sectors. Non-performing assets are one

of the major concerns for banks in India.

NPAs reflect the performance of banks. A high level of NPAs suggests high

probability of a large number of credit defaults that affect the profitability and net-worth of

banks and also erodes the value of the asset. The NPA growth involves the necessity of

provisions, which reduces the overall profits and affects the financial health of the bank.

The issue of Non Performing Assets has been discussed at length for financial system

all over the world. The problem of NPAs is not only affecting the banks but also the whole

economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of

health of the industry and trade.

This report deals with understanding the concept of NPAs, its magnitude and major

causes for an account becoming non-performing with special reference to Karnataka Vikas

Grameena Bank.

Title of the Project

“A Study on Non Performing Assets of Karnataka Vikas Grameena Bank”

Scope of the Study

The study is confined on “Non Performing Assets” in case of Karnataka Vikas

Grameena Bank (Main Branch), Club Road, Hubli and the entire organization.

“Non Performing Asset” management is a key subject which plays an important role

in deciding the overall performance of the bank. Therefore, the subject of “Non Performing

Asset” is chosen for the project work. Accordingly the project is being undertaken at

Karnataka Vikas Grameena Bank, Main Branch, Hubli.

KLE’s Institute of Management Studies and Research, Hubli 1


Need of the Study

The present research is concentrated to find out the efficiency of measures undertaken

by Karnataka Vikas Grameena Bank to reduce “NPA” which in turn contributes in improving

its profit margin and strengthening the financial position of the bank.

The purpose of this project is to investigate and provide a comprehensive overview of

managing the Non Performing Assets (NPA) in Karnataka Vikas Grameena Bank(KVGB)

and the techniques practiced in the bank for managing the risk associated with the Non

performing Assets and converting ill performing assets through securitization.

The study tries to explore an empirical approach to the analysis of Non-Performing

Assets (NPAs) with special reference of Karnataka Vikas Grameena Bank. The NPAs are

considered as an important parameter to judge the performance and financial health of banks.

The level of NPAs is one of the drivers of financial stability and growth of the banking

sector. This study aims to find the fundamental factors which have impacted NPAs of

Karnataka Vikas Grameena Bank. The empirical analysis assesses how macroeconomic

factors and bank-specific parameters affect NPA of bank.

OBJECTIVES OF THE SYUDY

Research Objectives

The main aim of the research is to study Non Performing Assets and assess the

effectiveness of the techniques for minimizing the NPAs, adopted by Karnataka Vikas

Grameena Bank. This research aims at analyzing and finding out possible strategies to reduce

the NPAs.

Sub-objectives of the study

1. To understand the concept and classification of the Non Performing Assets.2. To know why an account becomes Non Performing Assets and the steps taken by the

bank to reduce Non Performing Assets.3. To highlight Loans and Advances trend and amount of NPA in KVG Bank4. To study the level of Non Performing Assets and its effects on financial health of the

bank.5. To devise the tools to control Non Performing Assets.6. Framing strategies to locate ill performing assets well in advance and securitizing the

same.



REASONS FOR SELECTING NPA study in KVG Bank:

According to NABARD reports Gross NPA ratio (Gross NPA to Gross Advances) of

Regional Rural Banks (RRBs) in India was 8.53% in 2005-06, 6.4% in 2006-07 and 4.6% in

2007-08. In KVG Bank Gross NPA ratio was 4.71% in 2005-06, 4.14% in 2006-07 and

3.58% in 2007-08. This statistics shows that KVGB is better in terms of NPA management as

compared to all RRBs in India since its Gross NPA ratio was less than Gross NPA ratio of all

RRBs.

Amongst 6 regional rural banks in Karnataka, KVGB is in good position, in terms of

total outstanding loans and deposits and as compared to other RRBs in Karnataka, KVGB has

less NPA, KVGB earns a good level of income but NPAs are reducing its profit, the above

said reasons induces to select the NPA for the Study.

RESEARCH DESIGN

A research design is the arrangement of conditions for collection and analysis of data

in a manner that aims to combine relevance to the research purpose with economy in

procedure. The effort of the investigation is to provide descriptive profile of Non Performing

Assets (NPA), classification of NPAs, reasons for NPA, methods available to reduce NPAs,

techniques followed by Karnataka Vikas Grameena Bank to curb NPAs, Government policies

pertaining to maintaining NPA levels with specified limits, level of Non Performing Assets

and its effects on financial health of the bank and framing strategies to manage Non

Performing Assets.

RESEARCH METHODOLOGY

Type of research:

The research base was Descriptive Research.

Sources of information

(1) Primary data:

Direct personal interview of bank officials

(2) Secondary data:

Secondary data sources will include websites, magazines, newspapers, textbooks and

audited reports and accounts of the bank



DATA ANALYSIS

After the relevant data were collected, descriptive analysis was carried out which was

preferred for assessment purposes. Hence for all data interpretations were made and diagrams

and graphs have been used to support discussions related to findings. Finally, conclusion and

recommendations were made accordingly

Limitations of study

The study is conducted on the basis of data which was provided by the bank. Only

consolidated figures are available.

Access to the information is limited and complete dependency on the annual report

and information provided by bank officials.

The data are extracted from the records covering a period of 3 years only.

The data and information taken at the time of study might have changed subsequently

because all the procedures, rules and regulations might have changed at any time, based on

industrial policy, RBI guidelines, etc. The data was available for the period of 2005-06, 2006-

07 and 2007-08. Data for previous year 2008-09 was not available because bank had not yet

issued Audited annual reports.

FINDINGS

(1) Loans and advances disbursed in the year 2007-08 were reduced in Allied sectors,

Trade and services, non-priority sector. NPA was more in Allied sectors, Trade

and services, non-priority sector. So bank reduced the credit disbursement and

increased advances in other sectors by introducing new schemes in the 2007-08.

(2) In the year 2005-06, the gross NPA is Rs 82.43crores and in the very next year it

increased to Rs 89.67 after that every year up to now the NPA increased

proportionately. In the year 2007-08 Gross NPA was Rs 91.19crores.

(3) Gross NPA was written off by 100% and Net NPA was brought down to Rs. Zero

in the year 2007-08.

(4) In the year 2005-06 NPA is absorbing 9.19% of the Net Profit. In the year 2006-

07 NPA is reducing 4.48% of net profit and in the year 2007-08 NPA is reducing

4.37% of the Net profit. In the year 2005-06 NPA had reduced 9.19% of Net profit

because the NPA management different in all 4 rural banks which merged later on



to form KVGB. It was possible to reduce NPA to a greater extent of 4.48% and

4.37% in the years 2006-07 and 2007-08 respectively.

(5) During the year 2007-08 under report, the Bank had implemented a scheme for

writing-off of the bad/doubtful debts. Accordingly non farm sector NPA loans

with book balance upto Rs 25000 which were classified as loss assets are written

off. Total written off amount during the year is Rs 168.69 lakhs. The amount of

cumulative recovery out of written off amount is Rs 40.40 lakhs upto end of

March 2008.

(6) There are several reasons for the rise in NPA; few causes can be controlled by

bank. So bank worked more on controllable causes and this helped it to reduce

NPAs to some extent.

(7) The managers and officers interviewed admitted that they have noticed wilful

defaulters as instrumental in increase in NPA.

(8) Political environment and political interferences such as political patronage of

defaulters and Govt loan waiver scheme are contributing to rise in NPA level.

Economic conditions may include decrease in level of income of borrowers etc.

(9) According to managers and officers of KVGB the major reasons for advances

becoming Non performing is wrong selection of borrowers and lack of inter-bank

co-ordination in exchange of information over list of defaulters.

(10) KVGB has adopted all possible preventive and corrective measures to reduce

the existing NPAs and prevent generation of new NPAs.

RECOMMENDATIONS

General suggestions:

The Bank should adopt the following General strategies for control of NPAs. The suggestions

are as follows:

(1) Projects with old technology should not be considered for finance.

(2) Exposure on big corporate or single project should be avoided.

(3) Conducting NPA workshops not only for recovery officers but also for entire staff

(4) There is need to shift banks approach from collateral security to viability of the project

and intrinsic strength of promoters.

(5) Reducing the lending in Allied sectors, Trade and services, non-priority sector

(6) Excessive reliance on collaterals should be avoided

(7) Extending inter-bank co-ordination in exchange of information over list of defaulters.



Pre-sanction suggestions:

(1) Uneven scale of repayment schedule with higher repayment in the initial years normally

is preferred.

(2) As for as possible, repayment of term loans should be fixed on monthly basis rather than

on quarterly or semiannual basis.

(3) Personal guarantees of the directors should normally be insisted upon.

(4) Bank should assess and continue to keep a track of guarantor also.

Post sanctions suggestions:

(1) The Credit section should carefully watch the warning signals viz. non-payment of

quarterly interest, dishonor of cheque etc.

(2) Inspection system can be improved by surprise visits by recovery officers.

(3) Monitoring of NPA symptoms which are borrower-related:

Following are the indicators which have to be interpreted in order to ensure that there are

no willful defaults:

a) Unnecessary and frequent visits of borrower to the branch or Head Office.

b) His standard to living shows upward swing soon after loan is disbursed.

c) He purchases immovable property. This indicates that borrower has diversified the loan

amount and purchased immovable property.

d) He does not bother for his health.

e) His next generation is not interested in his business

f) He has developed relationship with political leaders.

g) He tries to avoid banker’s visit to the factory and/or his house.

(4) List of defaulters is displayed in the notice board of all branches of KVGB without

disclosing the account number, amount of loan, overdue, etc.

(5) Approaching influential borrowers who are defaulters, while important functions such as

thread ceremony, marriage, etc. are going on in their houses and branch staff can directly

ask for repayment during such functions and loans have been repaid because the borrowers

(defaulters) tried to protect their self prestige in the presence of invited guest and relatives.

(6) List of defaulters prepared and pasted at public places and the recovery van, a hired jeep,

flagged with banner Vasuli Dal (recovery squad of Karnataka Vikas Grameena Bank).



(7) The bank has to go for selling of Non Performing Assets to Asset Reconstruction

Company of India Limited (ARCIL) to bring down the NPAs.

(8) Presently Bank is spending 3 days a week on Public Working day recovering the NPA

from the customer which to be increased to 4 days a week, because the bank has to spend

2 days for selling the property.

CONCLUSION:

NPA is a double-edged weapon, which affects bank profitability due to interest income not

being recognized on NPA accounts and loan loss previously to be created from profit earned.

The bank must adopt structured NPAs management policy for elimination or reducing the

NPAs in the bank. In general the trend of NPAs in KVGB are decreasing trend, on the same

time the KVGB has been adopted a very good techniques to control over the NPAs but

presence of NPA in the bank accounts reduces the profitability.

It is not possible to eliminate totally the NPA in the banking business but can only

be minimized. It is always wise it follow the proper policy appraisal, supervision and follow-

up of advances to avoid NPAs.

For reduction of NPAs, though there is a greater need of political threat and effective

enactment of laws to recover NPAS, the banks should also like advantage of Debt Recovery

Tribunals, Lok adalat, and the legislations enacted by the state govt. and one-time settlement

schemes.

In the case of KVGB it is one of the good sign that the NPA ratio has been

decreasing every year.



INDUSTRY PROFILE

History of Banking in India:

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be able to

meet new challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer confined to

only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached

even to the remote corners of the country. This is one of the main reasons of India's growth

process.

The Government's regular policy for Indian banks since 1969 has paid rich dividends

with the nationalization of 14 major private banks of India.

The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinct phases.

They are as mentioned below:-

1. Early phase from 1786 to 1969 of Indian Banks

2. Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

3. New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991.

Phase I :

The General Bank of India was set up in the year 1786. Next came Bank of

Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809),

Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it

Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India

was established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,



Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank

of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic

failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To

streamline the functioning and activities of commercial banks, the

Government of India came up with The Banking Companies Act, 1949 which was

later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.23 of

1965). Reserve Bank of India was vested with extensive powers for the supervision of

banking in India as the Central Banking Authority.

During those days public had lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it the savings bank facility provided by the Postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase II :

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive banking

facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of

India to act as the principal agent of RBI and to handle banking transactions of the Union and

State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on

19th July, 1969, major process of nationalization was carried out. It was the effort of the then

Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were

nationalized.

Second phase of nationalization of Indian Banking Sector Reform was carried out in

1980 with seven more banks. This step brought 80% of the banking segment in India under

Government ownership.



The following are the steps taken by the Government of India to Regulate Banking

Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalization of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalization of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of Regional Rural Banks.

1980 : Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector banks of India

rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and

immense confidence about the sustainability of these institutions.

Phase III :-

This phase has introduced many more products and facilities in the banking sector in

its reforms measure. In 1991, under the chairmanship of Mr.M Narasimham, a committee

was set up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being

put to give a satisfactory service to customers. Phone banking and net banking is introduced.

The entire system became more convenient and swift. Time is given more importance than

money.

The financial system of India has shown a great deal of resilience. It is sheltered

from any crisis triggered by any external macroeconomics shock as other East Asian

Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are

high, the capital account is not yet fully convertible, and banks and their customers have

limited foreign exchange exposure.



Banking in India originated in the first decade of 18th century with The General Bank

of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these

banks are now defunct. The oldest bank in existence in India is the State Bank of India being

established as "The Bank of Calcutta" in Calcutta in June 1806.

Couple of decades later, foreign banks like HSBC and Credit Lyonnais started their

Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading

port, mainly due to the trade of the British Empire, and due to which banking activity took

roots there and prospered. The first fully Indian owned bank was the Allahabad Bank set up

in 1865.

By the 1900s, the market expanded with the establishment of banks like Punjab

National Bank, in 1895 in Lahore; Bank of India, in 1906, in Mumbai - both of which were

founded under private ownership. Indian banking sector was formally regulated by Reserve

Bank of India from 1935. After India's independence in 1947, the Reserve Bank was

nationalized and given broader powers.

SBI Group:

The Bank of Bengal, which later became the State Bank of India. State Bank of India;

with its seven associate banks command the largest banking resources in India.

Nationalization:

The next significant milestone in Indian Banking happened in the late 1960s when the

then Indira Gandhi government nationalized, on 19th July, 1969, 14 major commercial Indian

banks, followed by nationalization of 6 more commercial Indian banks in 1980. The stated

reason for the nationalization was more control of credit delivery. After this, until the 1990s,

the nationalized banks grew at a leisurely pace of around 4% - also called as the Hindu

growth of the Indian economy.

After the amalgamation of New Bank of India with Punjab National Bank, currently

there are 19 nationalized banks in India.



Liberalization:

In the early 1990s the then Narasimha Rao Government embarked on a policy of

liberalization and gave licenses to a small number of private banks, which came to be known

as New Generation tech-savvy banks, which included banks like ICICI Bank and HDFC

Bank. This move along with the rapid growth in the economy of India, kick started the

banking sector in India, which has seen rapid growth with strong contribution from all the

three sectors of banks, namely, government banks, private banks and foreign banks. However

there had been a few hiccups for these new banks with many either being taken over like

Global Trust Bank while others like Centurion Bank have found the going tough.

The next stage for the Indian banking has been set up with the proposed relaxation in

the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given

voting rights which could exceed the present cap of 10%.

Current scenario:

Currently banking in India is generally fairly mature in terms of supply, product range

and reach-even though reach in rural India still remains a challenge for the private sector and

foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered

to have clean, strong and transparent balance sheets relative to other banks in comparable

economies in its region. The stated policy of the Bank on the Indian Rupee is to manage

volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail banking,

mortgages and investment services are expected to be strong. One may also expect M&As,

takeovers, and asset sales.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks

(that is with the Government of India holding a stake), 29 private banks (these do not have

government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign

banks. They have a combined network of over 53,000 branches and 17,000 ATMs.

