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“A STUDY OF NON PERFORMING ASSETS WITH SPECIAL REFERANCE TO BANK OF INDIA”

DISSERTATION 2010

Submitted in the partial fulfillment of the requirement for the award of

MASTER OF BUSINESS ADMINISTRATION

Submitted By:

VINAY .H .N Register Number: 08NZCM6088

To

Bangalore University Bangalore

Under the Guidance of

INTERNAL GUIDE Mr.Tyagarajan Senior Professor, VVN IMTR, Bangalore

VVN INSTITUTE OF MANAGEMENT TECHNOLOGY AND RESEARCH #3, Vanivilas Road, Bangalore – 560 004.

Month & Year of Submission April – 2010

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DECLARATION

I hereby declare that the Dissertation report titled “A study of Non

Performing Assets with special reference to Bank of India” has been my

original report - prepared and designed by me during the year 2010 under the

guidance of Mr. Tyagarajan, Senior Professor, at VVN IMTR, Bangalore.

I also hereby declare that this Dissertation report has not been submitted

at any time to any other university or institute for the award of any other degree

or prizes.

Place: Bangalore

Date: 22-04-2010

VINAY.H.N

Reg. No: 08NZCM6088

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ACKNOWLEDGEMENT

It is my pleasure to be indebted to various people, who directly or

indirectly contributed in the development of this work and who influenced my

thinking, behavior, and acts during the course of study.

First I would like to express my profound sense of gratitude to Mr. R.

Jaya Panday, Branch Manager of Bank of India, for providing me an

opportunity to undertake the project.

As a student specializing in finance, I came to know about the ground

realities in topics like NON PERFORMING ASSETS WITH SPECIAL

REFERENCE TO BANK OF INDIA. For this I am indebted to Mr.

Tyagarajan, Senior Professor, VVN IMTR who took personal interest in my

project and bore the associated headaches.

I would be unfair if I do not mention the name of Dr.Mahesh Kumar K.

R., Director, VVN IMTR for his inspiring presence and blessings and who gave

me valuable tips to complete this project.

Lastly, I would like to thank the almighty and my parents for their moral

support and my colleagues with whom I shared my day-to-day experience and

received lots off suggestions that improved my work quality.

VINAY .H.N

Reg. No: 08NZCM6088

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CONTENTS

Chapters

Title

Page No.

Chapter – 1

INTRODUCTION TO THE STUDY 1.1 Introduction 1.2 Background 1.3 Need of the study

Chapter - 2

THEORETICAL BACKGROUND OF THE STUDY 2.1 Introduction to NPA: 2.1.a Meaning 2.1.b Definitions 2.2 What is a NPAs 2.3 Classification of Loans 2.4 Types of Non-Performing Assets 2.5 Asset Classification 2.6 Guidelines for classification of Assets 2.7 Factors for Risk in NPAs: 2.7.a External factors 2.7.b Internal factors 2.8 Problems due to NPA 2.9 Impact of NPA 2.10 Existing systems / Procedures for NPA 2.11 Appropriateness of the Existing System

Chapter - 3

ORGANIZATION PROFILE 3.1 Industry Profile: 3.1.a Introduction 3.1.b Meaning of Bank 3.1.c Defenestration 3.1.d Types of Banks

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3.1.e Indian Banking Industry 3.1.f Current Structure of Indian Banking Industry 3.1.g Feature of Indian Banking Industry 3.1.h Nationalized Banks in India 3.2 Company Profile: 3.2.a Introduction to BOI 3.2.b History 3.2.c BOIs Established History 3.2.d Mission and Vision 3.2.e Board of Directors 3.2.f Investor Profile / Share holding pattern 3.2.g Shareholding pattern of Institutional Investors 3.2.h Business Mix 3.2.i Strategic Investments / Alliances / Joint ventures 3.2.j Services Provided by the Bank of India 3.2.k loans Provided by the Bank of India 3.2.l Bank of India – Accolades, Awards & Highlights 3.2.m Compotators Profile

Chapter - 4

RESEARCH METHODOLOGY 4.1 Title of the Project 4.2 Objectives of the Study 4.3 Research Methodology 4.3.a Formulating the Problem 4.3.b Research Design 4.3.c Determining the Data Source 4.3.d Analysis of the Data 4.3.e Interpretation of the Data 4.3.f Preparing Research Report 4.4 Scope of this Study 4.5 Limitation of the study

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Chapter - 5

ANALYSIS AND INTERPRETATION OF DATA 5.1 Ratio Analysis 5.1.a Analysis of Liquidity and Solvency Position 1. Current Ratio 2. Quick Ratio 3. Absolute Liquidity Ratio 4. Debt-Equity Ratio 5. Cash to Current Assets Ratio 5.1.b Analysis of NPAs Ratio 1. Gross NPA Ratio 2. Net NPA Ratio 3. Provision Ratio 4. Problem Assets Ratio 5. Capital Adequacy Ratio 5.2 Conclusion (Analysis)

Chapter - 6

FINDINGS AND SUGGESTIONS

Chapter - 7

CONCLUSION

APPENDIX

BIBLIOGRAPHY

ABBREVIATION

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LIST OF TABLES AND CHARTS

CHARTS

SL.NO. TITLE Page No. 1

Figure 3.1 Growth in Indian Banking Assets

2

Figure 3.2 Total Deposits of Bank of India

3

Figure 3.3 Total Cash Deposits of Bank of India

4

Figure 3.4 Total Gross Advances of Bank of India

5

Figure 3.5 Growth in Advances of Bank of India

6

Figure 3.6 Deposits category wise

7

Figure 3.7 Credit category wise

8

Figure 5.1 Current Ratio

9

Figure 5.2 Quick Ratio

10

Figure 5.3 Absolute Liquidity Ratio

11

Figure 5.4 Debt-Equity Ratio

12

Figure 5.5 Cash to Current Assets Ratio

13

Figure 5.6 Gross NPA Ratio

14

Figure 5.7 Net NPA Ratio

15

Figure 5.8 Provision Ratio

16

Figure 5.9 Problem Assets Ratio

17

Figure 5.10 Capital Adequate Ratio

18

Figure 8.1 Overseas NPAs

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TABLES / FORMATS

SL.NO. TITLE Page No.

1

Table 3.1 Investor Profile / Shareholding pattern

2

Table 3.2 Shareholding Pattern of Institutional Investors

3

Table 3.3 Total Deposits of Bank of India

4

Table 3.4 Total Cash Deposits of Bank of India

5

Table3.5 Total Gross Advances of Bank of India

6

Table 3.6 Growth in Average Business

7

Table 3.7 Deposits Category wise

8

Table 3.8 Credit Category wise

9

Table 5.1 Current Ratio

10

Table 5.2 Quick Ratio

11

Table 5.3 Absolute Liquidity Ratio

12

Table 5.4 Debt Equity Ratio

13

Table 5.5 Cash to Current Assets Ratio

14

Table 5.6 Gross NPA to Gross Advances

15

Table 5.7 Net NPA to Net Advances

16

Table 5.8 Provision Ratio

17

Table 5.9 Problem Assets Ratio

18

Table 5.10 Capital Adequacy Ratio

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19

Table 5.11 Fish eye view of the Ratio Analysis

20

Table 8.1 NPA of Different Banks

21

Table 8.2 Bank-wise Gross NPA, Gross Advances & Gross NPA ratio of Nationalized Banks

22

Table 8.3 Balance Sheet of Bank of India

23

Table 8.4 Profit & Loss Account of Bank of India

24

Table 8.5 NPA Ratios of Bank of India

25

Table 8.6 Sector wise Breakup of NPA

26

Table 8.7 Overseas NPAs

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ABSTRACT

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

of the banking sector may have an adverse impact on other sector. 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 assets. The NPA growth

involves the necessity of provisions, which reduces the overall profits and

shareholders’ value.

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.

The report deals with understanding the concept of NPAs its magnitude

and major causes for an account becoming non-performing, projection with

special reference to Bank of India.

VINAY.H.N

(Reg. No: 08NZCM6088)

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CHAPTER – 1

INTRODUCTION TO THE

STUDY

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1. INTRODUCTION TO THE STUDY

1.1 INTRODUCTION

The banking industry has undergone a sea change after the first phase of economic

liberalization in 1991 and hence credit management. While the primary function of banks is

to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing

loans etc., in recent times the banks have become very cautious in extending loans, The

reason being mounting Non-Performing Assets (NPAs).

It's a known fact that the banks and financial institutions in India face the problem of

swelling Non-Performing Assets (NPAs) and the issue is becoming more and more

unmanageable. In order to bring the situation under control, some steps have been taken

recently. The Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 was passed by Parliament, which is an important step towards

elimination or reduction of NPAs.

In liberalizing economy banking and financial sector get high priority, Indian banking

sector of having a serious problem due to non-performing assets. The financial reforms have

helped largely to clean NPA was around Rs.90,170 crores in the year 2009. The earning

capacity and profitability of the bank are highly affected due to this.

Non-Performing Asset means an asset in the Bank’s book or loan account of

borrower, which has been classified by a bank or financial institution as sub-standard,

doubtful or loss asset, in accordance with the directions or guidelines relating to asset

classification issued by the Reserve Bank of India.

Presently if monthly installment is pending beyond 30 days that loan account is

treated as watch category account. In this period, the Bank will take all necessary steps to

recover the dues to turn the loan account as standard asset. If the monthly installment is due

beyond 90 days, the banker treats the loan account as Non Performing Assets or NPA. In the

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beginning it will be substandard assets, depriving the bank of interest on the loan and

additionally, capital charge i.e., making provision for the loan in their profit and loss account.

1.2 BACKGROUND

Accepting deposits from the general public and granting of credit for economic

activities is the prime business of banking. 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 banks 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 ever to

the remote corners of the country. This is one of the main reasons of India’s growth process.

Banking sector reforms in India has progressed promptly on aspects like interest rate

deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,

asset classification, income recognition and provisioning. But it could not match the pace

with which it was expected to do. The accomplishment of these norms at the execution stages

without restructuring the banking sector as such is creating havoc.

During pre-nationalization period and after independence, the banking sector

remained in private hands large industries who hand their control in the management of the

banks were utilizing major portion of financial resources of the banking system and as a

result low priority was accorded to priority sectors. Government of India nationalized the

banks to make was to expand their networks in rural areas and give loans to priority sectors

such as small scale industries, self-employed groups, agriculture and schemes involving

women.