Bank is a financial institution that borrows money from the public and lends money to

the public for productive purposes. The Indian Banking Regulation Act of 1949 defines the

term Banking Company as "Any company which transacts banking business in India" and the


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

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

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


term Banking as "Accepting for the purpose of lending all investment of deposits, of money

from the public, repayable on demand or otherwise and withdrawal by cheque, draft or

otherwise".

Banks play important role in economic development of a country, like

Banks mobilise the small savings of the people and make them available for

productive purposes.

Promotes the habit of savings among the people thereby offering attractive rates of

interests on their deposits.

Provides safety and security to the surplus money of the depositors and as well

provides a convenient and economical method of payment.

Banks provide convenient means of transfer of fund from one place to another.

Helps the movement of capital from regions where it is not very useful to regions

where it can be more useful.

Banks advances exposure in trade and commerce, industry and agriculture by

knowing their financial requirements and prospects.

Bank acts as an intermediary between the depositors and the investors. Bank also

acts as mediator between exporter and importer who does foreign trades.

Indian nationalized banks (banks owned by the Government) continue to be the major

lenders in the economy due to their sheer size and penetrative networks which assures them

high deposit mobilization. The Indian banking can be broadly categorized interest

nationalized, private banks and specialized banking institutions.

When operation through a large network of branches and people it is necessary to

have commonality of thinking and approach and a credit policy document provides the basis

for this. Some well known banking institutions disappeared under a mountain of ill-advised

credit exposure and some very well known names considered stalwarts in global banking

came close to disappearing.



The Structure of Indian Banking.

The Indian banking industry has Reserve Bank of India as its Regulatory Authority.

This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The

private sector banks are again split interest old banks and new banks.


Reserve Bank of India[Central Bank]

Scheduled Banks

Scheduled Co-operative BanksScheduled Commercial Banks

Public Sector Banks

Nationalized Banks

SBI & its Associates

Private Sector Banks

Old Private Sector Banks

Foreign Banks

Regional

Scheduled Urban Co-Operative

Banks

Scheduled State Co-Operative Banks

New Private Sector Banks


Regional Rural Banks

The RRBs, called by different names in different states, such as Grameena Banks,

Gramin Banks, Grama Banks, Gramya Banks, Elaquai Dehati Banks, Gaonlia Banks, etc

were started in 1975, i.e. during the Emergency days, with the aim of providing credit to

small and marginal farmers, agricultural labourers, rural artisans, street vendors and all those

living below the poverty line as the preamble of the Regional Rural Banks Act, 1976

proclaimed in unequivocal terms.

Regional Rural Banks have been in existence for around three decades in the Indian

financial scene. Inception of regional rural banks (RRBs) can be seen as a unique experiment

as well as experience in improving the efficacy of rural credit delivery mechanism in India.

With joint share holding by Central Government, the concerned State Government

and the sponsoring bank, an effort was made to integrate commercial banking within the

broad policy thrust towards social banking keeping in view the local peculiarities. The

genesis of the RRBs can be traced to the need for a stronger institutional arrangement for

providing rural credit. The Narsimham committee conceptualized the creation of RRBs in

1975 as a new set of regionally oriented rural banks, which would combine the local feel and

familiarity of rural problems characteristic of cooperatives with the professionalism and large

resource base of commercial banks. Subsequently, the RRBs were set up through the

promulgation of RRB Act1 of 1976. Their equity is held by the Central Government,

concerned State Government and the Sponsor Bank in the proportion of 50:15:35. RRBs were

supposed to evolve as specialised rural financial institutions for developing the rural economy

by providing credit to small and marginal farmers, agricultural labourers, artisans and small

entrepreneurs.

Over the years, the RRBs, which are often viewed as the small man’s bank, have

taken deep roots and have become a sort of inseparable part of the rural credit structure2.

They have played a key role in rural institutional financing in terms of geographical

coverage, clientele outreach and business volume as also contribution to development of the

rural economy3. A remarkable feature of their performance over the past three decades has

been the massive expansion of their retail network in rural areas. From a modest beginning of

6 RRBs with 17 branches covering 12 districts in December 1975, the numbers have grown

into 196 RRBs with 14,446 branches working in 518 districts across the country in March



2004. RRBs have a large branch network in the rural area forming around 43 per cent of the

total rural branches of commercial banks.

The rural orientation of RRBs is formidable with rural and semi urban branches

constituting over 97 per cent of their branch network. The growth in the branch network has

enabled the RRBs to expand banking activities in the unbanked areas and mobilise rural

savings.

India’s own Gramin Banks, the regional rural banks (RRBs), are a success story, too,

for a different reason. These banks have shown tremendous improvement in their financial

performance as a result of several revamping measures the government has implemented, in

doses, from 1993.

Social cost for social benefit:

As these banks were designed to exclusively cater to the credit needs of the poor in

the rural and far-flung areas, it was presumed that they would incur some losses. The framers

of the RRB policy spelt this out in the very beginning, not as if they were discovered

subsequently. These losses were supposed to be treated as the necessary social cost for the

social benefit of covering the rural poor.

In fact, the RRBs lived up to this expectation; as many as 196 RRBs were established

by 1990 with more than 14,500 branches across the length and breadth of the country, taking

banking services to the unbanked rural, tribal and other interior areas. About 123 million

persons, belonging to the weaker sections, benefited from these banks.

But the performance evaluation was made in terms of the viability of the RRBs. The

accumulated losses of Rs 621 crore by 1991-92 and 152 out of 196 RRBs being in losses was

a big cause of concern that provoked the corrective measures. If the performance were

viewed keeping the establishment goals in view, this loss, which worked out to Rs 18 lakh

per RRB per year, would be peanuts compared with the service they rendered to the poor.

Profitability:

The policymakers who became monomaniac wanted the profitability to be increased

at any cost – even at the cost of distancing the RRBs from the rural poor – and set out with

revamp measures.



As a first measure, the barrier of financing exclusively to the weaker section was

removed. In other words, the non-target group, or the rich, became their new target group.

The second main objective, cheap credit, was given a go-by in tandem; the rates of interest

charged on the loans at RRBs have become higher than any other commercial bank.

The third objective of mobilising rural savings and channelling them for the development of

the same area and to access funds from urban markets for the benefit of rural people also

suffered a setback as a result of excessive profitability concern, as indicated by a low credit-

deposit (CD) ratio. The CD ratio of RRBs has fallen from around 100% in the beginning to

around 50% today.

Instead of attracting funds from the urban centres, the RRBs are taking the rural

resources to urban centres as evidenced by their high investment-deposit (ID) ratio, ranging

between 55% and 60% during the last three years. The RRBs invested in securities of Rs

45,666.14 crore against their deposit base of Rs 83,143.55 crore in 2007.

The fourth major objective was to take banking services to the door steps of the rural poor.

The RRBs’ spread has been heartening and rapid – 196 RRBs opening 14,500-odd branches

all over rural India, accounting for 20% of the total bank branches. But, the reform measures

did not allow the RRBs to continue with their rural and regional character. As of March 2008,

of the 14,458 branches, only 11,353 were in the rural areas, 2,561 in semi-urban areas and

584 in urban areas. Stranger still, as many as 60 branches of RRBs are in metropolitan areas

even as many as 1,014 rural branches were closed or shifted between 1998 and 2007 on the

plea of non-viability.

The regional character also suffered a setback following the consolidation exercise

that started in September 2005. The number of RRBs has reduced from 196 back then to 88

by May 2008 and the principle of each RRB functioning in a homogeneous agro-climatic area

is given a go-by. There is a distance of 1,000 km or more between some of the amalgamated

RRBs and the districts covered are not contiguous as the rule for amalgamation was ‘one

RRB for one sponsor bank in one State’.

So, all the original characters of the RRBs have undergone a transformation; rather,

they have become more commercial than the pure commercial banks.

The RRBs have no doubt turned from eternal loss makers into profit-making entities

following the revamping measures. The net profit generated in the RRBs in 2007-08 was Rs

625.11 crore. Though higher than the previous year’s Rs 617.13 crore, it was lower than the

profit earned in the year before of Rs 748.11 crore.



This raises doubts on the sustainability of even the commercial character of these

banks, which have sacrificed their social responsibility. At times, the external factors such as

loan waivers and rescheduling of installments on account of drought and the resultant

reduction in non-performing assets favorably influence their financial results.

In fact, the accumulated loss in the system during 2007-08 of Rs 2,759.49 crore was

higher than the previous year’s Rs 2,636.85 crore.

Also to be viewed from the commercial angle is the fact that their business volume is

disproportionately low compared with their share in branch network. While RRB branches

account for 19.58% of the total bank branches, their deposit of Rs 83,143.55 crore accounts

for only 2.6% of the total bank deposits in India and advances of Rs 48,492.59 crore

constitute a still lower share of 2.01%.

Similarly, the rural branches of the RRBs account for 36.94% of the total rural

branches of all the banks put together. But, their share in institutional agricultural advances is

not more than 10%.

While it is clear that the turnaround strategy of RRBs has clearly turned them away

from their original goals, their profits, induced through sacrificing the rural weaker sections’

credit and other measure, do not seem to be sustainable. Also, the business levels of the banks

are nowhere comparable to their size in terms of number of offices.



BANK PROFILE

One of the successful experiments of the Banking Sector in India has been the

formation of the Regional Rural Banks (RRBs). Experts in the field have acknowledged this

fact taking into account the recent enormous progress achieved by the RRBs, which have

travelled a long way in the last 30 years, on a journey that can best be described as arduous.

Close on the heels of Nationalization, when the focus shifted from Class Banking to Mass

Banking, the RRBs emerged as a low cost Bank designed to cater to the needs of Small and

Marginal Farmers, Rural Artisans, Petty Traders etc., who operate in Rural Areas.

The initial period was marked with innumerable challenges as the RRBs had to deal

with illiterate, superstitious people, not exposed to the changing world scene. It was indeed

an uphill task, as they were expected to play the role of not just a Banker, but also that of a

friend, philosopher and guide, leading them on the path of development.

Malaprabha Grameena Bank, Bijapur Grameena Bank, Varada Grameena

Bank and Netravathi Grameena Banks were the four RRBs, sponsored by Syndicate

Bank, in the State of Karnataka. When the above RRBs were established without much ado

way back in the 1970/80s, people may not have had the slightest idea about the ripple that

these RRBs would create in the banking industry and the impact that they would have on the

rural scene. In the formative years, the main concern was to reach out to the rural poor

through its strong network of branches. The Banks were playing a pivotal role in bringing

about a metamorphosis in their respective areas of operation through implementation of the

various schemes and programmes tailored to suit the requirements of their customers.

As part of the measures which will lead to strong, efficient and vibrant Banking

System, the mergers and restructuring phase of the recommendations of the Narsimham

Committee is now being implemented and thus the four RRBs sponsored by Syndicate Bank

in the State of Karnataka were amalgamated to form the KARNATAKA VIKAS

GRAMEENA BANK by a Government of India Notification dated 12/09/2005. The

combined business level of this Bank was Rs.3263.73 Crores with Deposits of Rs.1620.46

Crores and Advances of Rs.1643.27 Crores as on 12/09/2005



The Banks have come a long way from those initial years and after amalgamation the

Bank has a network of 409 branches cutting across the length and breadth of the nine districts

forming its area of operation. Surmounting the initial problems of bringing about uniformity

in the working of these Branches after amalgamation, the Bank was able to record a growth

of 20.41% as on 31/03/2008 in comparison to the combined figures of the four RRBs put

together as on 31/03/2007. The Bank plans to achieve a business level of Rs 6450 Crores by

the end of March 2009. As at the close of December 2008 the total business is Rs. 5507

Crores Comprising Deposits of Rs.2569 Crores and Advances of Rs. 2938 Crores

respectively.

Apart from conducting the Banking business, the Bank is intricately involved in the

social fabric of the people it serves. The activities undertaken are –

Recognising that health is a neglected sector among the rural people, the Bank has

been organizing various health camps free of cost. Also in association with the

District Blindness Eradication Centre, it has conducted free Eye Check-up Camps

followed by cataract surgery and implantation of IOL. Bank also runs a free clinic

at one of the villages in its area of operation.

When the river Krishna was in spate, thousands of families were rendered

homeless. Bank was quick to respond by distributing rugs at a relief camp and

donating a day’s salary of the Staff to the Chief Minister’s Relief Fund.

Responding positively to a news item in the local daily, a village situated close to

the Dharwad town was gifted solar light. This village had no electricity till the

Bank took it upon itself to provide it.

Bank has adopted several balawadies run by the Akshara Foundation in the slum

areas, adopted a rural school for overall development, donated steel plates to the

children of Government Schools at many places, recognises meritorious rural

students by awarding cash prizes etc., etc.

Thus, the Bank has fulfilled the aspirations of the rural people with its total involvement. To

continue as the leading and visible Grameena Bank, acting as a catalyst for the growth of

Agriculture/Allied and Non-Farm Activities, encouraging customers to pursue gainful

vocation to maximize returns for a decent living, to liberate vulnerable sections from the

clutches of money lenders and finally build a vibrant and pro-active Financial Institution is

the mission of Karnataka Vikas Grameena Bank.



MISSION:

To continue as the leading and visible Grameena Bank in the country by acting as a

catalyst for the growth of Agriculture/ Allied and Non-Farm activities.

To accelerate lending and reach out to all needy customers to pursue gainful vocation

and thus enable them to maximize returns for a decent living and more so committing

to liberate vulnerable sections from the clutches of money lenders.

To build vibrant and proactive financial institution with staff committed to serve by

adopting improved technological inputs and products to drive improved business

growth.

To motivate and encourage “SAVINGS” and channelise the same for disbursement of

credit to achieve alround development of people of nine districts in Karnataka true to

its name “KARNATAKA VIKAS”.

Organisation structure:



KEY PERSONS:

Board of Directors:

Mr. K P Muralidharan Chairman

Mr. K. Raghuram Bhandari Special officer, Institutional

Finance Govt. of Karnataka

Mr. R. Sekar AGM, RBI, Bangalore

Mr. P. S. Mohanan DGM, NABARD,

Bangalore

Mr. Murali Mohan Regional Manager,

Syndicate Bank, Belgaum

Smt Shikha CEO, Zilla Panchayat,

Dharwad

Mr. N. R. Sadananda Regional Manager,

Syndicate Bank, Hubli

Mr Naveen Chandra Shetty Central Govt. Nominee-Non Official

Director

Mr Monte Feranandes Central Govt. Nominee-Non Official Director.

Other Key Persons:

I T Sethuraman General Manager

G Subba Rao General Manager

B G Hangaragi Senior Manager

Branch officials’ details:

Mr H Kariyappa Manager of KVGB, Main branch, Hubli

R G Nargund Senior Officer

M A Shaik Recovery Officer



Number of branches:

KVGB has 309 rural branches, 63 semi-urban branches and 35 urban branches spread across

Bagalkot, Belgaum, Bijapur, Dharwad, Gadag, Haveri, Dakshina Kannada, Udupi, Uttar

Kannada districts. Totally there are 407 branches of KVGB.

Products and Services of KVG Bank:

(1) Personal Banking:

(a) Savings Bank Account

These accounts are designed to help the individuals (personal customers) to

inculcate the habit of saving money and to meet their future requirement of

money. Amounts can be deposited/withdrawn from these accounts by way of

cheques/ withdrawal slips. It helps the customers to keep minimum cash at home

besides earning interest of 3.5% p.a.

(b) Current Accounts

Current Accounts can be opened by individuals, partnership firms, private and

public limited companies, HUFs/specified associates, societies, trusts, etc.

(c) “FINANCING 2, 3 & 4 WHEELERS ” for undertaking Agricultural /other

activity

Purpose: To undertake Agricultural / other own business / Profession.

Special Features: Unique loan scheme for purchase of vehicles for Agricultural

use /Business purpose at reduced margin for SF / MF. For Agriculturists,

rate of interest and other norms are applicable as per Agri Loans, and for

others, SRTO norms are applicable.

Quantum: For SF/ MF 95 % of the vehicle value. Other farmers 85% of the

vehicle value. For businessmen 75 % of vehicle value



(d) VIKAS SUVARNA

Under Vikas Suvarna Scheme, Jewel loans can be arranged with fixed credit

limits or as an Overdraft facility.

A Jewel Loans with fixed credit limits:

Purpose: Loans under the scheme may be granted for all the purposes i.e.

production and also for Consumption purposes.

Eligibility: Agriculturist /Non agriculturists. They should be customers of the

Bank properly introduced.

Rate of Interest:

Interest shall be debited on monthly rests & compounded quarterly, however, in

case of agriculturist; it is to be collected on quarterly/ half yearly/ yearly basis

depending on the cropping pattern or other income generation activity taken up. If

overdue, 2% over and above the normal rate of interest is to be collected.

Jewel Appraiser fee: 1% subject to minimum of Rs10/- and maximum of

Rs.25/- for Advances upto Rs.10000/- and Rs.50/- for loan above Rs.10000/-

Conditions:

No Jewel loans are arranged in the name of Jewel appraiser.

(e) VIKAS PRATIBHA SCHEME

Eligibility Criteria

Courses Eligibility:

a) Studies in India: Graduation Courses, Post Graduation Courses like Masters

and Ph.D- Professional Courses like Engineering, Medical, Agriculture,

Veterinary, Law, Dental etc. Computer Certificate Courses of reputed institutes

accredited to Dept of Electronics or Institutes affiliated to University. Etc.



b) Studies in abroad: Graduation courses offered by reputed universities, Post

graduation like MCA, MBA, MS etc.

c) Courses conducted by CIMA-London, CPA in USA etc.

Student Eligibility

Any major student representing himself or a minor student represented by

parent or guardian of Indian nationality

Secured admission on the basis of merit to professional / technical / other

courses through entrance test / selection process.

Secured admission to foreign university / institutions

Branches shall ensure that the beneficiaries financed are the permanent

residents of their command area / service area.

Quantum of Finance

Need based finance in the form of short term/term loan subject to repaying

capacity of the parents / students and the maximum of Rs.10.00 lakhs and

Rs.20.00 lakhs for studies in India and Studies in Abroad respectively

"DEMAND LOANS” - for Salaried & Non-Salaried Customers

Salaried Class :

o 10 to 15 times of gross salary

o Maximum cut back up to 60 %

o Personal clean loans & loan for vehicles/ consumer durables etc.

o Loans for New as well as used cars

Non- Salaried Class :

o Personal loans up to 50 % of gross annual income

o Loan for vehicles/ consumer durables etc.

o Loans for New as well as used cars are provided.



(f) A regular interest earning scheme. A flexible and convenient deposit scheme

which ensures that your money never remains idle. Even very small amounts earn

interest for very short periods. Yes. You can deposit an amount of just Rs.1000/-

for a period as short as 15 days and make it grow.

(2) DEPOSITS

Savings Bank Account

Minimum Amount: With Cheque Book Facility:

* For all category of Branches minimum balance is Rs.500/-

Without Cheque Book Facility:

* For Urban Branches minimum Rs.250/-

* For Semi-urban and Rural Branches Rs.100/-

Period: Operative Account.

Rate of Interest: 3.50% simple interest.

Vikas Premium Savings Bank Account

Minimum Amount: Minimum Balance of Rs.10000/- Shall be maintained in SB.



Vikas Special Premium Savings Bank Account

Minimum Amount: Minimum Balance of Rs.20000/- Shall be maintained in SB.





Jeevana Prabha Savings Bank Account (An Insurance Linked Deposit Account)

Minimum Amount: Rs.1,110/- initial Deposit.

A minimum of Rs.1000/- shall always be maintained in the account to derive benefit

of the Scheme.

Period: For a minimum period of 3 years from the date of opening of the account.

Rate of Interest: Simple interest as applicable to SB Account.

Current Account

Businessmen, Traders, Industries, Companies, Associations and others who have

occasions to receive, to be received / pay out cash / cheques quite often have to open

current accounts.

Minimum Amount: Urban Area – Rs.2000/- initial deposit for individuals and

Rs.3000/- for others. Rural / Semi urban Areas – Rs.500/- for individuals and

Rs.1000/- for others.


If minimum balance is not maintained, Rs.20/- per occasion is to be levied.

Sanchayani Deposit (RD/CD):

Minimum Amount: Monthly installments of Rs.10/- and in multiples of Rs.10/-.

Period: Minimum 12 months or more and in completed quarters and maximum 120

months.

Rate of Interest: On quarterly basis as applicable to Term Deposits.

Fixed Deposits: (Normal / Monthly / Quarterly / Half Yearly)

Minimum Amount: Minimum of Rs.500/- in multiples of Rs.100/-

Period: Minimum 15 days and Maximum 120 months.



Rate of Interest: Applicable simple rate of interest at Half yearly rests.

Payable on Monthly / Quarterly / Half Yearly / On Maturity

Nirantara Deposit:

Minimum Amount: Minimum of Rs.5/- in multiples of Rs.5/-

Period: Maturity period of 60 Months from the date of opening the account.

Rate of Interest: 5% on Maturity.

(3) ADVANCES

Short Term Loans

(a) VIKAS KISAN SAMRUDHI CREDIT CARD SCHEME

Objective: The scheme aims at providing adequate and timely credit for the

comprehensive credit requirement of farmers under single window, with flexible

and simplified procedure, adopting whole farm approach including short term

credit needs and a reasonable component for consumption needs through KCC.

Nature of Financial Accommodation:

It is both in the form of Term loan(repayable in 5 years) for meeting the investment

credit requirement and Revolving Cash Credit for agriculture and allied activities.

The working capital /recurring expenditure shall be in the form of revolving cash

credit.

Quantum of Limit:

a) The limit is fixed taking in to account a) Short term credit requirement for crop

cultivation for the entire year (requirements for all the three seasons in a year)

depending on the type of crop grown, type of cultivation-irrigated or rain fed

etc.

b) Term loans requirement which are repayable within 5 years under agriculture

and allied activities based on the unit cost of the assets to be acquired by the

farmer.



c) Working Capital limits for agriculture and allied activities. The initial

investment in fixed and /or working capital requirement/recurring expenditure of

the borrower is the basis for fixing the limit. As regards consumption requirement,

the bank may take in to consideration the family labour and fix the overall limit

under KCC and KSCC. The total limit will be in relation to the projected net

earning and repayment capacity of the borrower.

(b) VIKAS SUGGI

Under this scheme all short term crop production loan which are not covered

either under Vikas Kissan Credit Card or Vikas Kisan Samrudhi Credit Card

are to be covered.

(C) VIKAS KALYANA SCHEME

Vikas Kalyana is one such loan product being implemented for the benefit of

agriculturists to avoid selling the agricultural produce at distress market price

during harvesting season.

Objective of the scheme

To protect interest of agriculturists from selling their produce at distress market

price during harvesting seasons.

Eligibility of the borrowers

All Agriculturists.

Crops eligible for storage

Food grains (Paddy, Jowar, Wheat, Ragi etc) Oil seeds (Ground Nut, Sunflower,

safflower,) and pulse crops (Tur, Bengal gram, Green gram, Soya beans etc)

Commercial crops like Areca nut, coconut etc.

Loan amount

A maximum amount of Rs. 5.00 lakh can be sanction per applicant. However, the

farmers availing pledge loans should credit 50% of proceeds to their outstanding

crop/KCC loan, if the outstanding crop/KCC loan is availed for growing the crop

proposed for pledging.



Other Schemes:

SCHEMES OF THE KVG BANK

a) Credit Policy :

The Bank continued to accord prime importance to the Loans and Advances

portfolio with its multi dimensional utilitarian aspects. Considering the vast area of

operation of the Bank covering nine potential Districts in the State Bank has adopted a

Credit Policy as per the guidelines issued by RBI\NABARD and sponsor Bank. The

Credit Policy is aimed at increasing high quality and high yielding advances with

special thrust on advances to investment credit in agriculture sector, credit linkage to

SHGs\JLGs and also to augment credit flow to SME Sector.

b) Policy for extending Relief measures:

Occurrence of drought, flood pest attack and other natural calamities caused

wide spread damage to economic pursuits of our borrowers. It is felt necessary to

have a set of guidelines to provide relief by the Branches to calamity affected persons

without delay.

Hence, Bank adopted a Policy for extending relief measures to the borrowers

affected by natural calamities, in tune with NABARD directives.

c) Crop loans at reduced rate of interest:

As envisaged in the Union budget 2006-07, during the year 2006-07, Crop

loans up to Rs. 3 lakhs were sanctioned with interest @ 2% provided by NABARD.

With this, total crop loans disbursed during the year 2006-07 was at Rs. 540.10

Crores.

d) Tie up arrangements:

During the previous years, the Bank had entered into Tie-up arrangements

with 6 Tractor\vehicle manufacturing Companies for supplying Tractors\Two\Three\

Four wheelers to our customers, providing free Registration\Insurance of Vehicle at

dealers cost, additional free servicing of the vehicles etc. This year the Bank had

executed fresh MOU with Eicher Tractors & Sonalika Tractors, hence, now our



customers will have choice of 8 Tractor\vehicle manufacturing Companies, providing

additional benefits.

e) Coverage of collateral free loans under Credit Guarantee scheme of CGTSI:

To have a better coverage of risk on the collateral free loans sanctioned to

SMEs, Bank has proposed to cover such collateral free loans up to Rs. 25 lakhs

sanctioned to SMEs, under the Credit Guarantee scheme of CGTSI. Bank has

been already enrolled as MLI with CGTSI for the purpose.

f) Provision for ;inclusion of Education expenses in KCC:

As suggested by Sponsor Bank to encourage education among the family

members of the farmers, Branches are permitted to include expenses for Education up

to Rs.1,000\- in the KCC limits sanctioned to the farmers.

g) Enhancement in project cost under KVIB MMS loans:

Till last year KVIB was considering projects with cost up to Rs.10 lakhs for

grant of Margin Money Subsidy (MMS). However, the KVIB has enhanced the

maximum permissible cost of the project up to Rs. 25 lakhs for grant of MMS, hence

the Branches are permitted to consider Project with total cost up to Rs. 25 lakhs,

under KVIBMM scheme.

h) Introduction of PAIS for Swarojgar Credit Card holders:

As suggested by NABARD, Swarojgar Credit Card holders were brought

under coverage of Personal Accident Insurance Scheme (PAIS) for a sum assured up

to Rs. 50,000\- with United India Insurance Company Ltd.

i) Credit Rating of high value NFS loan a\cs:

In order to ensure healthy credit portfolio and also to assess the

creditworthiness of the applications \ borrowers. Credit Rating System was introduced

for Borrowers having \ proposed cumulative credit limits of Rs.20.00 lakhs & above.

Credit Rating charts as adopted by the Sponsor Bank were prescribed for the purpose.

j) Package of Relief measures in Distgress district:

Govt. of India has identified Belgaum district in bank’s Area of operation

and extended Package of Relief measures to be implemented in the Distress districts.



Under the scheme, interest on the eligible lover due loans of Farmers as on 01-07-

2006 was waived, the loan a\cs were to be restructured and fresh finance made

available to such borrowers. Bank waived eligible overdue interest, for which, claim

was submitted to NABARD. Restructuring of the loan a\cs is being done and fresh

finance is being made available to the needy farmers.

k) Interest subvention of Poultry loan a\cs:

Considering the loss of income to the poultry units due to outbreak of Avian

Flu during February 2006. Govt. of India had announced onetime interest subvention

of 4% to the poultry units affected by avian Flu. Accordingly Bank had passed on the

eligible interest subvention to 75 eligible loan a\cs and reimbursement of the same

was received.

l) Loan Schemes Launched during the year:

In terms of the directives issued by RBI\NABARD \ Sponsor Bank, land

also considering the genuine needs of our customers, the following new loan

schemes were launched during the year:

During the year 2008 KVG Bank launched the following Schemes:

Sl.No Name Of the scheme Features

1 Vikas Jalavardhini A scheme for financing individual farmers and joint liability groups for rain water harvesting

2 Bed and breakfast scheme of the Ministry of Tourism

A scheme aimed for making available value-for-money accommodation with extra income to the tourists

3 Scheme for Development or strengthening of agricultural marketing infrastructure, Grading and standardisation

A scheme is provided to cope up with the large expected marketable surpluses of agricultural and allied commodities

4 Amrutha scheme of Govt of Karnataka

A scheme for the benefit of widows and distressed women to provide assistance for purchase of dairy animal costing Rs 20000

5 Asare scheme to establish e-halli (e- This scheme aims at empowering women



Mahile) information and service centres

members of SHGs and rural women by providing employment opportunities

Income Tax Act

As per Finance Bill, 2006 the provisions for exemption granted under section 80(P) of the

Income Tax Act available to RRBs (treating them as deemed Cooperative society) have been

withdrawn. The Task Force is of the opinion that in view of the high cost of operations in

rural areas having significant business and default risks, low profit margins, need to finance

at lower rates of interest to financially weaker sections of the rural society and that the RRBs

as a separate rural

credit system are yet to consolidate and are poised at a critical stage of take off, the

provisions under section 80(P) of Income Tax Act may be continued for a further period of 5

years or till the restructuring process is completed

Therefore, KVGB will not pay Income tax till 2009-10.



INTRODUCTION TO STUDY

Introduction to Non Performing Assets (NPA)

Non Performing Assets surfaced suddenly in the Indian banking scenario, around the

eighties. In the midst of turbulent structured changes overtaking the international banking

institutions and where the global financial markets were undergoing sweeping changes.

Management of Non Performing Assets nowadays is a critical performing area for

banks. It is better for Indian banks to try for the international standard in terms of efficiency,

productivity, profitability, assets recognition norms, and provisioning and capital adequacy to

compete in the competitive new economy.

Definition of N.P.A

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

transparency the ‘90 days overdue’ norm for identification of Non Performing Assets has

been adopted by the R.B.I. (w.e.f. 31.03.2004)

So NPA refers to,

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

days in respect of a term loan.

The Account remains ‘out of order’ for a period of more than 90 days. In respect of an

overdraft/ C.C.

The bills remains ‘overdue’ for a period of more than 90 days in the case of bills

purchased and discounted.

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

respect of other accounts.

A loan granted for short duration crops is treated as NPA, if the installment of

principal or interest thereon remains overdue for two crops season and a loan granted

for long duration crops is treated as NPA, if installment of principal or interest

thereon remains overdue for one crop season.

An account would be classified as NPA only if the interest charged during any quarter

is not serviced fully within 90 days from the end of the quarter.



So in short, NPA refers to those assets where in which the bank does not earn income

from that account, asset (or) loan granted.

If an irregular Account continuously remain as irregular category for a period of 90

days (earlier 180 days) it seems NPA. According to the guidelines of the RBI once an

Account is listed as NPA, the interest has to be deducted out of the profit of the same

accounting year.

Indian Economy and NPAs:

Undoubtedly the world economy has slowed down, recession is at its peak, globally

stock markets have tumbled and business itself is getting hard to do. The Indian economy has

been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal

system, cutting of exposures to emerging markets by FIIs, etc.