At a lower level Non Performing Assets (NPAs) has emerged since over a decade as

an alarming threat to the banking industry in our country sending distressing signals on the

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sustainability and endurability of the affected banks. The positive results of the chain of

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

two Narasimham Committee Reports in this contemporary period have been neutralized by

the ill effects of this surging threat. Despite various correctional steps administered to solve

and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus

confronted universally on banking and financial institutions.

1.3 NEED OF THE STUDY

This report explores a Descriptive research to the analysis of Non-Performing Assets

(NPAs) with Special reference of Bank of India. 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 report aims to find

the fundamental factors which impact NPAs of banks. The tools used for analysis is Ratio

Analysis, The results show that movement in NPAs over the years can be explained well by

the factors considered in the model for the Bank of India. The other important results derived

from the analysis include the finding that banks’ exposure to priority sector lending reduces

NPAs.

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CHAPTER – 2

THEORETICAL

BACKGROUND OF THE

STUDY

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2. THEORETICAL BACKGROUND OF THE STUDY

2.1 INTRODUCTION TO THE NPA

“NPA” The three letters Strike terror in banking sector and business circle today.

NPA is short form of “Non Performing Asset”. The dreaded NPA rule says simply this:

when interest or other due to a bank remains unpaid for more than 90 days, the entire bank

loan automatically turns a non performing asset. The recovery of loan has always been

problem for banks and financial institution. To come out of these first we need to think is it

possible to avoid NPA, no cannot be then left is to look after the factor responsible for it and

managing those factors.

2.1.a Meaning

Non Performing Asset means an asset or account of borrower, which has been

classified by a bank or financial institution as sub-standard, doubtful or loss asset, in

accordance with the directions or guidelines relating to asset classification issued by The

Reserve Bank of India.

2.1.b Definitions

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank.

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

the interest and/ or installment of principal has remained ‘past due’ for a specified period of

time.

2.2 WHAT IS A NPAs (NON-PERFORMING ASSETS)

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

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

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

a non-performing asset (NPA) shall be a loan or an advance where;

• 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/Cash Credit (OD/CC),

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

purchased and discounted,

• Interest and/or installment of principal remains overdue for two harvest seasons but

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

agricultural purposes.

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

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

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

at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the

interest charged during any quarter is not serviced fully within 180 days from the end of the

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

from March 31, 2004.

2.3 CLASSIFICATION OF LOANS

In India the bank loans are classified on the following basis.

v Performing Assets:

Loans where the interest and / or principal are not overdue beyond 180 days at the end

of the financial year.

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v Non-Performing Assets:

Any loan repayment, which is overdue beyond 90 days or two quarters, is considered

as NPA.

2.4 TYPES OF NON-PERFORMING ASSETS

1) Gross NPA

2) Net NPA

1. Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI

guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by

banks. It consists of all the non-standard assets like as sub-standard, doubtful, and loss

assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio =

2. Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding

NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets

contain a huge amount of NPAs and the process of recovery and write off of loans is very

time consuming, the provisions the banks have to make against the NPAs according to the

central bank guidelines, are quite significant. That is why the difference between gross and

net NPA is quite high.

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It can be calculated by following

Net NPAs Ratio =

2.5 ASSET CLASSIFICATION:

The RBI has issued guidelines to banks for classification of assets into four categories.

1. Standard assets:

These are loans which do not have any problem are less risk.

An asset, which does not disclose any problem and also does not carry more than

normal risk attached to the business.

2. Sub-Standard assets:

These are assets which come under the category of NPA for a period of less than 12

months.

In the case of term loan, if installments of principal are overdue for more than one

year but not exceeding two years, it is to be treated as sub-standard asset.

An asset where the terms of the loan agreement regarding interest and principal have

been re-negotiated or re-scheduled should be classified as sub-standard and should remain in

such category for at least two years of satisfactory performance under the re-negotiated or

rescheduled terms.

In other words, the classification of assets should not be upgraded merely as a result

of re-scheduling unless there is satisfactory compliance of the above condition.

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3. Doubtful assets:

These are NPA exceeding 12 months

Here too, rescheduling does not entitle a bank to upgrade the quality of an advance

automatically.

In the case of a term loan, if installments of principal are overdue for more than two

years, it is to be treated as doubtful.

4. Loss assets:

These NPA which are identified as unreliable by internal inspector of bank or

auditors or by RBI

An asset where loss has been identified by the bank or internal / external auditors or

by RBI inspection but the amount has not been written-off, wholly or partly. In other words,

such an asset is considered unrealizable and of such little value that its continuance as a

bankable asset is not warranted although there may be some salvage or recovery value.

2.6 GUIDELINES FOR CLASSIFICATION OF ASSETS

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

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

dependence on collateral security for realization of dues.

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

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

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

value account depending upon their respective business levels. The cutoff point

should be valid for the entire accounting year.

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• Responsibility and validation levels for ensuring proper asset classification may be

fixed by the banks. The system should ensure that doubts in asset classification due to

any reason are settled through specified internal channels within one month from the

date on which the account would have been classified as NPA as per extant

guidelines.

• Availability of security / net worth of borrower/ guarantor: The availability of

security or net worth of borrower/ guarantor should not be taken into account for the

purpose of treating an advance as NPA

• Accounts with temporary deficiencies: The classification of an asset as NPA should

be based on the record of recovery. Bank should not classify an advance account as

NPA merely due to the existence of some deficiencies which are temporary in nature

such as non¬-availability of adequate drawing power based on the latest available

stock statement, balance outstanding exceeding the limit temporarily, non¬-

submission of stock statements and non¬-renewal of the limits on the due date, etc.

• Upgradation of loan accounts classified as NPAs: If arrears of interest and principal

are paid by the borrower in the case of loan accounts classified as NPAs, the account

should no longer be treated as non-performing and may be classified as ‘standard’

accounts.

• Accounts regularised near about the balance sheet date: The asset classification of

borrowal accounts where a solitary or a few credits are recorded before the balance

sheet date should be handled with care and without scope for subjectivity. Where the

account indicates inherent weakness on the basis of the data available, the account

should be deemed as a NPA. In other genuine cases, the banks must furnish

satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner

of regularisation of the account to eliminate doubts on their performing status.

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2.7 FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the

problem of NPAs is more in public sector banks when compared to private sector banks and

foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

2.7.a EXTERNAL FACTORS:

1) Ineffective recovery tribunal: The Govt. has set of numbers of recovery tribunals,

which works for recovery of loans and advances. Due to their negligence and

ineffectiveness in their work the bank suffers the consequence of non-recover, their

by reducing their profitability and liquidity.

2) Willful Defaults: There are borrowers who are able to payback loans but are

intentionally withdrawing it. These groups of people should be identified and proper

measures should be taken in order to get back the money extended to them as

advances and loans.

3) Natural calamities: This is the measure factor, which is creating alarming rise in

NPAs of the PSBs. every now and then India is hit by major natural calamities thus

making the borrowers unable to pay back there loans. Thus the bank has to make large

amount of provisions in order to compensate those loans, hence end up the fiscal with

a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to

irregularities of rain fall the farmers are not to achieve the production level thus they

are not repaying the loans.

4) Industrial sickness: Improper project handling , ineffective management , lack of

adequate resources , lack of advance technology , day to day changing govt. Policies

give birth to industrial sickness. Hence the banks that finance those industries

ultimately end up with a low recovery of their loans reducing their profit and

liquidity.

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5) Lack of demand: Entrepreneurs in India could not foresee their product demand and

starts production which ultimately piles up their product thus making them unable to

pay back the money they borrow to operate these activities. The banks recover the

amount by selling of their assets, which covers a minimum label. Thus the banks

record the non recovered part as NPAs and has to make provision for it.

6) Change on Govt. policies: With every new govt. banking sector gets new policies for

its operation. Thus it has to cope with the changing principles and policies for the

regulation of the rising of NPAs. The fallout of handloom sector is continuing as most

of the weavers Cooperative societies have become defunct largely due to withdrawal

of state patronage. The rehabilitation plan worked out by the Central government to

revive the handloom sector has not yet been implemented. So the over dues due to the

handloom sectors are becoming NPAs.

2.7.b INTERNAL FACTORS:

1) Defective Lending process: There are three cardinal principles of bank lending that

have been followed by the commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

A. Principles of safety: By safety it means that the borrower is in a position to repay the

loan both principal and interest. The repayment of loan depends upon the borrowers:

a) Capacity to pay

b) Willingness to pay

Capacity to pay depends upon:

a) Tangible assets

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b) Success in business

Willingness to pay depends on:

a) Character

b) Honest

c) Reputation of borrower

The banker should, therefore take utmost care in ensuring that the enterprise or business for

which a loan is sought is a sound one and the borrower is capable of carrying it out

successfully. He should be a person of integrity and good character.

2) Inappropriate technology: Due to inappropriate technology and management

information system, market driven decisions on real time basis cannot be taken.

Proper MIS and financial accounting system is not implemented in the banks, which

leads to poor credit collection, thus NPA. All the branches of the bank should be

computerized.

3) Improper SWOT analysis: The improper strength, weakness, opportunity and threat

analysis is another reason for rise in NPAs. While providing unsecured advances the

banks depend more on the honesty, integrity, and financial soundness and credit

worthiness of the borrower.

• Banks should consider the borrowers own capital investment.

• It should collect credit information of the borrowers from:

a) From bankers.

b) Enquiry from market/segment of trade, industry, business.

c) From external credit rating agencies.

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4) Analyze the balance sheet: True picture of business will be revealed on analysis of

profit/loss a/c and balance sheet.

5) Purpose of the loan: When bankers give loan, he should analyze the purpose of the

loan. To ensure safety and liquidity, banks should grant loan for productive purpose

only. Bank should analyze the profitability, viability, long term acceptability of the

projectwhile financing.

6) Poor credit appraisal system: Poor credit appraisal is another factor for the rise in

NPAs. Due to poor credit appraisal the bank gives advances to those who are not able

to repay it back. They should use good credit appraisal to decrease the NPAs.

7) Managerial deficiencies: The banker should always select the borrower very

carefully and should take tangible assets as security to safe guard its interests.