Further, international rating agencies like, Standard & Poor have lowered India's

credit rating to sub-investment grade. Such negative aspects have often outweighed positives

such as increasing forex reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception and are

bound to face the heat of a global downturn. Bankers have realized that unless the level of

NPAs is reduced drastically, they will find it difficult to survive.

Reasons for existence of huge levels of NPAs in the Indian banking system:

The origin of the problem of growing 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.

NPAs have become an issue for banks and financial institutions in India:



To start with, 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 to make provision on such assets as per the Reserve Bank of

India (RBI) guidelines.

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

industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of

banks.

Further, Reserve Bank of India (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.

‘ 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 90 days as on the date of Balance Sheet or credits

are not enough to cover the interest debited during the same period, these accounts should be

treated as ‘out of order’.

‘Over Due’:

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.

RBI guidelines on income recognition (interest income on NPAs)

Banks recognize income including interest income on advances on accrual basis. That

is, income is accounted for as and when it is earned.

The prima-facie condition for accrual of income is that it should not be unreasonable

to expect its ultimate collection. However, NPAs involves significant uncertainty with respect

to its ultimate collection.



Considering this fact, in accordance with the guidelines for income recognition

issued by the Reserve Bank of India (RBI), banks should not recognize interest income on

such NPAs until it is actually realized.

Reversal of Interest Income:

If any advance becomes NPA as at the close of any year, interest accrued and credited

to income Account in the corresponding should be reversed or provided for if the same is not

realized.

Reporting of NPA’s:

Banks are required to furnish a report on NPA as on 31st March of each year after

completion of audit. The NPA would relate to the banks global portfolio including the

advances at the foreign branches.

Classification of Assets:

The NPA’s are classified into 3 categories namely:

Sub-standard Assets

Doubtful Assets

Loss Assets

These are being classified by the Banks based on the period for which the asset has

remained non-performing and the reliability of the dues.

Sub-Standard Assets:

An asset becomes NPA is first classified as a sub-standard asset and which remains as

NPA for a period less than or equal to12 months (earlier18 months).

In such cases, the current net worth of the borrower/ guarantor or the current

market value of the security charged is not enough to such an assets will have well defined or



weaknesses that endanger the liquidation of the debt and are characterized by the distinct

possibility that the banks will sustain some loss, if deficiencies are not corrected.

Doubtful Assets:

A substandard asset becomes a doubtful if it has remained as a substandard for a

period exceeding 12 months (before 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 the weakness makes collection or

liquidation in full, on the basis of currently known facts, conditions and values highly

questionable and improbable.

Loss Assets:

An asset, which is considered as irrecoverable by the banks of internal or external

auditor or the R.B.I. Inspection is treated as loss Account but the amount has not been

written off wholly.

In classification of assets interest above categories should be done taking interest

Account the degree of well defined or weakness and the extent of deepened on collateral

security for realization of dues.

Banks should establish appropriate internal system to eliminate the tendency to delay

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

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

Account Depending their respective business levels.

In terms of RBI guidelines, as and when an asset becomes a NPA, such advances

would be first classified as a sub-standard one for a period that should not exceed 18 months

and subsequently as doubtful assets.



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 purpose of presentation of advances in the banks balance sheet.

UP GRADATION OF LOAN ACCOUNT CLASSIFIED AS NPA

In case of any borrower pays the arrears of interest and principal classified as NPA’s

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

‘standard’ Account.

CLASSIFICATION TO BE BASED ON BORROWERS-WISE AND NOT FACILITY

WISE

The classification as NPA of the accounts should be based on the borrower wise and

not based on the facility wise. That is if a borrower is having more than one facility (like two

or more account’s) in the same bank. The borrowers all the facilities should be treated as

NPA’s and not particular facility or part thereof which has become irregular.

Note: If the borrower is availing limits from more than one branch all the

limits of the borrowers in all the branches to be treated as NPA.

NORMS OF NPA:

Asset Classification

Treatment of accounts under IRAC norms should be borrower-wise and not facility

wise, i.e.,different facilities granted to a borrower cannot have different asset classification.

In other word, if a borrower enjoys several facilities and one of them becomes non-

performing, all the other facilities too should be classified as NPAs.

All borrowed accounts, irrespective of their outstanding, are required to be classified as

Standard Assets or Non-Performing Assets (NPAs). NPAs are required to be classified

further into the following three categories, based on the period for which the asset has

remained non-performing and the realisability of the dues:



1. Sub-standard Assets

2. Doubtful Assets

3. Loss Assets

Standard Asset:

Performing assets are standard asset is one which does not disclose any problem and which

does not carry more than normal risks attached to the business. The performing asset is one

that generates income to the bank.

Sub-standard Assets:

With effect from 31st March 2005, a sub standard asset would be one, which has remained

NPA for a period less than or equal to 12 months. Such an asset will have well defined credit

weakness that jeopardizes the liquidation of the debt and are characterized by the distinct

possibility that the bank will sustain some loss, if deficiencies are not corrected.

Doubtful Assets:

An asset would be classified as doubtful, if it has remained under sub-standard assets

category for a period exceeding 12 months. A loan classified as doubtful has all the

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

characteristic that the weaknesses make collection or liquidation in full,-on the basis of

currently known facts, conditions and values- highly questionable and improbable.

Further doubtful assets are classified into three sub-categories for the purpose of provisining.

They are:

Bad and doubtful upto 1 year

Bad and doubtful 1-3 years

Bad and doubtful above 3 years

Loss Assets:

Loss asset is one where loss has been identified by the bank or internal or external auditor 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.



Asset classification is a very good information tool. It gives the clear picture of bank assets

and also their quality. It also provides a base for making provision. The classification of

assets brings transparency in banking system.

Income Recognition

Income recognition policy:

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

Internationally income from Non-performing asset 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, NSC, IVPs, KVPs and Life

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

available in the account.

Fees and commission 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-negotiation or rescheduled extension on credit.

If the government guaranteed advances become NPAs, the interest on such advances

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

Reversal of Income:

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

the year, interest accrued and audited to income account in the corresponding

previous year should be reversed or provided for all if the same is not realized. This

will apply to govt. guaranteed accounts also.

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

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

past periods, if uncollected.

Leased Assets-the finance charge component of finance income as defined in ‘AS-19

Leases’ issued by the council of the Institute Of charted Accounts of India(ICAI) on



the leased assets which has accrued and was credited to income account reversed or

provided for in the current accounting period.

Reporting of NPAs:

Banks are required to furnish a report on NPAs as on March 31 each year after

completion of audit. The NPAs would relate to the Banks Global portfolio including the

advances at the foreign branches. The report should be furnished as per the prescribed format.

While reporting the NPA figures to RBI the amount held in interest suspense account,

should be shown as a deduction from gross NPAs as well as gross advances while arriving at

the Net NPAs. When NPAs are reported to RBI, the amount of technical write-off if any

should be reduced from the outstanding Gross Advances and Gross NPA’s to eliminate any

distortion in the quantum of NPA’s being reported.

Provisioning Norms

In order to narrow down the divergences and ensures adequate provisioning by banks.

It was suggested that a banks statutory auditors, if they also desire, could have a dialogue

with RBIs regional office/inspectors who carried out the Banks inspection during the

previous year with regard to the accounts contribution to the differences.

In conformity with the prudential norms provisions should be made on the Non-

performing assets on the basis of classification of assets into prescribed categories. Taking

into account the time lag between an accounts becoming doubtful of recovery, its recognition

as such, the realization of the security an the erosion overtime in the value of security charged

to the bank, the bank should make provision against Sub-standard assets, doubtful assets and

loss assets.

Loss Assets

The entire asset should be written off, if the assets are permitted to remain in the

banks for any reasons, 100% of the outstanding should be provided for.

Doubtful Assets



100% of the extent to which to which the advance is not converted by the realizable

value of the security to which the banks has a valid recourse and the realizable value is

estimated on a realistic basis.

In regard to the secure portion, provision may be made on the following basis at the rates

ranging fro 20% to 100% of the secured portion depending upon the period for which the asset has

remained doubtful.

Period for which the advance has

remained in doubtful category

Provision Requirement (%)

Upto one year 20%

One to three year 30%

One to three years outstanding stock of

NPA as on 31st March 2004

- 60% with effect from 31-3-2005

-70% with effect from 31-3-2005

-100% with effect from 31-3-2005

Advances classified as doubtful more than 3

years on or after April 2004

100% with effect from 31st March 2004

Sub-Standard Assets

A general provision of 10% on total outstanding should be made without making any

allowance for DICGC/ ECGC guarantee cover securities available. The ‘unsecured

exposures’ which are identified as ‘sub-standard’ would attract additional provisions of 10%

i.e. a total of 20% on the outstanding balance. The provisioning requirement for unsecured

doubtful asset would remain unchanged at100%. Unsecured exposure is defined as an

exposure where the realizable value of security as assed by the bank/ RBI inspecting officers

is not more than 10% of the outstanding exposure.

Standard Assets

From the year ending 31st March 2000, the banks should made a general provision of

a minimum of 25% on standard asset on global loan portfolio basis. The provisions on



standard assets should not be reckoned for arriving at Net NPAs. The provision towards

standard assets need not be betted from Gross advances but shown separately as ‘contingent

provisions against standard assets’ under ‘other liabilities and provisions’.

Other Provisioning Norms:

A) Books of selling bank

1. When a bank sells its non-performing financial assets to other banks, the same will be

removed from its books on transfer.

2. If the sale is at a price below the net book value (NBV) (i.e., book value less provisions

held), the shortfall should be debited to the profit and loss account of that year.

3. If the sale is for a value higher than the NBV, the excess provision shall not be reversed

but will be utilized to meet the shortfall/ loss on account of sale of other non performing

financial assets.

B) Books of purchasing bank

The asset shall attract provisioning requirement appropriate to its asset classification

status in the books of the purchasing bank.

C) Accounting of recoveries:

Any recovery in respect of non-performing asset purchased from other banks should

first be adjusted its acquisition cost. Recoveries in the excess of the acquisition cost can be

recognized as profit.

D) Capital Adequacy:

For the purpose of capital adequacy, banks should assign 100% risk weights to the

non-performing financial assets purchased from other banks. In case the non- performing

asset purchased is an investment, then it would attract capital charge for market risks also.

For NBFCs the relevant instructions on capital adequacy would be applicable.

E) Exposure Norms:

The purchasing bank will reckon exposure on the obligor of the specific financial

asset. Hence these banks should ensure compliance with the prudential credit exposure



ceilings (both single and group) after reckoning the exposures to the obligors arising on

account of the purchase. For NBFCs the relevant instructions on exposure norms would be

applicable.

Main reasons for accounts becoming NPAs:

Units closed

Borrower Absconding

Sale of Assets

Diversion of Funds

Wilful Default

Non Renewal of the Limits

Interest/Instalments not paid.

Non repayment of loans due to natural calamities such as drought, floods, earthquakes

etc.

Lack of verification of his/her securities.

Often stated reasons for NPAs in India:

Corruption

Judicial system flaws

Nonexistent fear of penalties

Inefficient credit appraisal systems

Lack of technology, methodology and data support for scientific credit appraisal

Commonly used methods to reduce NPAs :

Personal contacts with borrowers.

Frequent follow-ups by bank officials.

Issue of periodical notices.

Adjustments of his/her outstanding deposits.

Apply of Scientific for appraisal before the loan is disbursed and monitor it closely in

real time.

Conduct recovery Campaign

Break up recovery to branch level network



Take every NPA case as a separate issue and analyze the need for further funding

from an economic point of view.

Implement a system for selecting a good borrower.

Effects of NPAs:

As the number of accounts become NPAs this will lead to additional provisions which

has to be made and these provisions are made out of profits earned by the Bank. Ultimately it

leads to reduction in profits.

Prerequisites to Controlling NPAs:

1. Governance :

Independent oversight board with clear mandate.

Defined and transparent procedures

Improved reporting standards

2. Greater focus on restructuring :

The quality and speed of asset resolution is key

Taking ownership of NPAs and proactive management

Working with debtors to improve cash-flow of assets underlying NPAs.

3. Greater powers and institutional capabilities:

For example, power to separate bad management from the debtor and to

liquidate debtors, which cannot be expeditiously restructured.

Training, knowledge Transfer

Leadership

4. Incentives and disciplines for banks:

Enhanced accountability of Banks and Bank managers

Ensure banks put in place risk analysis and credit management systems

Ultimate burden not transferable to AMCs.

5. Greater protection of creditor rights:

Credible liquidation procedures and efficient secured transaction processes

Triggers and inventives for insolvency

Strong and Credible regulators, free from political pressure.

6. The Road to Recovery:

The key Facilitators

Early detection



Speed

Voluntary references

Facilitation and quick arbitration.

Acts governing Securitisation and NPA: The Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act extends to the whole of India

Under section 69 of Transfer of Property Act, mortgagee can take possession of

mortgaged property and sale the same without intervention of Court only in case of English

mortgage. (English Mortgage is where mortgagor binds himself to repay the mortgaged

money on a certain date, and transfers the mortgaged property absolutely to the mortgagee,

but subject to a proviso that he will re-transfer the property to the mortgagor upon payment of

the mortgage money as agreed). In addition mortgagee can take possession of mortgaged

property where there is a specific provision in mortgage deed and the mortgaged property is

situated in towns of Kolkata, Chennai or Mumbai. In other cases possession can be taken

only with the intervention of court.

Therefore till now Banks/Financial Institutions had to enforce their security through court.

This was a very slow and time-consuming process. There was also no provision in any of the

present law in respect of hypothecation, though hypothecation is one of the major security

interest taken by the Bank/Financial Institution.

Keeping in mind the above factors among many other the Securitisation and Reconstruction

of Financial Assets and Enforcement of Security Interest Act was enacted with effect from

21.6. 2002.

The Act deals with three aspects.

1. Enforcement of Security Interest by secured creditor (Banks/Financial Institutions)

2. Transfer of non- performing assets to asset Reconstruction Company, which will then

dispose of those assets and realise the proceeds.

3. To provide a legal framework for securitisation of assets.



Securitization is the process of pooling and packaging Financial Assets, usually relatively

illiquid, into liquid marketable securities. Securitization allows an entity to assign (i.e. sell)

its interest in a pool of financial assets (and the underlying security) to other entities.

OBJECTIVES OF THE STUDY

OBJECTIVES OF THE SYUDY

Research Objectives

The main aim of the research is to study Non Performing Assets and assess the

effectiveness of the techniques for minimizing the NPAs, adopted by Karnataka Vikas

Grameena Bank. This research aims at analyzing and finding out possible strategies to reduce

the NPAs.

Sub-objectives of the study

1. To understand the concept and classification of the Non Performing Assets.

2. To know why an account becomes Non Performing Assets and the steps taken by the

bank to reduce Non Performing Assets.

3. To highlight Loans and Advances trend and amount of NPA in KVG Bank

4. To study the level of Non Performing Assets and its effects on financial health of the

bank.

5. To devise the tools to control Non Performing Assets.

6. Framing strategies to locate ill performing assets well in advance and securitizing the

same.

REASONS FOR SELECTING NPA study in KVG Bank:

According to NABARD reports Gross NPA ratio (Gross NPA to Gross Advances) of

Regional Rural Banks (RRBs) in India was 8.53% in 2005-06, 6.4% in 2006-07 and 4.6% in

2007-08. In KVG Bank Gross NPA ratio was 4.71% in 2005-06, 4.14% in 2006-07 and

3.58% in 2007-08. This statistics shows that KVGB is better in terms of NPA management as

compared to all RRBs in India since its Gross NPA ratio was less than Gross NPA ratio of all

RRBs.

Amongst 6 regional rural banks in Karnataka, KVGB is in good position, in terms of

total outstanding loans and deposits and as compared to other RRBs in Karnataka, KVGB has



less NPA, KVGB earns a good level of income but NPAs are reducing its profit, the above

said reasons induces to select the NPA for the Study.

RESEARCH DESIGN, RESEARCH METHODOLOGY and DATA COLLECTION

RESEARCH DESIGN

A research design is the arrangement of conditions for collection and analysis of data

in a manner that aims to combine relevance to the research purpose with economy in

procedure. The effort of the investigation is to provide descriptive profile of Non Performing

Assets (NPA), classification of NPAs, reasons for NPA, methods available to reduce NPAs,

techniques followed by Karnataka Vikas Grameena Bank to curb NPAs, Government policies

pertaining to maintaining NPA levels with specified limits, level of Non Performing Assets

and its effects on financial health of the bank and framing strategies to manage Non

Performing Assets.

RESEARCH METHODOLOGY

Type of research:

The research base was Descriptive Research.

Sources of information

(1) Primary data:

Direct personal interview of bank officials

Bank officials who provided information: Mr M G Nargund (Senior Officer, Hubli),

Mr H Kariyappa (Branch Manager, Hubli), Mr B G Hangaragi (Senior Manager,

HO, Dharwad), M A Shaik (Recovery Officer, Hubli) and staff members

(2) Secondary data:

Secondary data sources will include websites, magazines, newspapers, textbooks and

audited reports and accounts of the bank

Due to the vastness of the subject an attempt is made to understand the main spheres

of the problem of Non-performing assets and its effect on the financial stability of the bank.



This study is descriptive in nature and is based on the secondary information from the

journals published by the bank, financial magazines, websites etc.

Tools for analysis: Simple statistical, arithmetic methods and ratios are used to analyse

the data that were collected and tabulated.

FINANCIAL ANALYSIS

(1) Operating Profit

Operating profit is the profit before interest and tax. It is also known as PBIT.

Operating profit of KVG Bank for 3 years is as follows:

(Amount in Crores)

Year Operating Profits

2005-06 69.01

2006-07 120.96

2007-08 124.01

Interpretations:

Karnataka Vikas Grameena Bank is the result of merger of four Regional

Rural Banks of Karnataka. The Bank’s Operating Profit is gradually increasing. .

Operating Profit in 2005-06 stood at Rs. 61.01(in Crs) at the end of financial year

2007-08 it was Rs.124.01 (in Crs).



There is huge increase in operating profit in the year 2006-07 and 2.52%

increase in the year 2007-08. KVGB was formed on 12th-September-2006. Therefore

the above table shows the Operating profit of 200 days of the year 2005-06 and

operating profits of the years 2006-07 and 2006-07.

(2) Net Profits

Net profit is obtained by deducting Provisions from Operating profit.

Following table shows the Net Profit of KVGB for 3 years:

Year Net Profits

2005-06 30.29

2006-07 71.82

2007-08 72.13

Interpretations:

Above graph shows the Net Profit of 200 days of the year 2005-06 and 2

financial years 2006-07 and 2007-08. The Bank’s Net Profit is gradually increasing. In

the year 2005-06 Net profit was Rs 30.29 crores and Rs 71.82 crores in the year 2006-

07 and Rs 72.13 crores in the year 2007-08. There is growth of 0.43% in the Net profit




The performance of bank is recognised by its net profit. With a narrow interest

spread bank was able to earn very good profit in the year 2007-08. This was possible on

account of meticulous planning and foresight resulting in increased net profit.

(3) Investments, Advances, Deposits and Borrowings

The following table shows the inflows and outflows of funds of the bank:

(Amount in thousands)

Year Investments Advances Deposits Borrowings

2005-06 5331555 17096177 19171358 1668788

2006-07 6221313 21193822 22303803 3694880

2007-08 7822021 24800407 27567386 3708275

3.1. Interpretations for Investments:

Management of funds of the Bank was of prime importance amongst its other

key areas of performance obligations ever since the RRBs were permitted to invest

their Surplus funds in Securities, Bonds and Debentures within the parameters of

directive guidelines issued by RBI\NABARD, from time to time, with a system of

monitoring the inflow and out flow of funds on day-to-day basis, the Bank has been



able to gauge the availability of surplus funds for the purpose of short term as well as

long term investments or even for pre-payment of refinances.

The following table shows various Investments of KVGB:

Sl No Particulars As on 31/03/2006 As on 31/03/2007 As on 31/03/2008

1 Equity Shares 0.58 0.58 0.64

2 Bonds and Debentures 58.65 74.67 66.64

3 Govt. Securities 472.03 544.79 713.31

4 Mutual Funds 1.90 2.09 1.62

Total 533.16 622.13 782.21

KVGB’s investment in Bonds and Debentures, Govt securities and Mutual Funds has

increased in the year 2006-07. In the year 2007-08 there is decrease in investments in

Bonds and Debentures and Mutual Funds because of recession in India. Due to

meltdown of share market KVG bank has reduced its investment in Bonds and

Debentures and Mutual Funds. There is 30.93% increase in investment in Govt

securities because it is the safest investment option at the time of recession.

By this investment decision KVGB is able to maintain its profit growth.

3.2. Advances: The bank is able to maintain dominance in the field of Advances by

increased deployment of funds in the form of Loans and Advances.

The following table shows the sector-wise Disbursement of Credit: (Rs in Crores)

Sl No. Sector 2005-06 2006-07 2007-08

A Priority Sector

i) Agriculture 428.40 632.19 786.38

ii) Allied Activities 7.31 13.51 9.55



iii) SSI\RA 24.73 26.31 73.67

iv) Trade & Service 187.38 187.09 139.44

Total of Priority Sector 647.82 859.19 1009.04

B Non Priority Sector 197.40 241.09 266.11

Total Disbursement 845.22 1100.19 1275.15

Interpretations:

NPA was more in Allied sectors, Trade and services, non-priority sector. So bank

reduced the credit disbursement and increased advances in other sectors by

introducing new schemes in the 2007-08.

3.3. Deposits:

There is consistent increase in the level of Deposits and the bank recorded the

deposits growth rate of 23.60% in the year 2007-08.

3.4. Borrowings:

KVBG used refinance facility made available by NABARD/Sponsor bank

(Syndicate Bank) under the various Refinance schemes. The repayments were made

as per time schedule according to NABARD/Sponsor bank (Syndicate Bank)

guidelines.

Bank has undertaken several measures to reduce NPA because it will reduce

earning capacity of the bank and repayment of borrowings would be impossible if

there is no or less profit.

(4) NON-PERFORMING ASSETS (NPA)

4.1. As per the Annual report of the KVGB, year wise details of the NPAs in KVGB

are given in the following tables:



(Amount in Crores)

4.2. Details of Non Performing Assets (NPA) Purchased/Sold during 2005-06, 2006-07,

2007-08: Nil

4.3. Percent (%) of NPA to Total Advances

(Amount in Crores)Particulars 2005-06 2006-07 2007-08

Total Advances

Non Performing Assets

% of NPA to Total Advances

Provisions held for NPA

Additional Provisions held for NPA

Provisions held for Standard Assets

Risk Fund Provisions Held

Unrealised Interest on NPA

1749.96

76.35

5.15

40.35

23.37

4.09

1.68

75.06

2168.40

89.67

4.14

49.02

23.37

6.76

1.68

78.39

2547.86

91.91

3.58

67.82

23.37

7.71

0.00

91.35

4.4. Movement of Gross NPA, Net NPA and Provisions for NPA:

(Amount in Crores)


Year NPA Outstanding % growth2005-06 82.43 - - - - -2006-07 89.67 8.78%2007-08 91.19 1.70%


The above graph explains very clearly about the trend of NPAs in KVGB for the last 3years.

In the year 2005-06, the gross NPA is Rs 82.43crores and in the very next year it increased to


Particulars Year Year Year31/03/2006 31/03/2007 31/03/2008

Movement of NPAs (Gross) a) Opening Balance 76.35 82.43 89.67b) Additions during the year 19.03 21.81 17.39c) Reductions during 12.95 14.57 15.87d) Closing balance 82.43 89.67 91.19

Movement of net NPAs a) Opening Balance 17.81 17.03 15.6b) Additions during the year 12.37 7.24 1.52

c)Reductions during 12.95 8.67 17.12 d) Closing balance 17.03 15.6 0Movement of provisions for NPA (excluding provisions on standard assets)

a) Opening Balance 58.54 65.4 74.07b) Provisions made during the

year6.66 8.74 19.62

c) Write-off of excess provisions 0 0.7 2.5d) Closing balance 65.4 74.07 91.19


Rs 89.67 after that every year up to now the NPA increased proportionately. In the year 2007-

08 Gross NPA was Rs 91.19crores.

The announcement of Debt Waiver Scheme coupled with unseasonal summer rains affected

the recovery climate severely, resulting in addition to the NPAs of the Bank. There was a

total addition of Rs 17.02 crores to the outstanding level of NPAs as at 31-3-2008.

Therefore, Gross NPA was written off by 100% and Net NPA was brought down to Rs. Zero


PROBLEMS OF KVG BANK REGARDING NPAs:

NPA reduce the yield on evidences but also reduces the profitability of KVGB. The effect of

NPAs can be classifies in to two categories i.e. Impact on internal factors and Impact on

external factors.

1. Impact on external factors:

Regulatory and credit rating agencies are also not happy with the level of NPA

Indifferent attitude developed in the mind of the Bank customers.

Image of the bank in the minds of the general public will go down.

2. Impact on internal factors:

NPAs affect the internal position of the bank. The following are the impact of internal

factors:

2.1 NPAs increase Total Expenditures

2.2. NPAs reduce the earning Capacity and Profitability

2.3. NPAs reduce the ROA (Return On Assets)

2.4. NPAs reduce the ROCE (Return On Capital Employed)



Other internal impact of NPA:

NPAs erode current profits through provisioning requirements

They result in reduced interest income

They require high provisioning requirements affecting profits

They limit recycling of funds, set in asset- liability mismatches, etc.

Impact of NPA on financial performance of the bank can be measured by calculating

ratios which are as follows:

(I) Profitability ratios

(II) Leverage Ratios

(III) Investment ratios

(IV) Recovery and NPA ratios

2. Impact on internal factors:

NPAs affect the internal position of the bank. The following are the impact of internal

factors:

2.1 NPAs increase Total Expenditures:

The overall expenses of the bank continued to rise for a number of reasons. The

Provision for doubtful accounts, that caused the dramatic increase in total expenses.

The size of provision for doubtful accounts varies from year to year because of the

differences in the levels of the risk anticipated. The following table gives the details

about the total expenses of the Bank. The same information is given in the chart below:

Trend of Total Expenses

(Amount in ‘000)

Year Total expenses including Provision for doubtful accounts

Total expenses excluding Provision for doubtful accounts

2005-06 1073257 10182162006-07 2266963 21795582007-08 2798311 2602107



The above graph gives a very clear picture about the differences between the total expenses,

including provision and excluding provision of the KVGB. The Provision for doubtful debts

occupies a dominant role in the total expenses. Provisions for BDD increase the total

expenses of the bank.

2.2. NPAs reduce the earning Capacity:

The NPA affects earning capacity of the bank. In general various causes reduce the

profitability performance of the bank. The provision for doubtful debts is one among the most

important cause for reducing the profitability of the bank. The following table gives a detail

about Profit before tax of the bank.

Profitability of the Bank:



Interpretations:

From the above graph it is clear that in the year 2005-06 NPA is absorbing 9.19% of the Net

Profit. In the year 2006-07 NPA is reducing 4.48% of net profit and in the year 2007-08 NPA

is reducing 4.37% of the Net profit. In the year 2005-06 NPA had reduced 9.19% of Net

profit because the NPA management was different in all 4 rural banks which merged later on

to form KVGB. Due to experience and good NPA management measures by the bank, it was

possible to reduce NPA to a greater extent of 4.48% and 4.37% in the years 2006-07 and

2007-08 respectively.

Inspite of the measures undertaken by KVGB, there is reduction in Net profit due to NPA in

the accounts of KVGB.

2.3. NPAs reduce the ROA (Return On Assets)

ROA is a measure of how effectively the bank’s assets are being used to generate profit.

Return On Assets = Operating Profit X 100

Total Assets

(Amount in ‘000)



Year Operating Profit Total Assets Ratio(ROA)

2005-06 8,96,391 2,61,09,223 3.43

2006-07 19,67,966 3,22,41,897 6.10

2007-08 20,82,288 3,86,88,473 5.38

Interpretation:

The profitability of the bank in terms of return on assets was somewhat lower than the

preceding year, but within above table range, the return on assets was 5.38%. During the

previous year 2005-06 and 2006-07, however, they were respectively, 3.43% and 6.10%. The

major reason for the slight decrease in the level of ROA in the year 2007-08 was, of course,

the provision for doubtful debts accounts (provisions for NPA) – which was higher than its

level during the previous year.

2.4. NPAs reduce the ROCE (Return On Capital Employed)

This ratio basically highlights the fact that overall profitability is the effect of Profit margin

(earnings as a % of sales) and assets turnover and accordingly it is also expressed.

Return on Capital Employed = Net profit before tax, interest and dividends ("EBIT") Total assets (or total assets less current liabilities



(Amount in ‘000)

YearEBIT Capital employed Ratio(ROCE)

2005-06 8,96,391 37,44,018 23.94

2006-07 19,67,966 45,25,469 43.48

2007-08 20,82,288 52,71,185 39.5

Interpretation:

The probability of the bank in terms of return on assets was somewhat lower than the

preceding year, but within above table range, the return on assets was 39.5%. During the

previous year 2005-06 and 2006-07, however, they were respectively, 23.94% and 43.48%.

The major reason for the slight decrease in the level of ROA in the year 2007-08 was, of

course, the provision for doubt full debts accounts (provisions for NPA) – which was higher

than its level during the previous year.

NPA reduces ROA and ROCE i.e, NPA reduces the earning capacity of assets, return

on assets and return on capital also gets affected.

Impact of NPA on financial performance of the bank can be measured by calculating

ratios which are as follows:

(I) Profitability ratios



The primary objective of business enterprises is to earn profit and the study of

profitability in relation to sales, capital employed and net worth occupies and

important place in ratio analysis

(1) Net profit margin

The profit margin tells how much profit a bank makes for every Rs 100 it generates in revenue.

Net Profit margin = Net Profit for the year X 100

Total Income

(Amount in ‘000)Year

Net profit Total Income Net profit margin Provisions towards NPA

2005-06 320943 1394200 23.02% 4035002006-07 718186 2985149 24.06% 4902002007-08 721339 3519650 20.49% 678200

Interpretation:

Net profit margin has increased in the year 2006-07 by 1.04% (i.e, 24.06% - 23.02%)

because increase in Net profit is proportionately larger than increase in Provisions

towards NPA. In the year 2007-08 Net profit margin has drastically decreased to



20.49% due to huge increase in Provisions towards NPA. Net Profit Margin is

inversely proportionate to Provisions towards NPA. Provisions towards NPA (along

with other expenditure items) is deducted from Total Income to get Net profit.

(2)Gross profit margin

Gross profit margin indicates the relation between Net Interest income and the total

income generated by interest income and operation income.



Gross profit margin = Net Interest Income X 100

Total Income

(Amount in ‘000)

YearNet Interest Income

Total Income

Gross profit margin (%)

Interest on Advances

Recovery of NPA

%growth in Recovery of NPA

2005-06 782816 1394200 56.15 1062948 129545 - - - - - -

2006-07 1719696 2985149 57.61 2276459 145700 12.47

2007-08 1779820 3519650 50.57 2710453 158700 8.92

Interpretation:

Interest on Advances received includes amount of Recovered NPA. In the year 2006-07,

NPA recovered was 12.47% and Gross Profit margin was 57.61%. There was decline in

Gross Profit Margin from 57.61% to 50.57% in the year 2007-08 because of decrease in

recovery of NPA from 12.47% to 8.92%. Decrease in Recovery of NPA led to decrease in

Interest earned, thereby ending up with decrease in Net Interest Earned.