When accepting securities banks should consider the:

1. Marketability

2. Acceptability

3. Safety

4. Transferability

The banker should follow the principle of diversification of risk based on the famous

maxim “do not keep all the eggs in one basket”; it means that the banker should not grant

advances to a few big farms only or to concentrate them in few industries or in a few cities. If

a new big customer meets misfortune or certain traders or industries affected adversely, the

overall position of the bank will not be affected.

Like Orissa State Cooperative Bank (OSCB) suffered loss due to the Optical Translation

Measurement (OTM) Cuttack, and Orissa hand loom industries. The biggest defaulters of

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OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom Wildlife

Conservation Society (WCS) ltd (2439.60lakhs).

8) Absence of regular industrial visit: The irregularities in spot visit also increases the

NPAs. Absence of regularly visit of bank officials to the customer point decreases the

collection of interest and principals on the loan. The NPAs due to willful defaulters

can be collected by regular visits.

9) Re loaning process: Non remittance of recoveries to higher financing agencies and re

loaning of the same have already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is

increasing day by day.

2.8 PROBLEMS DUE TO NPA

1) Owners do not receive a market return on their capital .in the worst case, if the banks

fails, owners lose their assets. In modern times this may affect a broad pool of

shareholders.

2) Depositors do not receive a market return on saving. In the worst case if the bank

fails, depositors lose their assets or uninsured balance.

3) Banks redistribute losses to other borrowers by charging higher interest rates, lower

deposit rates and higher lending rates repress saving and financial market, which

hamper economic growth.

4) Nonperforming loans epitomize bad investment. They misallocate credit from good

projects, which do not receive funding, to failed projects. Bad investment ends up in

misallocation of capital, and by extension, labor and natural resources.

Non-performing asset may spill over the banking system and contract the money stock,

which may lead to economic contraction. This spillover effect can channelize through

liquidity or bank insolvency:

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a) When many borrowers fail to pay interest, banks may experience liquidity shortage.

This can jam payment across the country.

b) Illiquidity constraints bank in paying depositors

c) Undercapitalized banks exceed the bank’s capital base.

'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 six months 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'.

Example of OUT OF ORDER:

Sanctioned limit Rs.60,00,000/-

Drawing power Rs.55,00,000/-

Amount outstanding continuously from 1.01.2010 to 31.03.2010 Rs. 47,00,000/-

Total interest debited Rs.3,42,000/-

Total credits Rs.1,25,000/-

‘Overdue’:

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

the due date fixed by the bank.

Banks should, classify an account as NPA only if the interest charged during any

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

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2.9 IMPACT OF NPA

v Profitability

NPA means booking of money in terms of bad asset, which occurred due to wrong

choice of client. Because of the money getting blocked the prodigality of bank decreases not

only by the amount of NPA but NPA lead to opportunity cost also as that much of profit

invested in some return earning project/asset. So NPA doesn’t affect current profit but also

future stream of profit, which may lead to loss of some long-term beneficial opportunity.

Another impact of reduction in profitability is low ROI (return on investment), which

adversely affect current earning of bank.

v Liquidity

Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead

to borrowing money for shot\rtes period of time which lead to additional cost to the company.

Difficulty in operating the functions of bank is another cause of NPA due to lack of money.

Routine payments and dues.

v Involvement of management

Time and efforts of management is another indirect cost which bank has to bear due to

NPA. Time and efforts of management in handling and managing NPA would have diverted

to some fruitful activities, which would have given good returns. Now day’s banks have

special employees to deal and handle NPAs, which is additional cost to the bank.

v Credit loss

Bank is facing problem of NPA then it adversely affect the value of bank in terms of

market credit. It will lose its goodwill and brand image and credit which have negative

impact to the people who are putting their money in the banks.

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2.10 EXISTING SYSTEMS / PROCEDURES FOR NPA

IDENTIFICATION AND RESOLUTION IN INDIA

1. Internal Checks and Control

Since high level of NPAs dampens the performance of the banks identification of

potential problem accounts and their close monitoring assumes importance.

Though most banks have Early Warning Systems (EWS) for identification of potential

NPAs, the actual processes followed, however, differ from bank to bank.

The EWS enable a bank to identify the borrower accounts which show signs of credit

deterioration and initiate remedial action. Many banks have evolved and adopted an elaborate

EWS, which allows them to identify potential distress signals and plan their options

beforehand, accordingly. The early warning signals, indicative of potential problems in the

accounts, viz. persistent irregularity in accounts, delays in servicing of interest, frequent

devolvement of L/Cs, units' financial problems, market related problems, etc. are captured by

the system.

The major components/processes of a EWS followed by banks in India as brought out by

a study conducted by Reserve Bank of India at the instance of the Board of Financial

Supervision are as follows:

a) Designating Relationship Manager/ Credit Officer for monitoring account/s

b) Preparation of `know your client' profile

c) Credit rating system

d) Identification of watch-list/special mention category accounts

e) Monitoring of early warning signals

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A. Relationship Manager/Credit Officer

The Relationship Manager/Credit Officer is an official who is expected to have complete

knowledge of borrower, his business, his future plans, etc. The Relationship Manager has to

keep in constant touch with the borrower and report all developments impacting the borrowal

account. As a part of this contact he is also expected to conduct scrutiny and activity

inspections. In the credit monitoring process, the responsibility of monitoring a corporate

account is vested with Relationship Manager/Credit Officer.

B. Know your client' profile (KYC)

All the banks in India have a system of preparing `know your client' (KYC) profile/credit

report. As a part of `KYC' system, visits are made on clients and their places of

business/units. The frequency of such visits depends on the nature and needs of relationship.

C. Credit Rating System

The credit rating system is essentially one point indicator of an individual credit exposure

and is used to identify measure and monitor the credit risk of individual proposal. At the

whole bank level, credit rating system enables tracking the health of banks entire credit

portfolio.

Most banks in India have put in place the system of internal credit rating. While most of

the banks have developed their own models, a few banks have adopted credit rating models

designed by rating agencies. Credit rating models take into account various types of risks viz.

financial, industry and management, etc. associated with a borrowal unit. The exercise is

generally done at the time of sanction of new borrowal account and at the time of review /

renewal of existing credit facilities.

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D. Watch-list/Special Mention Category

The grading of the bank's risk assets is an important internal control tool. It serves the

need of the Management to identify and monitor potential risks of a loan asset. The purpose

of identification of potential NPAs is to ensure that appropriate preventive / corrective steps

could be initiated by the bank to protect against the loan asset becoming non-performing.

Most of the banks have a system to put certain borrowal accounts under watch list or special

mention category if performing advances operating under adverse business or economic

conditions are exhibiting certain distress signals. These accounts generally exhibit

weaknesses which are correctable but warrant banks' closer attention. The categorization of

such accounts in watch list or special mention category provides early warning signals

enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take

necessary preventive steps to avoid their slippage into non performing advances.

E. Early Warning Signals

It is important in any early warning system, to be sensitive to signals of credit

deterioration. A host of early warning signals are used by different banks for identification of

potential NPAs. Most banks in India have laid down a series of operational, financial,

transactional indicators that could serve to identify emerging problems in credit exposures at

an early stage. Further, it is revealed that the indicators which may trigger early warning

system depend not only on default in payment of installment and interest but also other

factors such as deterioration in operating and financial performance of the borrower,

weakening industry characteristics, regulatory changes, general economic conditions, etc.

2. Management/Resolution of NPAs

A reduction in the total gross and net NPAs in the Indian financial system indicates a

significant improvement in management of NPAs. This is also on account of various

resolution mechanisms introduced in the recent past which include the SRFAESI Act, ("The

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest

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Act") one time settlement schemes, setting up of the CDR mechanism, strengthening of

DRTs (Debt Recovery Tribunals).

Compromise settlement schemes with borrowers are found to be more effective than legal

measures. Many banks have come out with their own restructuring schemes for settlement of

NPA accounts.

3. Credit Information Bureau

To serve as a mechanism for exchange of information between banks and FIs for curbing

the growth of NPAs incorporated Credit Information Bureau (India) Limited (CIBIL) in

January 2001. Pending the enactment of CIB Regulation Bill, the RBI constituted a working

group to examine the role of CIBs. As per the recommendations of the working group, Banks

and FIs are now required to submit the list of suit-filed cases of Rs. 10 million and above and

suitfiled cases of willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL.

CIBIL will share this information with commercial banks and FIs so as to help them

minimize adverse selection at appraisal stage.

Willful Defaulters

RBI has issued revised guidelines in respect of detection of willful default and diversion

and siphoning of funds. As per these guidelines a willful default occurs when a borrower

defaults in meeting its obligations to the lender when it has capacity to honor the obligations

or when funds have been utilized for purposes other than those for which finance was

granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent

their access to capital markets. Sharing of information of this nature helps banks in their due

diligence exercise and helps in avoiding financing unscrupulous elements. RBI has advised

lenders to initiate legal measures including criminal actions, wherever required, and

undertake a proactive approach in change in management, where appropriate.

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2.11 APPROPRIATENESS OF THE EXISTING SYSTEMS

Most of the participant lenders have special NPA management cells at Head Offices

for dealing with NPAs. The participants were generally of the view that though time and

resources were adequate for dealing with NPAs, skills needed to be improved upon.

Within the constraints of the existing legal and regulatory environment banks in India

have done a commendable job in bringing down the levels of NPAs in recent years. However,

with the tightening of NPA recognition norms, which would mean early recognition and

faster provisioning of NPAs, banks now need to evolve systems that help them identify

potential NPAs and take quick action to:

§ Prevent the potential NPA from actually becoming non-performing, and

§ Avoid increasing their exposure to such potential NPAs.

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CHAPTER – 3

ORGANIZATION PROFILE

3.1 INDUSTRY PROFILE

3.2 COMPANY PROFILE

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3.1 INDUSTRY PROFILE (All about Banking Industries)

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3.1 INDUSTRY PROFILE

3.1a Introduction

The Banking Industry was once a simple and reliable business that took deposits

from investors at a lower interest rate and loaned it out to borrowers at a higher rate.

However deregulation and technology led to a revolution in the Banking Industry that

saw it transformed. Through technology development, banking services have become

available 24 hours a day, 365 days a week, through ATMs, at online banking, and in

electronically enabled exchanges where everything from stocks to currency futures contracts

can be traded.

The Banking Industry at its core provides access to credit. In the lenders case, this

includes access to their own savings and investments, and interest payments on those

amounts. In the case of borrowers, it includes access to loans for the creditworthy, at a

competitive interest rate.

Banking services include transactional services, such as verification of account

details, account balance details and the transfer of funds, as well as advisory services that

help individuals and institutions to properly plan and manage their finances. Online banking

channels have become a key in the last 10 years.

The collapse of the Banking Industry in the Financial Crisis, however, means that

some of the more extreme risk-taking and complex securitization activities that banks

increasingly engaged in since 2000 will be limited and carefully watched, to ensure that there

is not another banking system meltdown in the future.

3.1.b Meaning of Bank

A bank is a financial institution that accepts deposits and channels those deposits into

lending activities. Banks primarily provide financial services to customers while enriching

investors. Government restrictions on financial activities by banks vary over time and

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location. Banks are important players in financial markets and offer services such as

investment funds and loans.

3.1.c Definition

The definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries on the business

of banking, which is specified as:

• conducting current accounts for his customers

• paying cheques drawn on him, and

• collecting cheques for his customers

Banks act as payment agents by conducting checking or current accounts for customers,

paying cheques drawn by customers on the bank, and collecting cheques deposited to

customers' current accounts. Banks also enable customer payments via other payment

methods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current accounts, by accepting

term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money

by making advances to customers on current accounts, by making installment loans, and by

investing in marketable debt securities and other forms of money lending.

3.1.d Types of Banks

Central Bank

The Reserve Bank of India is the central Bank that is fully owned by the Government.

It is governed by a central board (headed by a Governor) appointed by the Central

Government. It issues guidelines for the functioning of all banks operating within the

country.

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Public Sector Banks

• State Bank of India and its associate banks called the State Bank Group

• 20 nationalized banks

• Regional rural banks mainly sponsored by public sector banks

Private Sector Banks

• Old generation private banks

• New generation private banks

• Foreign banks operating in India

• Scheduled co-operative banks

• Non-scheduled banks

Co-operative Sector

The co-operative sector is very much useful for rural people. The co-operative banking

sector is divided into the following categories.

• State co-operative Banks

• Central co-operative banks

• Primary Agriculture Credit Societies

• Urban Co-operative Banks

• Land Development Banks

Development Banks/Financial Institutions

• Industrial Finance Corporation of India (IFCI)

• Industrial Development Bank of India (IDBI)

• Industrial Credit and Investment Corporation of India (ICICI)

• Industrial Investment Bank of India (IIBI)

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• Small Industries Development Bank of India (SIDBI)

• SCICI Ltd.

• National Bank for Agriculture and Rural Development (NABARD)

• Export Import Bank of India

• National Housing Bank

• North Eastern Development Finance Corporation

3.1.e Indian Banking Industry

History

Banking in India originated in the last decades of the 18th century. The first banks

were The General Bank of India which started in 1786, and the Bank of Hindustan, both of

which are now defunct. The oldest bank in existence in India is the State Bank of India,

which originated in the Bank of Calcutta in June 1806, which almost immediately became the

Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of

Bombay and the Bank of Madras, all three of which were established under charters from the

British East India Company. For many years the Presidency banks acted as quasi-central

banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of

India, which, upon India's independence, became the State Bank of India.

The oldest bank in existence in India is the State Bank of India, a government-owned

bank that traces its origins back to June 1806 and that is the largest commercial bank in the

country. Central banking is the responsibility of the Reserve Bank of India, which in 1935

formally took over these responsibilities from the then Imperial Bank of India, relegating it to

commercial banking functions. After India's independence in 1947, the Reserve Bank was

nationalized and given broader powers. In 1969 the government nationalized the 14 largest

commercial banks; the government nationalized the six next largest in 1980.

Around the turn of the 20th Century, the Indian economy was passing through a

relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the

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social, industrial and other infrastructure had improved. Indians had established small banks,

most of which served particular ethnic and religious communities.

3.1.f Current structure of Indian Banking Industry

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks

(that is with the Government of India holding a stake), 31 private banks (these do not have

government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign

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

According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75

percent of total assets of the banking industry, with the private and foreign banks holding

18.2% and 6.5% respectively.

The Indian banking system is financially stable and resilient to the shocks that may

arise due to higher non-performing assets (NPAs) and the global economic crisis, according

to a stress test done by the Reserve Bank of India (RBI).

Significantly, the RBI has the tenth largest gold reserves in the world after spending

US$ 6.7 billion towards the purchase of 200 metric tonnes of gold from the International

Monetary Fund (IMF) in November 2009. The purchase has increased the country's share of

gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6 per

cent.

Following the financial crisis, new deposits have gravitated towards public sector

banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled

Commercial Banks: September 2009', nationalized banks, as a group, accounted for 50.5 per

cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted

for 23.8 per cent. The share of other scheduled commercial banks, foreign banks and regional

rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent,

respectively.

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With respect to gross bank credit also, nationalized banks hold the highest share of

50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per cent and other

scheduled commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a

share of 5.5 per cent and 2.5 per cent respectively in the total bank credit.

The report also found that scheduled commercial banks served 34,709 banked centres.

Of these centres, 28,095 were single office centres and 64 centres had 100 or more bank

offices.

3.1.g Feature of Indian Banking Industry

The growth in the Indian Banking Industry has been more qualitative than quantitative

and it is expected to remain the same in the coming years. Based on the projections made in

the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the

report forecasts that the pace of expansion in the balance-sheets of banks is likely to

decelerate. The total assets of all scheduled commercial banks by end-March 2010 is

estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current

market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an

annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate

of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be

large additions to the capital base and reserves on the liability side.

Figure 3.1: Growth in Indian Banking Assets:

256 285342 374

448535

616

850

1000

0

200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006 2008 2010

Growth in Indian Banking Assets (US$ Billions)

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“Indian banking industry assets are expected to reach US$1 trillion by 2010 and are

poised to receive a greater infusion of foreign capital,” says Prathima Rajan, analyst in

Celent's banking group and author of the report. “The banking industry should focus on

having a small number of large players that can compete globally rather than having a large

number of fragmented players."

The Indian Banking Industry can be categorized into non-scheduled banks and

scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks.

There are about 67,000 branches of Scheduled banks spread across India. As far as the

present scenario is concerned the Banking Industry in India is going through a transitional

phase.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India

account for more than 78 per cent of the total banking industry assets. Unfortunately they are

burdened with excessive Non Performing assets (NPAs), massive manpower and lack of

modern technology. On the other hand the Private Sector Banks are making tremendous

progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far

as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.

3.1.h Nationalized Banks in India

Nationalized banks dominate the banking system in India. The history of nationalized

banks in India dates back to mid-20th century, when Imperial Bank of India was nationalized

(under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955.

Then on 19th July 1960, its seven subsidiaries were also nationalized with deposits over 200

crores. These subsidiaries of SBI were State Bank of Bikaner and Jaipur (SBBJ), State Bank

of Hyderabad (SBH), State Bank of Indore (SBIR), State Bank of Mysore (SBM), State Bank

of Patiala (SBP), State Bank of Saurashtra (SBS), and State Bank of Travancore (SBT).

However, the major nationalization of banks happened in 1969 by the then-Prime

Minister Indira Gandhi. The major objective behind nationalization was to spread banking

infrastructure in rural areas and make affordable finance available to Indian farmers. The

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nationalized 19 major commercial banks are Allahabad Bank, Andhra Bank, Bank of Baroda,

Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation

Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce (OBC),

Punjab and Sind Bank, Punjab National Bank (PNB), Syndicate Bank, UCO Bank, Union

Bank of India, United Bank of India (UBI), and Vijaya Bank.

In the year 1980, the second phase of nationalization of Indian banks took place, in

which 7 more banks were nationalized with deposits over 200 crores. With this, the

Government of India held a control over 91% of the banking industry in India. After the

nationalization of banks there was a huge jump in the deposits and advances with the banks.

At present, the State Bank of India is the largest commercial bank of India and is ranked one

of the top five banks worldwide. It serves 90 million customers through a network of 9,000

branches.

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3.2 COMPANY PROFILE

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3.2 COMPANY PROFILE

Company: “Bank of India”

3.2.a Introduction

Bank of India being a major bank in the public sector always endeavours to strike a

viable equilibrium between commercial objectives and social responsibilities.

3.2.b History

Bank of India was founded on 7th September, 1906 by a group of eminent

businessmen from Mumbai. The Bank was under private ownership and control till July 1969

when it was nationalized along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50

employees, the Bank has made a rapid growth over the years and blossomed into a mighty

institution with a strong national presence and sizable international operations. In business

volume, the Bank occupies a premier position among the nationalised banks.

The Bank has 3101 branches as on 31 march 2009, in India spread over all states/

union territories including 141 specialised branches. These branches are controlled through

48 Zonal Offices. There are 29 branches/ offices (including three representative offices)

abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified

Institutions Placement in February 2008. . Total number of shareholders as on 30/09/2009 is

2,15,790.

While firmly adhering to a policy of prudence and caution, the Bank has been in the

forefront of introducing various innovative services and systems. Business has been

conducted with the successful blend of traditional values and ethics and the most modern

infrastructure. The Bank has been the first among the nationalized banks to establish a fully

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computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in

1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction

of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into

an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It

is an association that has blossomed into a joint venture with BSE, called the BOI

Shareholding Ltd. to extend depository services to the stock broking community. Bank of

India was the first Indian Bank to open a branch outside the country, at London, in 1946, and

also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence

abroad, with a network of 29 branches (including five representative office) at key banking

and financial centres viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The

international business accounts for around 17.82% of Bank's total business.

3.2.c BOI’s Established History

1906: Founded by a group of businessmen in Mumbai

1946: First Indian bank to open a branch outside India in London

1950: First Indian bank to open a branch in Japan

1969: Nationalized along with 13 other banks when BOI had 207 branches in India

and 12 branches abroad

1989: Established BOI Shareholding Ltd, a JV with Stock Exchange Mumbai (BSE)

to manage the clearinghouse activities of BSE

1997: Maiden public issue in February diluting GOI share to 76.53%

2003/ 04: Ranked as India’s most trusted service brand among all nationalized banks,

consecutively for three years by AC Nielsen ORG- MARG

2004: Ranked 25th among India’s Top 500 companies by Dun & Bradstreet

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2007 -09: Net Profit of INR 11.23 bn for 2006-07 ,INR 20.09 bn for 2007-08 and INR

30.07 bn surpassed land marks of INR 10 bn , INR 20 bn and INR 30 bn

respectively.