Note:

Net Interest Income = Interest Earned - Interest Expended

Year Interest Earned Interest Expended Net Interest Income

2005-06 1280625 497809 782816



2006-07 2736879 1017183 1719696

2007-08 3217182 1437362 1779820

(3) Cost to Income Ratio



Cost to Income ratio represents relationship between cost and income of the bank.

If cost to income is low, it indicates that bank is good in terms of profit

maximisation.

Cost to Income ratio = Operating Expenditure X 100

Net Income or Net Profit

(Amount in ‘000)Year Operating expenditure Net Profit Cost to Income ratio (%)

2005-06 508847 320943 158.55

2006-07 758333 718186 105.59

2007-08 842241 721339 116.76

Interpretations:

Operating expenses related to management and recovery of NPA include Legal

expenses, Travelling charges of Recovery officers, Postage and Telephone charges. If

there is no proportionate rise in Income (recovered income) with a increase in

Operating expenses then such expenses will be lead to decrease in profit.

Compared to all three years, 2006-07 was better in terms of profit maximisation. In

the year 2006-07 the amount spent on management and recovery of NPA yielded

some returns. In the year 2007-08, cost to income ratio was decreased which indicates

that the amount spent on NPA management and recovery was not in proportion to

amount recovered.

(II) Leverage Ratios



Capital structure / Leverage Ratios : These ratios study the relationship that

exists between owner’s funds and loan funds and highlight the relative weights of

the two sources of finance. These ratios also consider the application of long-

term funds on fixed assets and current assets. These ratios are regarded as

indicators of long-term solvency.

(1) Shareholders’ Fund to Total Assets or Proprietary ratio

Total Assets to Shareholders’ Fund shows the relationship between total assets

and shareholders fund.

Shareholders’ Fund to Total Assets = Total Shareholders fund

Total Assets

(Amount in ‘000)

Year Shareholders Fund Total assetsTotal shareholders fund to total assets

Provisions for NPA

2005-06 37,44,018 26109223

0.143403500

2006-07 45,25,469 32241897

0.140490200

2007-08 52,71,185 38688473

0.136678200

Interpretations:



Shareholders fund to total equity is declining year by year due to increase in liabilities.

Every year there is an increase in Provisions for NPA which has lead to increase in Total

liabilities. This has reduced the ratio of Shareholders’ Fund to Total Assets.

Thus net worth is decreasing because of NPA.

(2) Debt – Equity ratio



Debt to equity ratio indicates the proportionate claims of owners and the outsiders

against the bank’s assets. Debt Equity ratio indicates the percentage of funds

being financed through borrowings.

Debt – Equity ratio = Total outside debt (Borrowings)

Equity

(Amount in ‘000)Year Debt (Borrowings) Shareholders Fund Debt-Equity ratio

2005-06 1668788 37,44,018 0.452006-07 3694880 45,25,469 0.822007-08 3708274 52,71,185 0.70

Interpretations:

In the year 2006-07, Debt-Equity ratio was increased to 0.82 because the

promoters (Govt of India, Govt of Karnataka and Syndicate Bank) wanted to do

the business with maximum of outsider's funds in order to take lesser risk of their

investment and to increase their earnings (Reserves) by paying a lower fixed rate

of interest to outsiders.

(III) Investment Ratios



These ratios basically are concerned with the return on the funds invested or

employed in banking business. Return on investment is the ultimate test of success

of any business activity.

(1) Dividend Per Share

Dividend Per Share is the ratio that represents the profits for promoters’

(shareholders’) on each share.

Dividend Per Share = Dividend Payment

Number of shares

(2) Dividend Yield

Dividend Yield ratio shows how much a bank pays out in dividends each year

relative to its share price.

Dividend Yield = Dividend Per Share X 100

Market share price

(3) Earning yield

Earning yield shows the percentage of each invested in the stock that was earned in

the stock by the bank.

Earning yield = Earnings Per Share X 100

Market share price

(4) Dividend Cover

Dividend Cover represents how many times over the profits could have been paid

the dividend.

Dividend Cover = Profit for the year

Gross Dividend

(5) Price Earning Ratio



Price Earning Ratio is the ratio between market price per share and EPS. At any

time, the P/E ratio is an indication of how highly the market "rates" or "values" a

business.

Price Earning Ratio = Market price per share

Earnings Per Share

(6) Earning Per Share (EPS):

It measures the profit available to equity shareholders on a per share basis, that is,

the amount that they can get on every share held. It is calculated by dividing the

profits available to shareholders by the number of outstanding shares. The profits

available to the ordinary shareholders are represented by net profits after taxes and

preference dividend.

EARNING PER SHARE= (PROFIT AFTER TAX/NO OF SHARES OUTSTANDING)*100

The above mentioned Investment ratios cannot be ascertained in case of KVG Bank becuase

of the following reasons:

Shareholders of KVG Bank are Govt of India, Govt of Karnataka and Syndicate Bank.

Thier equity holdings are in the ratio of 50:15:35. Every year the profits of the bank are

transferred to Reserves and Surplus. Thus, dividend is not declared.

KVB Bank is not listed in any of the stock exchanges in India. Therefore market price

of shares cannot be ascertained.

So the investment ratios cannot be calculated for KVG Bank.

(IV) NPA and RECOVERY RATIOS:

a. Gross NPA ratio

b. Net NPA ratio

c. Problem asset ratio

d. Risk ratio

e. Provision ratio

(1) Gross NPA ratio



Gross NPA ratio represents ill performing financial asset in the total loans and

advances given by the bank to its customers.

Gross NPA ratio = Gross NPA X 100

Gross Advances

(Amount in Crores)Year NPA Outstanding Total Advance Gross NPA Ratio

2005-06 82.43 1749.96 4.71%2006-07 89.67 2168.4 4.14%2007-08 91.19 2547.86 3.58%

Interpretations:

Gross NPA ratio is declining year by year because KVG Bank evolved a broad loan

recovery policy an implemented through recovery officers with adequate

accountability and empowerment. 2 recovery officers were recruited in the year 2006-

07 and 2 were recruited in the year 2007-08. They were trained in Recovery

management through workshops. The defaulters were constantly reminded about their

overdues and notices were sent to them and recovery officers met defaulters regularly.

Several other measures were taken but due to some unavoidable causes NPA is not

fully moved out.

(2) Net NPA Ratio



Net NPA Ratio shows the actual non-performing loans to net advances.

Net NPA is derived after deducting Provisions for NPA from Gross NPA. Net

advances are derived by deducting provisions for bad and doubtful debts from Gross

Advances.

Net NPA Ratio = Net NPA X 100

Net Advances

(Amount in Crores)Year Net NPA Net Advances Net NPA Ratio

2005-06 17.03 1709.61 0.9962006-07 15.06 2119.38 0.7112007-08 0 2480.04 0.000

Interpretations:

There was decline in Net NPA Ratio in the year 2006-07 because of proporationate

decrease in Gross NPA.

The announcement of Debt Waiver Scheme coupled with unseasonal summer rains

affected the recovery climate severely, resulting in addition to the NPAs of the Bank.

There was a total addition of Rs 17.02 crores to the outstanding level of NPAs as at

31-3-2008.



During the year 2007-08 under report, the Bank had implemented a scheme for

writing-off of the bad/doubtful debts. Accordingly non farm sector NPA loans with

book balance upto Rs 25000 which were classified as loss assets are written off. Total

written off amount during the year is Rs 168.69 lakhs. The amount of cumulative

recovery out of written off amount is Rs 40.40 lakhs upto end of March 2008.

(3) Problem Assets Ratio

Problem Assets Ratio represents the relationship between Gross NPA and Total

assets.

In other words, it is a ratio showing the presence of non-performing assets in total

assets.

Problem Assets Ratio = Gross NPA X 100

Total Assets

(Amount in crores)Year Gross NPA Total Assets Problem Assets Ratio

2005-06 82.43 2610.92 3.16%2006-07 89.67 3224.19 2.78%2007-08 91.19 3868.85 2.36%



Interpretations:

Problem assets ratio is decreasing every year. This indicates that NPA is declining in

the Total Assets . Problem assets ratio was 3.16%% in the year 2005-06 and was

reduced to 2.78% and 2.36% in the years 2006-07 and 2007-08 respectively.

(4) Risk Assets Ratio

Risk Assets Ratio measures the impact of NPA on total capital and reserves of the

bank. This ratio specifies bank's capital to its risk. Regulators in the banking system

track a bank's risk to ensure that it can absorb a reasonable amount of loss arising

through NPA.

Risk Assets Ratio = Net NPA X 100

Total Capital and Reserves

(Amount in Crores)

Year Net NPA Total Capital and Reserves Risk ratio2005-06 17.03 374.40 4.552006-07 15.06 452.54 3.332007-08 0 527.11 0.00



Interpretations:

The above graph clearly shows that there is decrease in Risk ratio of the bank every

year. The capital is adequate to absorb the losses arising due to NPA. In the year

2007-08 NPA is fully written off. Therefore it is assumed that there is less risk.

(5) NPA Provisions Ratio

Provisions Ratio represents the portion of provisions in advances. Higher provisions

reduce gross advances.

NPA Provisions Ratio = Total NPA provisions X 100

Total Advances

(Amount in Thousands)


Year Provisions towards NPA Advances NPA Provisions ratio2005-06 403500 17096177 2.362006-07 490200 21193822 2.312007-08 678200 24800407 2.73


Interpretations:

In the year 2006-07 NPA provisions ratio was reduced to 2.31% but there was

increase in the year 2007-08 by 2.73%. Bank has to take necessary measures to reduce

NPA Provisions ratio. Higher the NPA Provisions ratio lower the profitability.

NPA MANAGEMENT AT KARNATAKA VIKAS GRAMEENA BANK

Objectives of NPA Management

Maximum recovery of NPA’s in the earliest possible time, and

To bring down the NPA levels. NPA management is an integral part of the overall loan

asset management of the bank, consisting of strategic approaches to:

1) Guard against risks of adverse selection of new assets:

Meaning, proper evaluation and appraisal of the credit proposals, so that the chances

of new assets turning to bad are minimized.

2) Prevent deterioration of existing performing assets:

It means keeping sustained and continued watch on the assets, and taking appropriate

actions as necessary, so that asset degeneration is minimized

3) Tackling the existing NPAs through preventive and corrective measures:

NPA management involves:

a) Analysis of the ‘assets’ for grouping and sub grouping



b) Based on the analysis, finalizing the strategy for optimum management.

Analysis helps to systematize recovery and control. It tells that the NPAs can be

broadly segregated into two groups.

Recoverable through regular follow up:

By inducing recovery through reminders, both written and oral.

Not recoverable through regular follow up:

The accounts falling under this head need to be tackled under one of the

following process:

a. Fit for initiation of legal action

b. Fit for negotiated settlements either directly or through initiation of legal action,

which will eventually lead to negotiated settlements.

c. Fit for waiver of legal action, leading to eventual write-off.

d. Fit for other solutions: like sale of security, merger and acquisitions etc.

The above can be diagrammatically represented as under:



Of the various processes, recovery through negotiated settlements offers the best scope

for maximizing NPAs reduction at the minimum expense. From the bank’s angle, the process

of compromise settlements (OTS- One Time Settlements) enables saving of a lot of valuable

time, apart from projecting a helpful/ positive image of the bank. In addition, recycling of the

recovered funds add to the interest of the bank.

Important statistics


RECOVERY

Wilful Repayments Imposed, conscious, effort-specific measures

Self motivated, hence no action necessary

Induced by periodical reminders

Legal Remedies Non Legal Remedies

Compromises

[OTS]

Decree Execution

Compromise, Write-off, Mergers, Acquisitions

Rehabilitation [subject to viability & RBI norms]


The following table shows the sector-wise defaults in payment of loans and advances

Sl No. Sector % defaults

A Priority Sector 54%

i) Agriculture 8%

ii) Allied Activities 15%

iii) SSI\RA 12%

iv) Trade & Service 19%

B Non Priority Sector 46%

NPA was more in Allied activities sector, Trade and services, non-priority sector. So

bank reduced the credit disbursement and increased advances in other sectors by

introducing new schemes in the 2007-08. So bank was able to reduce NPA in the

previous year.

Number of wilful defaulters:

Willful defaulters behind the increase in NPA 71%

Non-Willful defaulters behind the increase in NPA 29%

The managers and officers interviewed admitted that they have noticed wilful


Methods preferred by KVGB to Reduce NPA Level:



Sl No Factors % Score of factor

1 Recovery of over dues 34%

2 Monitoring Performing Assets 40%

3 Upgradation of Quality Assets 20%

4 Write – off Loss Assets 6%

Managers of KVGB prefer to monitor performing assets to prevent them from

becoming non-performing assets. They give second preference to recover the over

dues through various corrective measures. Upgradation of quality assets i.e, assessing

a borrower’s financial stability to repay the loan. Least preference is given to write-off

loss assets because writing off is considered to be loss and does not yield any

recovery.



1) REASONS FOR POOR RECOVERY OF LOANS:

A) External

External causes are causes which cannot be controlled by bank.

i. Natural calamities

ii. Political Interference

iii. Loan waiver, write off, etc.

iv. Geographical factors

v. Changes in Policy environment

vi. Changes in Technology

vii. Changes in Economic Conditions

viii. Target approach under Government

ix. Legal process i.e, delayed process in court

According to Managers and officers of KVGB following are main external

causes contributing to rise in NPA:

Sl No Main External Causes % score of causes

ii Political interferences 18%

v Changes in Policy environment 17%

vi Changes in Technology 4%

vii Changes in Economic Conditions 21%

ix Legal process i.e, delayed process in court 16%

Other External Causes 24%

From the above table inferences can be drawn that political environment and

political interferences such as political patronage of defaulters and Govt loan

waiver scheme are contributing to rise in NPA level. Economic conditions

may include decrease in level of income of borrowers etc. Legal processes

take lot of time for recovery. Inadequacies in power and raw materials,

product or process obsolescence due to technological changes rarely affected

the borrowers.



B) Internal causes

Internal causes can be either bank related or borrower related.

Bank Related:

i. Improper identification of borrower

ii. Lack of appraisal skills

iii. Delay in loan sanctioning

iv. Under or over financing

v. Insufficient gestation or repayment period

vi. Lack of post-disbursement follow-up

vii. Lack of borrower contact and poor understanding of rural clientele

viii. No thrust on recovery

ix. Laxity in internal control systems

x. Poor Management Information System

xi. Failure to ensure adequate rapport with government agencies and

other banks

xii. Low motivation and involvement of staff

xiii. Perception of bank as a charity institution

xiv. Poor Industrial Relations climate

According to Managers and officers of KVGB following are main internal causes

which can be controlled by bank and the causes contributing to rise in NPA:

Sl No

Main Internal Causes – Bank related: % score of causes

viii Lack of borrower contact and poor understanding of rural clientele

55%

xi Failure to ensure adequate rapport with government agencies and other banks

45%

Other reasons 5%

According to managers and officers of KVGB the major reasons for advances

becoming Non performing is wrong selection of borrowers and lack of inter-bank co-

ordination in exchange of information over list of defaulters with other banks and

Govt agencies.