3.2.d Mission & Vision

Mission

"To provide superior, proactive banking services to niche markets globally,

while providing cost-effective, responsive services to others in our role as a

development bank, and in so doing, meet the requirements of our

stakeholders".

Vision

"To become the bank of choice for corporates, medium businesses and

upmarket retail customers and to provide cost effective developmental

banking for small business, mass market and rural markets"

3.2.e BOARD OF DIRECTORS

Shri. Alok Kumar Misra

Chairman & Executive Director

(From 05.08.2009)

Bank of India, Head Office, Star House, C-5, ‘G’ Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051

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Shri Alok Kumar Misra has taken over as the Chairman and Managing Director of

Bank of India with effect from 5th August, 2009. Shri Misra was the Chairman & Managing

Director of Oriental Bank of Commerce prior to the present assignment.Shri Misra held the

post of the Executive Director of Canara Bank from 24th March 2006 to 3rd June 2007 and

the Chairman & Managing Director of Oriental Bank of Commerce from 4th June 2007.

Shri B. A. Prabhakar

Executive Director

(From 15.10.2008)

Bank of India, Head Office,

Star House,

C-5, ‘G’ Block,

Bandra-Kurla Complex

Bandra (East),

Mumbai - 400 051

Shri B. A. Prabhakar, is the Executive Director of the Bank w.e.f. October 15,2008.

Prior to the present assignment, he was General Manager with Bank of Baroda looking after

Treasury Operations. He is a Chartered Accountant and a B. Com from the University of

Mysore. He joined Bank of Baroda as a direct recruit officer in 1977. He has worked

extensively in the areas of credit, operations and treasury in Bank of Baroda. He has served as

the Chief Executive of Bank of Baroda’s operations in United Kingdom.

Shri Prakash P. Mallya,

Shareholder Director

(From 25.10.2008)

Pratosh 46, 2nd Cross,

Panduranga Nagar,

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Bannerghatta Road,

Bangalore – 560 076

Shri Prakash P. Mallya is an economist and a career banker. He is M.A. (Economics)

and UGC Research Fellow, worked on Ph.D. Thesis at Gokhale Institute of Politics &

Economics, Pune from 1971-73. He is Ex-Chairman and Managing Director of Vijaya Bank

and Ex-Executive Director of Syndicate Bank. He is Shareholder Director of the Bank, for a

period of 3 years from October 25, 2008.

3.2.f INVESTOR PROFILE / SHARE HOLDING PATTERN (%)

Table 3.1: Investor profile / Share holding pattern

Jan 09 Sep 09 Dec 09

Promoter (Govt. of India)

Foreign Institutional Investors

Financial Institutions / Banks

Insurance Companies

Mutual Funds

Bodies Corporate

NRIs / Foreign

Indian Public

64.47%

14.06%

2.38%

9.03%

1.91%

1.29%

0.50%

6.36%

64.47%

17.25%

0.37%

9.85%

0.68%

0.71%

0.52%

6.15%

64.47%

16.68%

0.16%

10.16%

0.86%

1.02%

0.52%

6.13%

Total 100.00% 100.00% 100.00%

Total Foreign Holding: 17.20%

3.2.g SHREHOLDING PATTERN OF INSTITUTIONAL INVESTORS

(Domestic) As on 31st December 2009

Table 3.2: Shareholding pattern of institutional investors

No. of Shares % of Shareholding

LIC

GIC & its subsidiaries

MUTUAL FUNDS

4,01,66,520

1,21,97,001

45,27,767

7.65

2.32

0.86

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ECGC

NATIONALISED BANKS

9,86,111

5,24,996

0.19

0.10

3.2.h BUSINESS MIX

Table 3.3: Total Deposits of Bank of India (INR in Bn)

Deposits December 08 March 09 December 09

India

Foreign

Global

1471.88

245.36

1717.24

1594.87

302.22

1897.09

1750.82

309.2

2060.2

Figure 3.2 : Total Deposits of Bank of India

Table 3.4: Total Cash Deposits of Bank of India (INR in Bn)

Cash Deposits Dec 08 Mar 09 Dec 09

Cash Dep.

AGGR. Dep.

462.9

1458.58

486.37

1581.21

567.14

1736.28

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Figure 3.3 : Total Cash Deposits of Bank of India

Table3.5: Total Gross Advances of Bank of India (INR in Bn)

Gross Advances Dec 08 Mar 09 Dec 09

India

Foreign

Global

1085.41

275.69

1361.1

1153.54

293.77

1447.32

1227.62

341.91

1569.53

Figure 3.4: Total Gross Advances of Bank of India

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Table 3.6: Growth in Average Business (INR in Bn)

Dec 08 Dec 09

AVG. Deposits

AVG. Advances

AVG. Investment

AVG. Working

AVG. Borrowings

AVG. Networth

1679.85

1313.07

439.46

2017.19

88.14

103.89

2023.58

1510.87

668.31

2440.44

123.53

122.54

Figure 3.5 : Growth in Average Business

Table 3.7: Deposits Category wise (Domestic) (INR in Bn)

Metro

Urban

Semiurban

Rural

991.25

337.88

214.58

207.11

57%

19%

12%

12%

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Figure 3.6 : Deposits Category wise (Domestic)

Table 3.8: Credit Category wise (Domestic) (INR in Bn)

Metro

Urban

Semiurban

Rural

837.26

186.51

92.76

111.09

68%

15%

8%

9%

Figure 3.7: Credit Category wise (Domestic)

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3.2.i STRATEGIC INVESTMENTS/ALLIANCES/JOINT VENTURES

• Promoter & the largest share holder of a leading Indian Primary Dealer – Securities

Trading Corporation of India Limited (STCI).

• The Bank manages clearing & settlement operation of Bombay Stock Exchange

through its subsidiary BOI Share Holding Limited.

• In India, the bank has strategic investments in:

– Leading commodity exchange (MCX)

– Financial intermediaries (CDSL/NCML)

– Asset Reconstruction company (ASREC)

– Credit Information Bureau (CIBIL)

• Acquired P.T. Bank Swadeshi TBK in Indonesia (76% stake)

• Established 100% subsidiary in Tanzania - BOI (Tanzania) Ltd.

• Overseas Joint Venture - Indo Zambia Bank Limited

• Joint Venture Insurance Company with Dai-Ichi Life Insurance Company and Union

Bank of India

• 5 RRBs with 35% stake

3.2.j SERVICES PROVIDED BY THE BANK OF INDIA

Online Services Ancillary Services

• Mobile Banking and Payments

• Internet Banking

• Online Trading in Shares

• Pay Bills

• Book Ticket

• Tax Payment

• Remittance

• Star Cash Management Service

• Safe Deposit Vault

• Depositary Services

• Gold

• Insurance

• Mutual Fund

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3.2.k LOANS PROVIDED BY THE BANK OF INDIA

• Star Mitra Personal Loan

• Star Pensioner loan scheme

• Star Home loan

• Star Holiday loan

• Star Mortgage loan

• Star Personal loan

• Star IPO

• Star Educational loan

• Star Auto fin

• Star Mahila Gold loan scheme

3.2.l BANK OF INDIA – ACCOLADES, AWARDS & HIGHLIGHTS

• National Award for Excellence in Lending to Micro & Small Enterprises 2009-

conferred by Government of India, Ministry of Micro, Small and Medium Enterprises

• Outlook Money NDTV Profit Awards 2009- Best Education Loan Provider –Runner

up

• NDTV Profit Business Leadership Awards 2009 Bank of India adjudged the “Best

Bank” in public sector bank category

• Bank of India has been rated by Economic Times /The Nielsen company survey

“The Most Trusted Brands” (MTB) 2009 as follows:

§ Under PSU Banking Category –2nd Next TO SBI

§ Under Top Service Brands–8th

§ The Debutant –first time in the Top 100 In the MTB , Bank of India ranked

92nd - 54 rankings ahead of last year rankings (146th Rank during 2008)

• Bank of India has won the TOP PUBLIC SECTOR BANK under BEST BANK

category and OVERALL BEST BANK in the DUN and BRADSTREET

• Bank of India has won the TOP PUBLIC SECTOR BANK under BEST BANK

category and OVERALL BEST BANK in the DUN and BRADSTREET BANKING

AWARDS 2009

• Bank of India is the first major public sector bank to receive ISO27001:2005

certification for its Data Centre and Disaster Recovery center"

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• Bank of India won International Award for Excellence in outsourcing sponsored by

Everest Group & Forbes at New York, USA.

• Bank of India has won a special Award for green IT at CIO 100 event for solar Power

• Bank of India won runners up award in FE India’s Best Bank Awards based on

various parameters like Growth, Profitability, Strength and Soundness, recognise the

exemplary performance of select banks that withstood the recent economic turmoil to

emerge stronger and maximise shareholder value.

• Global Business Mix reaches INR3629 bn(US$77.99bn) as on 31.12.2009

• Total assets of INR 2496bn (US$ 53.64bn) as on 31.12.2009

• Operates 3140 branches which includes 29 branches/offices overseas

• Market Cap of INR 196.94 bn (US $ 4.27 bn) as on 25.01.2010

• The Bank has headroom of INR 87.81 Bn (without disinvestment) to raise capital to

leverage growth opportunities and strengthen its position as a diversified global bank.

The Bank has raised INR 10 Bn in July 2009 and August 2009 through issue of Upper

Tier II Bonds. Further the Bank has raised INR 3.25 Bn in December 2009 through

IPDI Bonds and INR 10 Bn through issue of Upper Tier II Bonds in January 2010.

• International business constitutes ~ 17.94% of the total business

• 100% domestic business covered under the Core Banking System, spanning over

1920 cities and towns

3.2.m COMPOTATORS PROFILE

List of Public Sector Banks in India is as follows:

• Allahabad Bank • Andhra Bank • Bank of Baroda • Bank of Maharashtra • Canara Bank • Central Bank of India • Corporation Bank • Dena Bank • Indian Bank • Indian Overseas Bank • Oriental Bank of Commerce • Punjab and Sind Bank

• Punjab National Bank • State Bank of Bikaner & Jaipur • State Bank of Hyderabad • State Bank of India (SBI) • State Bank of Indore • State Bank of Mysore • State Bank of Patiala • State Bank of Saurashtra • State Bank of Travancore • Syndicate Bank • UCO Bank • Union Bank of India

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• United Bank of India • Vijaya Bank

• IDBI Bank

CHAPTER – 4

RESEARCH METHODOLOGY

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4. RESEARCH METHODOLOGY

4.1 TITLE OF THE PROJECT

“A Study on Non-Performing Asset with special reference to the Bank of India”

4.2 OBJECTIVES OF THE STUDY

• To analyze the NPA and its relation with operating profit of the bank.

• To study the general reasons for assets become NPAs.

• To point out the amount of NPAs in Bank of India.

• What are the criteria to recover the advances from the bank

• What are the methods adopted by the bank to look after NPA management.

4.3 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. In it we study the

various steps that are generally adopted by a researcher in studying his research problem

along with the logic behind them.

The purpose of research is to discover answers to the questions through the application of

scientific procedures. The main aim of research is to find out the truth which is hidden and

which has not been discovered as yet.

I have adopted the following procedure in completing my report study.

1. Formulating the problem

2. Research design

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3. Determining the data sources

4. Analysing the data

5. Interpretation

6. Preparing research report

4.3.a Formulating the problem

I am interested in the banking sector and I want to make my future in the banking

sector so decided to make my research study on the banking sector. I analysed first the factors

that are important for the banking sector and I came to know that providing credit facility to

the borrower is one of the important factors as far as the banking sector is concerned. On the

basis of the analysed factor, I felt that the important issue right now as far as the credit

facilities are provided by bank is non performing assets.

The bank will always face the problem of NPA because of poor recovery of advances

granted by the bank and several other reasons like adopting a poor recovery strategies so when

the loan is not recovered from the bank effectively and efficiently that balance amount will

become the NPA to the bank it may create some huge problem to the bank’s net profit.

The most important problem is disbursement of funds in quality assets (loans and

advances), the research should be identified, analyzed and possible solutions be suggested for

solving the important problem.

This particular topic has been selected to analyze the status of NPA at Bank of India and

their impact on the performance of the bank.

4.3.b Research Design

The research design tells about the mode with which the entire project is prepared. To

carry out my project I have used the descriptive research.

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Descriptive research includes surveys and fact-finding enquiries of different kinds. The

major purpose of descriptive research is description of the state of affairs, as it exists at present.

The main characteristic of this method is that the researcher has no control over the variables; he

can only report what has happened or what is happening. It is also called as ex post facto

research. Most ex post facto research projects are used for descriptive studies in which

researcher seeks to measure such items as, for example, frequency of shopping, preferences of

people, or similar data. Descriptive research also includes attempts by the researcher to discover

causes even when they cannot control the variables. The methods of research utilized in

descriptive research are survey methods of all kinds.

Why Descriptive Research?

In this case descriptive study was most suitable because it helped in giving focus to the

preferences, knowledge, beliefs & satisfaction of a group of people in a given population and

characteristics of the successful and unsuccessful companies. Moreover it helped in determining

the relationships between two or more variables.

4.3.c Determining the data source

The data source can be primary or secondary. The primary data are those data which are used

for the first time in the study. However such data take place much time and are also expensive.

Whereas the secondary data are those data which are already available in the market.

Primary data:

• Discussion with the manager and officers of the bank to get general information about the bank and its activities

• By taking guidance from bank guide and departmental guide

Secondary data:

• Collection of data through Bank annual report, Bank manuals, Text books, Websites, Journals and Magazines

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4.3.d Analysing the data

The primary data would not be useful until and unless they are well edited and tabulated.

When the person receives the primary data many un-useful data would also be there. So, I

analysed the data and edited them and turned them in the useful tabulations. So, that can become

useful in my report study.

Tool used for analysis:

Ratio Analysis: The relationship between two related items of financial statements is

known as ratio. A ratio is just one number expressed in terms of another. The ratio is customarily

expressed in three different ways. It may be expressed as a proportion between the two figures.

Second it may be expressed in terms of percentage. Third, it may be expressed in terms of rates.

4.3.e Interpretation of the data

With use of analysed data I managed to prepare my project report. But the analyzing of

data would not help the study to reach towards its objectives. The interpretation of the data is

required so that the others can understand the crux of the study in more simple way without any

problem so I have added the chapter of “analysis of the data” that would explain others to

understand my study in simpler way.

4.3.f Preparing research report

This is the last step in preparing the project report. The objective of the report writing

was to report the findings of the study to the concerned authorities.

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4.4 SCOPE OF THIS STUDY:

The scope of the study is limited to Bank of India only. The study covers the performance on NPA’s for last 3 years.

The study covers:

• To present a picture of movement of NPA in Bank of India • To know how NPA level will affect the profit of the bank.

4.5 LIMITATIONS OF THE STUDY:

1. This study is confined only to The Bank of India.

2. The study is restricted only to 6 weeks time. In depth study was not possible due to

lack of time.

3. The findings and recommendations may be applicable at the period of study only.

4. The study is conducted only on the basis of data provided by the bank websites.

Conclusions are drawn on the basis of limited data available.

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CHAPTER – 5

ANALYSIS AND

INTERPRETATION OF

DATA

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5. ANALYSIS AND INTERPRETATION OF DATA

5.1 RATIO ANALYSIS

The relationship between two related items of financial statements is known as ratio.

A ratio is just one number expressed in terms of another. The Ratio is customarily expressed

in three different ways. It may be expressed as a proportion between the two figures. Second

it may be expressed in terms of percentage. Third, it may be expressed in terms of rates.

The use of ratio has become increasingly popular during the last few years only.

Originally, the bankers used the current ratio to judge the capacity of the borrowing business

enterprises to repay the loan and make regular interest payments. Today it has assumed to be

important tool that anybody connected with the business turns to ratio for measuring the

financial strength and the earning capacity of the business.

5.1.a ANALYSIS OF LIQUIDITY & SOLVENCY POSITION

Liquidity refers to the ability of a concern to meet its current obligation as and when

they become due. Short term obligations are met by realizing amounts from current assets. If

the current assets can pay off the current liabilities, then the liquidity position will be

satisfactory. Solvency refers to the long term financial position of the organization. To

measure liquidity, following ratios can be calculated:

1) CURRENT RATIO:

Current Ratio explains the relationship between current assets and current liabilities.

Generally 2:1 is considered ideal for a concern. This ratio is an indicator of the firm’s

commitment to meet its short term liabilities.

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Table 5.1: Current Ratio (Amount in Mn)

Year Current assets Current liabilities Ratio % 2004-05 2005-06 2006-07 2007-08 2008-09

38.63 46.29 55.91 62.92 80.06

15.66 17.85 21.44 32.29 35.26

2.46 2.59 2.60 1.95 2.27

Figure 5.1: Current Ratio

Interpretation:

It reveals the short term solvency of the firm.

Current ratio of BOI shows a satisfactory level of current ratio (more than 2) from 2005-06 to

2009-10. In 2008-09, it is only 1.95; this is due to decrease in the components of current

assets.

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2) QUICK RATIO

The quick ratio tells about the relationship between quick assets and current liabilities. 1:1

is considered ideal ratio for a concern because it is wise to keep the liquid assets at least equal

to the current liabilities.

Table 5.2: Quick Ratio (Amount in Mn)

Year Quick assets Current liabilities Ratio % 2004-05 2005-06 2006-07 2007-08 2008-09

20.94 21.50 20.41 37.12 48.45

15.66 17.85 21.44 32.29 35.26

1.34 1.20 0.95 1.15 1.37

Figure 5.2: Quick Ratio

Interpretation:

Quick assets = Current assets-inventories-prepaid expenses.

It gives the liquidity position of the firm. This ratio is also not satisfactory in the year

2007-08. In 2007-08 the components of current liabilities, sundry creditors decreases and the

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other components i.e., earnest money and security deposit, other liabilities and provisions

increases. The ratio shows that liquidity position of BOI is also in a better level other than the

one period, 2007-08.

3) ABSOLUTE LIQUIDITY RATIO

Absolute liquidity ratio shows the relationship between the sum of cash and marketable

securities to the total current liabilities. In absolute liquidity ratio only absolute liquid assets

such as cash in hand, cash at bank and readily realizable securities are taken into

consideration. The desirable norm is 0.5:1.

Absolute liquid assets = Current assets – Inventories – Sundry debtors – loans& advances

Table 5.3: Absolute Liquidity Ratio (Amount in Mn)

Year Absolute Liquid assets

Current liabilities Ratio %

2004-05 2005-06 2006-07 2007-08 2008-09

6.32 8.65 10.21 15.14 14.60

15.66 17.85 21.44 32.29 35.26

0.40 0.48 0.49 0.46 0.41

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Figure 5.3: Absolute Liquidity Ratio

0.40

0.48 0.490.46

0.41

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2004-05 2005-06 2006-07 2007-08 2008-09

Absolute liquidity Ratio

Interpretation:

The recommended standard norm for the ratio is 0.5:1. The ratio in the company is below

the recommended value. Liquidity position of the company is not in satisfactory levels. The

ratio for the period 2006-07, 2007-08 is a greater value for BOI in comparison with the other

periods.

4) DEBT-EQUITY RATIO

The relationship between borrowed funds and owner’s capital is a popular measure of the

long term financial position or solvency of the firm. This relationship is shown by the debt-

equity ratio. This ratio indicates the relative proportion of the debt and equity in financing the

assets of a firm. This ratio is computed by dividing the total debt of the firm by its net worth.

Acceptable norm for this ratio is considered to be 2:1.

A high debt company, also known as highly leveraged or geared, is able to borrow funds

on very restrictive terms and conditions. A low debt equity ratio implies greater claim of

owner as than creditors. From the point of view of creditors, it represents a satisfactory

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capital structure of the business since a high proportion of equity provides a larger margin of

safety for them. This ratio shows the extent to which debt financing is used in the business.

Debt = Debentures + Current liabilities & Equity = Equity share capital + Preference share

capital + Reserves & surplus + share premium.