Borrower Related causes:

i. Misutilisation of Loan

ii. Diversion of Funds

iii. Lack of Technical and Managerial Skills

iv. Poor maintenance of Assets

v. Willful Default

vi. Personal accident, death, etc.

vii. Shifting of place of residence or business

According to Managers and officers of KVGB following are main internal

causes which can be controlled by bank and the causes contributing to rise in

NPA

Sl No Main Internal Causes – Borrower related: % score of causes

i Misutilisation of Loan 23%

ii Diversion of Funds 22%

iii Lack of Technical and Managerial Skills

(especially small borrowers)

25%

v Willful Default 22%

vi Shifting of place of residence or business 5%

Other reasons 3%

Managers and officers are in the opinion that mismanagement and diversion of funds

to other purposes are the main reasons for borrowed account becoming irregular. Lack of

Technical and Managerial Skills (especially small borrowers) and lack of experience and

exposure also results in irregularity of borrowed accounts. The borrower may shift his place

of residence or business and thus try to avoid repayment of loans.



Preventive and Corrective Methods used by KVGB to avoid NPA

The preventive methods include:

a. More careful and responsible scrutiny and appraisal. This includes timely

sanction, realism in fixing repayment schedule and adequacy of credit with

efficient delivery.

Factors considered by KVBG for securitizing the assets:

Whether the property available can be mortgaged or not

Whether the property available can be hypothecated or not

b. Monitoring performing assets

c. Regular and effective follow up with borrowers and timely action on sensing

the likely default.

d. Title, value, etc. and additional security are to be investigated before the

disbursement of loan.

e. More detailed information about the borrowers is to be obtained in terms of

his/her family background such as i) size of the family ii) number of

dependents in the family iii) earning members in the family iv) standard of

living v) length of residency in the area, etc.

f. Reviewing the advances in time and taking appropriate immediate action.

g. Sending demand notices in time.

h. Contacting the borrower before the harvest or cash inflow.

i. Proper supervision of the borrowal account through personal visits and calling

for periodical returns to get incipient signals of default.

j. Efficient MIS system on the borrowers and on the branches.

k. Credit rating of clientele.

l. Strict observance of time schedules.

m. Timely extension of period of limitation through debt acknowledgement

partial payment, renewal of documents etc.

n. Timely rephasement or rescheduling of loan in the event of natural calamities.



2) Corrective methods

(i) Sharing the Threat Perception:

The top management conducts seminars and meetings with the staff and conveys the

crisis in which the bank is in. It indicates that unless recoveries start coming the bank

would be closed.

(ii) Staff Motivation

Shields, trophies and appreciation certificates are awarded to the staff and branches

showing good recovery performances

(iii) Constitution of Special Recovery Cells and Related Measures

a) The special recovery cell in bank maintains rapport with Nodal Officers and

branches for effecting recoveries. In all branches of KVGB there is one recovery

officer for each branch. Each recovery officer spends on an average 3 days a week

on recovery. Recovery officers are accompanied by Branch managers and other

one or two officers if the case is important.

b) Executives of bank visit selected number of NPA parties and establish direct

personal contact for ensuring recovery. The bank arrange for customers meet

especially o NPA clients at various important centres to discuss an address their

problems.

c) The KVG bank arranges periodical lawyers' meet to review the status of suit filed

cases.

d) Pragmatic approach is followed for out of court settlement of loan accounts and

bringing compromise proposals to logical end at the earliest.

e) Identification of potential NPAs is done by the end of the first quarter of the

financial year so that preventive measures could be initiated at the beginning.

f) Staff mobility is ensured and the recovery staff is allowed to hire transport to suit

their needs and no questions are asked.

g) Staffs are deputed to Sub Divisional Officer (SDO) or Tehsil courts to assist the

court staff for issuing notices to borrowers in case of overdue loans.

h) Periodical recovery camps are held in villages in co-ordination with Government

officials.

i) The borrowers are constantly reminded about their overdues and notices to clear

them are regularly sent. A copy of the list is also given to the counter clerk so that



he/she can ask the defaulters whenever they come to the branch to transact to meet

the Branch Manager.

(iv) Involvement of Government Agencies

There are instances where KVGB was able to recover overdue loans by involving

District Administration. Some of the methods adopted to involve government

machinery are listed below:

a) Revenue recovery notices are issued by the District Magistrate or

SubDivisional

b) Officer once a year advising borrowers to deposit the overdue amount in

the bank to avoid legal actions permitted under the law.

c) The list of defaulters is given to the Revenue Authorities or Tehsildars in

case of agriculture loans; in case of industrial loans the list is given to

District Industries Centres for follow-up.

d) Joint recovery teams are formed in which Tehsildars, Revenue Inspector,

Patwari and bank Staff jointly participate to expedite the execution of

decrees.

e) Help of Block Development Officer (BDO) is solicited in case of

Government sponsored schemes. Joint inspections are carried out with

BDO and incase of accounts where misutilisation of loans and subsidy

amount is noticed, joint First information reports (FIRs) are lodged.

(v) Extraordinary Methods

Apart from what has been stated above KVGB has adopted certain extra-ordinary

method to ensure recovery and a few of such method adopted by the bank are narrated

here.

In some places the visit of a police constable to a particular person's house is

considered inauspicious and banks' taking advantage of this aspect have

served recovery notices through police constables and have put pressure to

get the loans recovered.

In some cases, the branch staffs have paid money for the performance of last

rites in the event of the death in the family of the borrower (defaulter) and

repayments have followed.



(vi) Write off Loss assets

Under corrective management, each NPA is examined in totality and on the basis of various

factors like past efforts, period of overdue, client profile, natural calamities etc. and suitable

strategy is decided. Since the reasons or factors responsible for sliding a good loan into bad

one vary for each loan account, it is necessary to adopt different strategies for different NPA

accounts.

Some corrective management strategies for reducing NPAs are:

(i) Recovery Strategies

effect recovery

compromises to improve recovery status of account

partial write off

adjustment of collateral securities

pressure on guarantors

special recovery drive

help from revenue authorities

(ii) Rephasement of loans or Rescheduling of demands

Repayment of the loan depends on the income generating capacity of the unit. It may

be difficult to get the term loan if the unit does not generate profit. Such units may

repay by borrowing from other sources or short term funds. But ultimately the loss

making unit may not be able to repay the loan. Therefore, rescheduling of repayment

conditions should be made according to the income generation capacity. Banks are

not permitted to upgrade the classification of any advance in respect of renegotiated

terms has worked satisfactorily for a period of two years after repayment. It may be

mentioned that rephasement of the loan installments should be done only when it is

expected to get payment after rephasement.

(iii) Rehabilitation of potentially viable units



If a sick unit is potentially viable, efforts are made to finalize the rehabilitation

package without loss of time. Provisions need to be made for a period of one year for

the date of the disbursement in respect of additional facilities sanctioned under

rehabilitation package approved by BIFR/term lending institutions such that statutory

auditors are also satisfied by the progress of rehabilitation program. If the unit

becomes viable, the entire is a long drawn procedure, it may be encouraged where

units are potentially viable and management reliable.

(iv)Compromise with borrowers for final settlements

A compromise may be called a negotiated settlement in which the borrower agrees to

pay a certain amount to the KVGB after getting certain concessions. A large number

of compromise proposals are being approved by KVGB with view to reduce the

NPAs and resorting to expensive of resorting to expensive recovery proceedings

spread over a long period.

(v) Calling up the advances and filing of civil suits

KVGB promptly file cases against willful defaulters with the concerned authorities of

the State Govt. The matters relating to recovery of advances is discussed in the state

level banker meeting and necessary help from the State Govt. authorities. A list of

defaulters are prepared for each village or city before organising the recovery camp

with which revenue officers, block development officers, gram sevaks, etc., are

closely associated.

(vi)Approaching debt recovery tribunals

Debt recovery tribunal –means the Tribunal established under subsection (1) of the

Recovery of Debts due to Banks and Financial Institution act 1993. In order to expide

recovery of NPAs, the Narasimhan Committee had suggested setting up of special

Debt Recovery Tribunals (DRTs), following which the Government passed the

Recovery of Debts due to Banks and Financial Institution Act 1993.these tribunals

were set up to try suits of values of over Rs.10 lakhs, while High courts and District

courts would take up cases of lesser values. KVGB approaches DRT when the assets

become Doubtful Assets-1.



(vii) Write off the outstanding

If all the efforts for recovery fail, KVGB writes of the advances. Such write off is

done after exhausting all other remedies when chances of recovery are negligible.

KVGB had 100% written off the NPA in the year 2007-08.

(viii) One Time Settlement (OTS)

OTS appears to be a useful instrument available for honourable exit. While giving no

scope for avoiding repayment, units with poor chance of survival and asset shortage

should be considered for OTS. There should be a thorough discussion with the

entrepreneurs at the very beginning of the proposal so that after OTS, they are able to

pay and get their accounts closed.

KVGB issues Notice and OTS are pursued when an asset becomes Loss Asset. Till

the assets become loss asset the bank does not pursue OTS.

Steps taken by KVGB when asset becomes:

(1) Sub- standard

Notices are issued and defaulting party is contacted through telephone or post then

recovery is pursued.

(2) Doubtful Assets 1

Notices are issued, Group Recovery Approach is followed, legal actions are initiated.


Recovery Approach is followed, legal actions are initiated


Recovery Approach is followed, legal actions are initiated

OTS (One Time Settlement) is pursued in deserving cases



(5) Loss Assets

Notice issued to borrower and OTS is pursued.

Corrective Management for NPA Management

Various Steps taken by KVGB for reducing NPAs

The following steps can be followed for trying various techniques for reducing

NPA’s. The steps can be shown in the following chart.

Study the problem and magnitude of NPA’s branch wise, amount and age wise.

Prepare a loan recovery policy and strategies for reducing NPA’s

Create a special recovery cells at head office /zonal office/regional office levels.

Identify critical branches of recovery

Fix targets of recovery and draw time-bound action program

Select proper techniques for solving the problem of each NPA

Monitor implementation of the time bound action plan

Take corrective steps wherever found necessary while monitoring the action plan and

make changes in the original plan if necessary

Recovery of Advances:

Follow-up of advocates/Civil courts: suits are filed and decrees enforcement by filing EP.



Mortgaged and/or hypothecated assets are sold and the amount of loans and advances are

recovered. Assets are sold through public auction. Assets of KVGB are not sold to other

banks or Assets reconstruction Company of India Ltd (ACRIL)

FINDINGS:

1. Loans and advances disbursed in the year 2007-08 were reduced in Allied sectors,

Trade and services, non-priority sector. NPA was more in Allied sectors, Trade and

services, non-priority sector. So bank reduced the credit disbursement and increased

advances in other sectors by introducing new schemes in the 2007-08.

2. In the year 2005-06, the gross NPA is Rs 82.43crores and in the very next year it

increased to Rs 89.67 after that every year up to now the NPA increased

proportionately. In the year 2007-08 Gross NPA was Rs 91.19crores.

3. The announcement of Debt Waiver Scheme coupled with unseasonal summer rains

affected the recovery climate severely, resulting in addition to the NPAs of the Bank.

There was a total addition of Rs 17.02 crores to the outstanding level of NPAs as at

31-3-2008.

4. Gross NPA was written off by 100% and Net NPA was brought down to Rs. Zero in

the year 2007-08.

5. In the year 2005-06 NPA is absorbing 9.19% of the Net Profit. In the year 2006-07

NPA is reducing 4.48% of net profit and in the year 2007-08 NPA is reducing 4.37%

of the Net profit. In the year 2005-06 NPA had reduced 9.19% of Net profit because

the NPA management different in all 4 rural banks which merged later on to form

KVGB. Due to experience and good NPA management measures by the bank, it was

possible to reduce NPA to a greater extent of 4.48% and 4.37% in the years 2006-07

and 2007-08 respectively.

6. Year 2006-07 was comparatively better than 2005-06 and 2007-08 in terms of

profitability.

7. Net profit margin has increased in the year 2006-07 by 1.04% (i.e, 24.06% - 23.02%)

because increase in Net profit is proportionately larger than increase in Provisions

towards NPA. In the year 2007-08 Net profit margin has drastically decreased to

20.49% due to huge increase in Provisions towards NPA. Net Profit Margin is

inversely proportionate to Provisions towards NPA. Provisions towards NPA (along

with other expenditure items) is deducted from Total Income to get Net profit.



8. Interest on Advances received includes amount of Recovered NPA. In the year 2006-

07, NPA recovered was 12.47% and Gross Profit margin was 57.61%. There was

decline in Gross Profit Margin from 57.61% to 50.57% in the year 2007-08 because

of decrease in recovery of NPA from 12.47% to 8.92%. Decrease in Recovery of

NPA led to decrease in Interest earned, thereby ending up with decrease in Net

Interest Earned.

9. Compared to all three years, 2006-07 was better in terms of profit maximisation. In

the year 2006-07 the amount spent on management and recovery of NPA yielded

some returns. In the year 2007-08, cost to income ratio was decreased which indicates

that the amount spent on NPA management and recovery was not in proportion to

amount recovered.

10. Shareholders fund to total equity is declining year by year due to increase in

liabilities. Every year there is an increase in Provisions for NPA which has lead to

increase in Total liabilities. This has reduced the ratio of Shareholders’ Fund to Total

Assets.

11. In the year 2006-07, Debt-Equity ratio was increased to 0.82 because the promoters

(Govt of India, Govt of Karnataka and Syndicate Bank) wanted to do the business

with maximum of outsider's funds in order to take lesser risk of their investment and

to increase their earnings (Reserves) by paying a lower fixed rate of interest to

outsiders.

12. Gross NPA ratio is declining year by year because KVG Bank evolved a broad loan

recovery policy an implemented through recovery officers with adequate

accountability and empowerment. 2 recovery officers were recruited in the year 2006-

07 and 2 were recruited in the year 2007-08. They were trained in Recovery

management through workshops. The defaulters were constantly reminded about their

overdues and notices were sent to them and recovery officers met defaulters regularly.

Several other measures were taken but due to some unavoidable causes NPA is not

fully moved out.

13. During the year 2007-08 under report, the Bank had implemented a scheme for

writing-off of the bad/doubtful debts. Accordingly non farm sector NPA loans with

book balance upto Rs 25000 which were classified as loss assets are written off. Total

written off amount during the year is Rs 168.69 lakhs. The amount of cumulative

recovery out of written off amount is Rs 40.40 lakhs upto end of March 2008.



14. The capital is adequate to absorb the losses arising due to NPA. In the year 2007-08

NPA is fully written off. Therefore it is assumed that there is no risk.

15. In the year 2006-07 NPA provisions ratio was reduced to 2.31% but there was

increase in the year 2007-08 by 2,73%. Bank has to take necessary measures to reduce

NPA Provisions ratio.

16. There are several reasons for the rise in NPA; few causes can be controlled by bank.

So bank worked more on controllable causes and this helped it to reduce NPAs to

some extent.

17. The managers and officers interviewed admitted that they have noticed wilful


18. Managers of KVGB prefer to monitor performing assets to prevent them from

becoming non-performing assets. They give second preference to recover the over

dues through various corrective measures. Upgradation of quality assets i.e, assessing

a borrower’s financial stability to repay the loan. Least preference is given to write-off

loss assets because writing off is considered to be loss and does not yield any

recovery.

19. Political environment and political interferences such as political patronage of

defaulters and Govt loan waiver scheme are contributing to rise in NPA level.

Economic conditions may include decrease in level of income of borrowers etc.

20. According to managers and officers of KVGB the major reasons for advances

becoming Non performing is wrong selection of borrowers and lack of inter-bank co-

ordination in exchange of information over list of defaulters.

21. Managers and officers are in the opinion that mismanagement and diversion of funds

to other purposes are the main reasons for borrowed account becoming irregular. Lack

of Technical and Managerial Skills (especially small borrowers) and lack of

experience and exposure also results in irregularity of borrowed accounts. The

borrower may shift his place of residence or business and thus try to avoid repayment

of loans.