Table 5.4: Debt-Equity Ratio (Amount in Crores)

Year Debt Equity Ratio % 2004-05 2005-06 2006-07 2007-08 2008-09

15.66 17.85 21.44 32.29 35.26

48.74 48.74 52.51 52.51 52.51

0.32 0.37 0.41 0.61 0.67

Figure 5.4: Debt-Equity Ratio

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Interpretation:

The debt is equal to the current liabilities and equity is the sum of equity share capital

and reserves and surplus. In 2009-10, the ratio is higher i.e., debtors are very high as

compared to equity of the firm. In 2005-06, ratio is very low, means debtors are very low for

the company. As for as BOI is concerned debt-equity ratio is within the recommended limit.

5. CASH TO CURRENT ASSET RATIO

When cash is in the flow it is earning for the enterprise; when it is idle, not only that it

does not earn, it also contributes negatively to the profitability of the enterprise, because the

fund that is tied to idle cash to be carried at a cost. Of all the current assets that are found in

the balance sheet of an enterprise, cash is most important in terms of its usage, hence it is

holding in stock form must be the least.

With the development of the financial market and rising efficiency in financial

management of enterprises, cash as a percentage of total current assets has been going down

significantly in almost all the developed nations of the world.

Table 5.5: Cash to Current Asset Ratio (Amount in Crores)

Year Cash Assets Current Ratio % 2004-05 2005-06 2006-07 2007-08 2008-09

2.45 2.85 3.25 4.56 4.58

38.63 46.29 55.91 62.92 80.06

0.063 0.062 0.058 0.072 0.057

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Figure 5.5: Cash to Current Asset Ratio

Interpretation:

Cash to current assets ratio of BOI is not very good as compared with other nationalize bank.

The Bank of India shows only decimal values, in 2007-08 and 2009-10 its showing very low

cash to current assets ratio and in 2008-09 it’s showing very high ratio.

5.1.b ANALYSIS OF NPAs RATIO

1) GROSS NPA RATIO

Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the

sum of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is to be

counted in terms of percentage and the formula for GNPA is as follows:

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Table 5.6: Gross NPA to Gross Advances

2006-07 2007-08 2008-09 Gross NPAs

Gross Advances 2,100 84,935

1,931 1,13,476

2,471 1,42,909

Ratio % 2.47 1.70 1.73

Figure 5.6: Gross NPA Ratio

Interpretation:

The table above indicates the quality of credit portfolio of the banks. High gross NPA ratio

indicates the low credit portfolio of bank and vice-a-versa. We can see from the above table

that the year 2007-08, has the higher gross NPA ratio of 2.47 %.

2) NET NPA RATIO

The net NPA percentage is the ratio of net NPA to net advances, in which the provision is to

be deducted from the gross advance. The provision is to be made for NPA account. The

formula for that is:

2.47

1.7 1.73

0

0.5

1

1.5

2

2.5

3

2006-07 2007-08 2008-09

Gross NPA Ratio

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Table 5.7: Net NPA to Net Advance (Amount in Crores)

2006-07 2007-08 2008-09 Net NPAs

Net Advances 812

75,696 592

1,02,420 628

1,30,098 Ratio % 1.07 0.57 0.48

Figure 5.7: Net NPA Ratio

Interpretation:

This ratio indicates the degree of risk in the portfolio of the bank. High NPA ratio indicates

the high quantity of risky assets in the Banks for which no provision are made. From the table

it becomes clear that the NPA ratio of BOI have been improved quite well as compared to the

previous year.

1.07

0.570.48

0

0.2

0.4

0.6

0.8

1

1.2

2006-07 2007-08 2008-09

Net NPA Ratio

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3) PROVISION RATIO

Provisions are to be made for to keep safety against the NPA, & it directly affect on the gross

profit of the Banks. The provision Ratio is nothing but total provision held for NPA to gross

NPA of the Banks. The formula for that is,

Table 5.8: Provision Ratio (Amount in Crores)

2006-07 2007-08 2008-09 Total Provision Gross NPA

1288 2100

1339 1931

1843 2471

Ratio % 61.33 69.34 74.59

Figure 5.8: Provision Ratio

61.33

69.3474.59

0

10

20

30

40

50

60

70

80

2006-07 2007-08 2008-09

Provision Ratio

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Interpretation:

This Ratio indicates the degree of safety measures adopted by the Bank. It has direct bearing

on the profitability, Dividend and safety of shareholders’ fund. If the provision ratio is less, it

indicates that the Banks has made under provision.

4) PROBLEM ASSET RATIO

It is the ratio of gross NPA to total asset of the bank. It has been direct bearing on return

on assets as well as liquidity risk management of the bank. The formula for that is:

Table 5.9: Problem Assets Ratio (Amount in Crores)

2006-07 2007-08 2008-09 Gross NPA Total Assets

2,100 1,41,636

1,931 1,78,829

2,471 2,55,017

Ratio % 1.48 1.08 0.97

Figure 5.9: Problem Assets Ratio

1.48

1.080.97

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2006-07 2007-08 2008-09

Problem Assets Ratio

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Interpretation:

It has been direct bearing on return on assets as well as liquidity risk management of the

bank. High problem asset ratio, which means high liquid, from the above table it becomes

clear that the BOI reducing the liquidity risk year by year.

5) CAPITAL ADEQUACY RATIO

Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets,

which are weighted/adjusted according to risk attached to them i.e.

Table 5.10: Capital Adequacy Ratio (Rs in Crore)

2006-07 2007-08 2008-09 Capital 488.14 488.14 525.91 Risk weighted Assets 2100 1931 2471 Ratio 23.24 25.28 21.28

Figure 5.10: Capital Adequacy Ratio

23.24

25.28

21.28

19

20

21

22

23

24

25

26

2006-07 2007-08 2008-09

Capital Adquacy Ratio

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Interpretation:

The capital adequacy ratio is important for to maintain as per the banking regulations. As far

as this ratio is concerned the year 2006-07 has shown very less percentage when compare

with the previous years. But the CAR was increased in 2007-08 by 25.28%, it shows that BOI

is satisfied the CAR.

5.2 Conclusion

Analysis:

Table 5.11: Fish eye view of the ratio analysis

Ratio Satisfied Better Not Satisfied

I. ANALYSIS OF LIQUIDITY & SOLVENCY POSITION

1. Current Ratio ***** 2. Quick Ratio ***** 3. Absolute Liquidity Ratio ***** 4. Debt Equity Ratio ***** 5. Current asset ratio *****

II. ANALYSIS OF NPAs RATIO

1. Gross NPA Ratio *****

2. Net NPA Ratio *****

3. Provision Ratio *****

4. Problem Assets Ratio *****

5. Capital Adequacy Ratio ***** Total Ratio satisfied level is: Better

CONCLUSION:

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The above table (Table 5.11: Fish eye view of the ratio analysis) indicates that the

Bank of India is in ‘better position’ by satisfying all the above ten out of eight ratios.

CHAPTER – 6

FINDINGS

AND

SUGGESTIONS

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6. FINDINGS AND SUGGESTIONS

FINDINGS

1. The reduction in loan installment to 90 days may raise the NPA levels in the short

run. But in turn will improve the asset quality of the banks.

2. The net NPAs of BOI has increased from 592 crore to 628 crore in 2008 and 2009.

3. By the above ratio analysis (Table 5.11: Fish eye view of the ratio analysis) we can

find that the Bank of India is doing better job in maintaining the NPAs.

4. The banks total advances & profitability are increasing year on year, the advances for

the year 2007-08 were Rs. 1,13,476.32 crore it increased to Rs. 1,42,909.37 crore for

the last year 2008-09. The net profit for the year 2006-07 was Rs. 1,123.16 crore; for

2007-08 it was Rs. 2,009.40 crore and it was up to Rs. 3,007.35 crore for 2008-09,

which shows that in spite of increasing advances the NPA ratio is coming down due

to higher level of efficiency.

5. The ratio between NPA to total assets shows the overall effect of non-performing

assets on the organization’s financial operations. The ratio of NPA to total assets for

last three years was 1.48% in 2006-07; 1.08% in 2007-08 and 0.97% in 2008-09. This

shows NPA has less effect on the financial strength of the bank.

6. The Provision Ratio was 61.33% in the year 2006-07 and it has been increased

74.59% in the year 2008-09. This ratio indicates the degree of safety measures

adopted by the Bank.

7. Gross NPA ratio was decreasing year by year; it indicates the quality of the credit

portfolio of the bank. The gross NPA in the year 2006-07 was 2.47%; in 2007-08 it

decreased to 1.70% and the year 2008-09 it was 1.74%.

8. Net NPA ratio drops 1.07 to 0.48 in the year 2006-07 to 2008-09. This ratio indicates

the degree of risk in the portfolio of the bank.

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SUGGESTIONS

Through RBI has introduced number of measures to reduce the problem of increasing

NPAs of the banks such as CDR mechanism. One time settlement schemes, enactment of

SRFAESI act, etc. A lot of measures are desired in terms of effectiveness of these measures.

What I would like to suggest for reducing the evolutions of the NPAs of Bank of India as

under.

1. The bank before providing the credit facilities to the borrower company should

analyze the major heads of the income and expenditure based on the financial

performance of the comparable companies in the industry to identify significant

variances and seek explanation for the same from the company management. They

should also analyze the current financial position of the major assets and liabilities.

2. Bank should evaluate the SWOT analysis of the borrowing companies i.e. how they

would face the environmental threats and opportunities with the use of their strength

and weakness, and what will be their possible future growth in concerned to financial

and operational performance.

3. Proper training is important to the staff of the bank at the appropriate level with on

going process. That how they should deal the problem of NPAs, and what continues

steps they should take to reduce the NPAs.

4. Bank should have its own independent credit rating agency which should evaluate the

financial capacity of the borrower before than credit facility.

5. The credit rating agency should regularly evaluate the financial condition of the

clients.

6. The Bank should have an external auditor / internal auditor and should check the

banks of accounts on regular basis or a monthly basis as they well be aware of the

company’s financial position and take the necessary precautions at an early stage.

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CHAPTER – 7

CONCLUSIONS

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7. CONCLUSION

The problem statement on which I focused my study is “Non-Performing Assets”.

The Indian banking sector is the important service sector that helps the people of the India to

achieve the socio economic objective. The Indian banking sector has helped the business and

service sector to develop by providing them credit facilities and other finance related

facilities. The Indian banking sector is developing with good appreciate as compared to the

global benchmark banks.