22. KVGB has adopted all possible preventive and corrective measures to reduce the

existing NPAs and prevent generation of new NPAs.



RECOMMENDATIONS

General suggestions:

The Bank should adopt the following General strategies for control of NPAs. The suggestions

are as follows:

1. Projects with old technology should not be considered for finance. Old technologies

won’t yield any profits. So the borrower may fail to repay the loans and advances.

2. Exposure on big corporate or single project should be avoided because failure of one

big project may lead to bankruptcy of the borrower and he may not be in the position to

repay the advances.

3. Conducting NPA workshops not only for recovery officers but also for entire staff so

that managers and recovery officers can get complete support from the staff and entire

staff will contribute to reduce the existing NPAs and prevent generation of new NPAs.

This will help the staff to notice NPA symptoms’ at early stage.

4. There is need to shift banks approach from collateral security to viability of the project

and intrinsic strength of promoters.

5. Reducing the lending in Allied sectors, Trade and services, non-priority sector. More

careful and responsible scrutiny and appraisal of financial stability of borrowers and

appraisal of loan outstanding. This includes timely sanction, realism in fixing

repayment schedule and adequacy of credit with efficient delivery.

6. Excessive reliance on collaterals should be avoided because in few cases it has led to

long drawn litigations and hence it should not be sole criteria for sanction

7. Extending the contact with other banks to avoid wrong selection of borrowers and take

on inter-bank co-ordination in exchange of information over list of defaulters. This can

be done through a campaign which includes seminar and personal visits to other banks

and highlighting the need for inter-bank co-ordination in exchange of information over

list of defaulters.



Pre-sanction suggestions:

(1)Uneven scale of repayment schedule with higher repayment in the initial years

normally is preferred.

(2)As for as possible, repayment of term loans should be fixed on monthly basis rather

than on quarterly or semiannual basis.

(3)Personal guarantees of the directors should normally be insisted upon.

(4)Wrong selection of borrowers can be avoided in exchange of information over list of

defaulters with other banks.

(5)Bank should assess and continue to keep a track of guarantor also.

Post sanctions suggestions:

(1) The Credit section should carefully watch the warning signals viz. non-payment of

quarterly interest, dishonor of cheque etc.

(2) Inspection system can be improved by surprise visits by recovery officers.

During inspection of units if the recovery officer observes red flag showing union

problem, shop floor atmosphere is not healthy, gossip, bare minimum number of staff

and if the books of accounts are not produced for inspection during visit then it

indicates that borrower’s financial position is declining. The bank has to take

immediate actions to avoid assets turning into non-performing loans.

(3) Monitoring of NPA symptoms which are borrower-related:

Following are the indicators which have to be interpreted in order to ensure that

there are no willful defaults:

i. Unnecessary and frequent visits of borrower to the branch or Head Office.

Unnecessary and frequent visits indicate that he wants to disguise that is

willing to repay loan.



ii. His standard to living shows upward swing soon after loan is disbursed. This

indicates that he has misutilised the loan amount and has used the loan amount

for improving his standard to living

iii. He purchases immovable property. This indicates that borrower has diversified

the loan amount and purchased immovable property.

iv. He does not bother for his health. It indicates that he is not interested to repay

the loan. On account of non-repayment of loan he might give an excuse that he

could not repay because of his ill health.

v. His next generation is not interested in his business. The borrower will not be

in position to repay loan if there is death of the borrower and his next

generation is not interested to continue the business then business loan will

remain unpaid.

vi. He has developed relationship with political leaders.

vii. He tries to avoid banker’s visit to the factory and/or his house.

(4) List of defaulters is displayed in the notice board of all branches of KVGB without

disclosing the account number, amount of loan, overdue, etc. The idea is simply to

draw attention of the defaulters to contact the Branch Manager.

(5) Approaching influential borrowers who are defaulters, while important functions such

as thread ceremony, marriage, etc. are going on in their houses and branch staff can

directly ask for repayment during such functions and loans have been repaid because

the borrowers (defaulters) tried to protect their self prestige in the presence of invited

guest and relatives. This method can be used only when the bank is sure that there is

willful default otherwise the bank may lose its customers.

(6) List of defaulters prepared and pasted at public places and the recovery van, a hired

jeep, flagged with banner Vasuli Dal (recovery squad of Karnataka Vikas Grameena

Bank). This method can be used only when the bank is sure that there is willful

default otherwise the bank may lose its customers. Bank should protect the interest of

the investor but not at the cost of Banks profitability

(7) The bank has to go for selling of Non Performing Assets to Asset Reconstruction

Company of India Limited (ARCIL) to bring down the NPAs.



(8) Presently Bank is spending 3 days a week on Public Working day recovering the NPA

from the customer which to be increased to 4 days a week, because the bank has to

spend 2 days for selling the property.

CONCLUSION:

NPA is a double-edged weapon, which affects bank profitability due to interest

income not being recognized on NPA accounts and loan loss previously to be created from

profit earned. The bank must adopt structured NPAs management policy for elimination or

reducing the NPAs in the bank. In general the trend of NPAs in KVGB are decreasing trend,

on the same time the KVGB has been adopted a very good techniques to control over the

NPAs but presence of NPA in the bank accounts reduces the profitability. In the case of

KVGB it is one of the good sign that the NPA ratio has been decreasing every year.

For reduction of NPAs, though there is a greater need of political threat and effective

enactment of laws to recover NPAS, the banks should also like advantage of Debt Recovery

Tribunals, Lok adalat, and the legislations enacted by the state govt. and one-time settlement

schemes.

It is not possible to eliminate totally the NPA in the banking business but can only be

minimized. It is always wise it follow the proper policy appraisal, supervision and follow-up

of advances to avoid NPAs.



BIBLIOGRAPHY

BOOKS REFERRED:

1. M.Y.Khan and P.K.Jain, Financial Management (Fourth Edition), Tata McGraw Hill.

2. Advance Accounts by Shukla and Grewal

WEB SITES

1. www.kvgbank.com

2. www.nabard.org

3. www.icicidirect.com

4. www.rbi.org.in

5. www.indiainfoline.com

6. www.legalservicesindia.com

7. www.indiastat.com

BANKS INTERNAL RECORDS:

1. Annual Reports of Karnataka Vikas Grameena Bank (2005-06 to 2007-08)

2. KVGB Manuals

3. Circulars sent to all Branches, Regional Offices and all the Departments.


http://www.indiastat.com/

http://www.legalservicesindia.com/

http://www.indiainfoline.com/

http://www.kvgbank.com/


Annexure:

Share Capital:

The bank started functioning with a Capital base of Rs 400 lakh by absorbing the paid up

capital of 4 RRBs subscribed by Government of India, Government of Karnataka and

Syndicate Bank in the ratio of 50:15:35 respectively.

CAPITAL

(Rs in Crores)

Sl No ItemsAs on

31/03/2007As on

31/03/2008

1 Capital to Risk Assets Ratio (CRAR %) 17.06 19.90

2 CRAR – Tier I Capital % 16.61 19.46

3 CRAR – Tier II Capital % 0.45 0.44

4 Percentage of shareholding of the Government of India 50% 50%

5 Amount of subordinated debt raised as Tier II Capital - -



AUDITED BALANCE SHEET , PROFIT & LOSS ACCOUNT

FOR THE YEAR ENDED 31.03.2006, 31.03.2007, 31.03.2008

BALANCE SHEET AS AT 31.03.2008

Capital & Liabilities ScheduleAs on

31/03/2006As on

31/03/2007 As on

31/03/2008

(Rs.000’s)

Capital 1 239732 239732 239732

Reserves & Surplus 2 3504286 4285737 5031453

Deposits 3 19171358 22303803 27567386

Borrowings 4 1668788 3694880 3708275

Other Liabilities & Provisions 5 1525059 1717745 2141627

TOTAL :: 26109223 32241897 38688473

Properties & Assets ScheduleAs on

31/03/2006As on

31/03/2007As on

31/03/2008

Cash and Balance with Reserve Bank of India

6 1195598 1690244 2460284

Balance with Banks & Money at Call and Short notices

7 1275562 1337938 2066239

Investments 8 5331555 6221313 7822021

Advances 9 17096177 21193822 24800407

Fixed Assets 10 84579 84067 103367

Other Assets 11 1125752 1714513 1436155

TOTAL :: 26109223 32241897 38688473



Contingent Liabilities 12 124376 131416 93525

Bills for collection 132913 140388 139362

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31/03/2006, 31/03/2007,31/03/2008

(Rs.000’s)

Income & Expenditure Schedule As on 31/03/2006 As on 31/03/2007As on

31/03/2008

I. INCOME

Interest earned 13 1280625 2736879 3217182

Other income 14 113575 248270 302468

TOTAL 1394200 2985149 3519650

II. EXPENDITURE

Interest expended 15 497809 1017183 1437362

Operating expenses 16 508847 758333 842241

Provisions and contingencies

17 66601 491447 518708

TOTAL 1073257 2266963 2798311

III. PROFIT / LOSS :

Net profit for the year 320943 718186 721339

TOTAL 320943 718186 721339



IV. APPROPRIATIONS

Transfer to reserves 320943 718186 721339

SCHEDULES FOR THE YEAR ENDED 31.03.2006, 31.03.2007, 31.03.2008

(Amount in ‘000s)

SCHEDULESAs on

31/03/2006As on

31/03/2007 As on

31/03/2008

1 CAPITAL:

1. Issued, Subscribed and Paid up capital

4,00,000 shares of Rs 100 each

2. Share Capital Deposit

40000

199732

40000

199732

40000

199732

Total 239732 239732 239732

2 RESERVES & SURPLUS 3504286 4285737 5031453

Total 3504286 4285737 5031453

3 DEPOSITS:

Demand deposits(from others)

Saving Bank deposits

Term deposits(from others)

1141668

8841925

9187765

1487454

10750480

10065869

1590659

11780738

14195989

Total 19171358 22303803 27567386

4 BORROWINGS:

1. Syndicate Bank

– General ST SAO 0 174 1008493



2. NABARD

– General ST SAO

- Liquidity support

- Schematic

- NODP

0

905000

763788

0

2168000

905000

594706

27000

935400

940383

763999

60000

Total 1668788 3694880 3708275

5 OTHER LIABILITIES:

Bills Payable

Inter Office Adjustments

Interest accrued

Others (including provisions)

51028

182887

70692

1220452

38163

265890

80579

1333113

48370

593331

94844

1405082

Total 1525059 1717745 2141627

6 CASH AND BALANCE WITH RBI:

1. Cash in hand

2. Balance with RBI

– In current accounts

250895

944703

406306

1283938

442995

2017289

Total 1195598 1690244 2460284

7BALANCES WITH BANKS & MONEY AT CALL & SHORT NOTICE:

Balance with Banks

– In Current Account

– In other Deposit Accounts572794

702768

737438

600500

1815739

250500

Total 1275562 1337938 2066239

8 INVESTMENTS:

- Government Securities

- Shares and Equities

4720285

5786

5447869

5786

7133129

6365



- Debentures and Bonds

- Tax free bonds

- Mutual Funds

583163

3354

18967

746715

0

20943

666361

0

16166

Total 5331555 773444 7822021

9 ADVANCES:

Loans and Advances:

- Bills Purchased and discounted

Total Advances

Less: Provisions for bad and doubtful debts

88857

17499635

403458

45773

21684012

490190

358359

25478594

678187

Total 17096177 21193822 24800407

10 FIXED ASSETS

1. Premises

a) Land

Add: Additions

Total

b) Buildings

Add: Additions

Less: Depreciation

Total

2. Other Fixed Assets

Furniture and Fixture

Add: Additions

Less: Deductions

Less: Depreciation

Total

3098

289

3387

16153

612

1026

15739

55395

24746

34

14654

65453

3387

0

3387

15739

4

1574

14169

65453

27392

30

26304

66511

3387

384

3771

14169

0

1417

12752

66511

51270

59

30878

86844

Total 84579 84067 103367



11

OTHER ASSETS

1. Interest accrued

2. tax paid in advance

3. Stationery and stamps

4. Others

113674

16124

9058

986896

145322

5016

11287

1552888

158144

28415

12045

1237551

1125752 1714513 1436155

12 CONTINGENT LIABILITIES

Guarantees given on behalf of Constituents( In India) 124376 131416 93525

Total 124376 131416 93525

13 INTEREST EARNED

Interest/Discount on Advances/Bills

Income on investment

Interest on balance with RBI

1062948

209318

8359

2276459

449426

10994

2710453

506729

0

Total 1280625 2736879 3217182

14 OTHER INCOME

Commission

Exchange

Inspection charges

Incidental charges

Service charges

Profit on sale of investments

Others

Reversal of Income Tax provisions

9855

13731

34613

19417

28884

147

6928

45404

21108

46563

0

66552

0

68643

67106

24467

56053

0

68571

3505

56456

26310

Total 113575 248270 302468

15 INTEREST EXPENDED

Interest on deposits 431907 844883 1234326



Interest on RBI/Inter-bank borrowings

NABARD

65902 19476

152824

42229

160807

Total 497809 1017183 1437362

16 OPERATING EXPENSES 508847 758333 842241

Total 508847 758333 842241

17 PROVISIONS AND CONTIGENCIES

Provisions on Standard assets

Provisions on BDD

Provisions on Investment (Non SLR)

Provision on Investment

Provision towards fraud

Provisions towards Income tax

11560

55041

17684

87405

9069

54196

6108

316985

9488

196204

6093

18283

0

288640

Total 66601 491447 518708

NON PERFORMING ASSETS

Details of Non Performing Assets Purchased/Sold: Nil


Particulars Year

31-03-2006

Year

31-03-2007

Year

31-03-2008

Total Advances

Non Performing Assets


Provisions held for NPA

Additional Provisions held for NPA

1749.96

76.35

5.15

40.35

23.37

2168.40

89.67

4.14

49.02

23.37

2547.86

91.91

3.58

67.82

23.37



Provisions held for Standard Assets

Risk Fund Provisions Held

Unrealised Interest on NPA

4.09

1.68

75.06

6.76

1.68

78.39

7.71

0.00

91.35

NPA Management:

The announcement of Debt Waiver Scheme coupled with unseasonal summer rains affected

the recovery climate severely, resulting in addition to the NPAs of the Bank. There was a

total addition of Rs 17.02 crores to the outstanding level of NPAs as at 31-3-2008. Particulars

of fresh NPAs added during the year and total NPAs recovered in comparison with that of

previous years:

Particulars Year

31-03-2006

Year

31-03-2007

Year

31-03-2008

NPAs at beginning 76.35 82.43 89.67

Additions during the year 19.02 21.81 17.39

Recovery 12.95 14.57 15.87

NPA at the end of the year 82.42 89.67 91.19

Write-Off of Loans

During the year 2007-08 under report, the Bank had implemented a scheme for writing-off of

the bad/doubtful debts. Accordingly non farm sector NPA loans with book balance upto Rs

25000 which were classified as loss assets are written off. Total written off amount during the

year is Rs 168.69 lakhs. The amount of cumulative recovery out of written off amount is Rs

40.40 lakhs upto end of March 2008.

Implementation of SARFAESI Act for Recovery of Dues:

Government of India, vide its Notification dated 17-05-2008 had specified that the provisions

of Securitization and Reconstruction of Securities Interest (SARFAESI) Act are applicable to



Regional Rural Banks also with effect from 1st April 2007. Accordingly with permission from

Board of Directors, Bank has started invoking provisions of the Act. Notices were issued to

5/8 accounts. Symbolic possession of the property was taken over by the Bank in 4 cases as at

end of March 2008.


Documents

Final Report