The only problem that the Banks are facing today is the problem of non-performing

assets. The non performing assets means those assets which are classified as bad assets which

are not possibly be returned back to the banks by the borrowers. If the proper management of

the NPAs is not undertaken it would hamper the business of the banks. The NPAs would

destroy the current profit, interest income due to large provisions of the NPAs, and would

affect the smooth functioning of the recycling of the funds.

If we analyze the past years data, we may come to know that the NPAs have increased

very drastically after 2001. The RBI has also been trying to take number of measures but the

ratio of NPAs is not decreasing of the banks. The banks must find out the measures to reduce

the evolving problem of the NPAs. If the concept of NPAs is taken very lightly it would be

dangerous for the Indian banking sector. The reduction of the NPAs would help the banks to

boost up their profits, smooth recycling of funds in the nation. This would help the nation to

develop more banking branches and developing the economy by providing the better

financial services to the nation.

There has been a continuous decrease in the time period considered to declare a loan

as non-performing. The continuous decrease in the time period is to bring the Indian banking

norms at par with international norms. This move will certainly reduce the NPAs and in turn

improve the asset quality of the banks.

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APPENDIX

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APPENDIX

Table 8.1: Non Performing Assets of different banks

Public Sector Bank: Total Assets, Gross and Net NPAs (Rs. Crore)

S.NO Banks Total Assets Gross NPA Net NPA NATIONALISED BANKS 2007 2008 2009 2007 2008 2009 2007 2008 2009

1 Allahabad Bank 67664 82939 97648 1094 1011 1078 440 400 422 2 Andhra Bank 47541 56592 68469 397 372 368 47 54 79 3 Bank of Baroda 143146 179600 227407 2092 1981 1843 502 494 451 4 Bank of India 141817 178830 225502 2100 1931 2471 812 592 628 5 Bak of Maharashtra 39009 48151 59030 820 766 798 277 254 272 6 Canara Bank 165961 180529 219646 1493 1273 2168 927 899 1507 7 Central Bank of India 93008 123956 147655 2572 2350 2316 878 1060 1063 8 Corporation Bank 52721 66698 86906 625 584 559 142 127 138 9 Dena Bank 31451 38642 48461 744 573 621 365 215 313 10 Indian Bank 56149 70508 84122 546 487 459 102 98 94 11 Indian Overseas Bank 82257 101838 121073 1120 997 1923 258 363 999 12 Oriental Bank of Commerce 73936 90705 112583 1454 1280 1058 216 538 442 13 Punjab & Sind Bank 21963 30949 41364 291 136 161 77 67 78 14 Punjab National Bank 162422 199020 246919 3391 3319 2767 726 754 264 15 Syndicate Bank 89277 107132 130256 1560 1769 1595 391 623 632 16 UCO Bank 74864 89795 111664 1506 1652 1540 1006 1092 813 17 Union Bank of India 102678 123992 160976 1873 1657 1923 601 128 326 18 United Bank of India 42310 54311 62041 817 761 1020 333 306 525 19 Vijaya Bank 42357 56184 62383 564 512 699 144 182 292

TOTAL of 19 Nationalised Banks (I)

1530531

1880271

2314103

25060

23410

25368

8244

8245

9339

II State Bank of India (SBI) 566565 721526 964432 9998 12837 15589 5258 7424 9552 III ASSOCIATES OF SBI 1 State Bank of Bikaner &

Jaipur 34507 41154 46370 463 437 490 223 209 253

2 State Bank of Hyderabad 49052 61620 76722 351 312 486 61 57 166 3 State Bank of Indore 24527 29276 33076 294 265 301 159 134 193 4 State Bank of Mysore 26843 33070 40486 384 359 368 75 89 129 5 State Bank of Patiala 47461 59060 69665 524 521 574 238 217 264 6 State Bank of Saurashtra 18847 21358 - 122 175 - 78 111 - 7 State Bank of Travancore 37993 43894 49461 540 571 544 268 268 188

TOTAL of 7 Associates (III)

239230 289432 315780 2679 2640 2764 1102 1085 1193

TOTAL of state Bank group (II +III)

805795 1010959 1280212 12677 15478 18352 6359 8509 10745

Other Public Sector Banks 1 IDBI Bank Ltd. 103839 130694 172402 1232 1565 1436 722 1083 949

TOTAL of Public Sector Banks (I+II+III+IV)

2440166 3021924 3766717 38968 40452 45156 15325 17836 21033

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Table 8.2: Bank-wise Gross Non-Performing Assets, Gross Advances and Gross NPA ratio of Nationalized Bank

Sl.NO Banks As on March 31, 2009

Gross NPAs Gross Advances

Gross NPA Ratio (%)

(1) (2) (3) NATIONALISED BANKS

1 Allahabad Bank 107825 5944340 1.81 2 Andhra Bank 36814 4442760 0.83 3 Bank of Baroda 184293 14484487 1.27 4 Bank of India 247088 14473156 1.71 5 Bak of Maharashtra 79841 3481728 2.29 6 Canara Bank 216797 13903691 1.56 7 Central Bank of India 231655 8674027 2.67 8 Corporation Bank 55922 4892712 1.14 9 Dena Bank 62077 2918536 2.13 10 Indian Bank 45918 5183064 0.89 11 Indian Overseas Bank 192341 7580954 2.54 12 Oriental Bank of Commerce 105812 6906472 1.53 13 Punjab & Sind Bank 16104 2469810 0.65 14 Punjab National Bank 276746 15609845 1.77 15 Syndicate Bank 159454 8249504 1.93 16 UCO Bank 153951 6966905 2.21 17 Union Bank of India 192335 9826485 1.96 18 United Bank of India 101956 3572745 2.85 19 Vijaya Bank 69882 3587463 1.95

Table 8.3: Balance Sheet of Bank of India

BANK OF INDIA BALANCE SHEET AS AT 31ST MARCH, 2009

(000’s Omitted) Particular As at

31-03-2009 As at

31-03-2008 CAPITAL AND LIABILITIES Capital Reserves & Surplus Deposits Borrowings Other Liabilities and Provisions TOTAL

5,259,146 129,690,067 1,897,084,797 94,869,763 128,113,898

5,259,146 100,634,764 1,500,119,812 71,724,490 110,561,565

2,255,017,671 1,788,299,777

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ASSETS Cash and balances with Reserve bank of India Balance with Banks and money at call and short notice Investments Advances Fixed Assets Other Assets TOTAL Contingent Liabilities Bills foe Collection

89,152,845 128,459,711 526,071,791 1,429,093,738 25,319,347 56,920,239

117,418,505 59,755,389 418,028,767 1,134,763,264 24,260,671 34,073,181

2,255,017,671 1,788,299,777 1,222,665,860 114,907,372

1,494,889,837 80,945,798

Table 8.4: Profit & Loss Account of Bank of India

BANK OF INDIA PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2009

(000’s Omitted)

Particular For the year

ended 31-03-2009

For the year ended

31-03-2008 INCOME Interest earned Other income TOTAL EXPENDITURE Interest expended Operating expenses Provisions and Contingencies TOTAL PROFIT Net Profit for the year Add: Profit brought forward TOTAL

163,473,479 30,518,627

123,552,212 21,169,261

193,992,206 144,721,473

108,484,531 30,939,633 24,494,579

81,259,517 26,449,874 16,918,056

163,918,743 124,627,447

30,073,463 0

20,094,026 5,417,591

30,073,463 25,511,617

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APPROPRIATIONS Transfer to Statutory Reserve Transfer to Revenue Reserve Transfer to Capital Reserve Transfer (from) / to Special Reserve-Currency Swap Interim Dividend (including dividend tax) Final Dividend (including dividend tax) Special Reserve u/s Sec 36(1) (vii) of Income Tax Act, 1961 Balance in Profit and loss Account TOTAL Earning Per Share (Rs)

8,000,000 9,974,714 5,692,579

(9,261) 1,843,287 3,072,144 1,500,000

0

7,000,000

15,096,101 428,209 29,594

0 2,457,713 500,000

0

30,073,463 25,511,617

57.26 40.83

Table 8.5: NPA Ratios of Bank of India

Particulars 2006-07 2007-08 2008-09

Gross NPA (in crores)

Net NPA (in crores)

Gross NPA Ratio (%)

Net NPA Ratio (%)

Provision Ratio (%)

Problem Assets Ratio (%)

Capital Adequacy Ratio (%)

2,100

812

2.47

1.07

43.95

1.48

12.23

1,930

592

1.70

0.57

57.22

1.08

10.68

2,471

628

1.73

0.48

51.84

0.97

12.65

Table 8.6: Sector wise Breakup of NPA (INR in Mn)

Dec - 08 Dec - 09 % of total NPA % of Total Sectoral Advances

Agriculture

MSME

3,317

10,770

4,160

17,056

10.56

43.31

7.73

4.32

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Retail credit

Other (Industry, Trade, Real estate Misc)

Domestic (total)

Foreign

Global (total)

7,176

8,241

29,504

2,089

31,593

6,572

11,596

39,384

3,896

54,437

16.69

29.44

2.91

Table 8.7: Overseas NPAs (INR in Mn)

Dec 08 Dec 09

Trade

Manufacturing

Real Estate

Other

Total

803.2

238.5

597.2

450.2

1244.0

549.1

1289.1

771.7

2089.2 3853.9

Figure 8.1: Overseas NPAs

803.2

238.5

597.2

450.2

1244

549.1

1289.1

771.1

0

200

400

600

800

1000

1200

1400

Trade Manufacturing Real Estate Other

8-Dec 9-Dec

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PRESS RELEASE OF BANK OF INDIA

HIGHLIGHTS FOR THE YEAR ENDED 31st MARCH 2009

• Business Mix reaches Rs.334440 crores - robust rise of 26.30 % .

• Net Profit shoots up by 49.68% from Rs.2009 crores to Rs.3007 crores.

• Operating Profit up by 47.45% (Rs. 5457Crore) supported by growth in net interest income as well as other income.

• Core Operating Profit (net of Treasury) up by 41.26% (Rs. 4711 Crore) from Rs. 3335 Crore in Mar’08.

• Net Interest Income rises by 30.03% to Rs. 5499Cr from Rs. 4229 Cr, despite challenging conditions.

• Net Interest Margin improves from 2.95% to 2.97%.

• Non Interest Income smartly rises by 44.17% from Rs 2117 crores to Rs 3052 crores.

• Gross NPA ratio at 1.71% .

• Net NPA ratio drops to 0.44% from 0.52% as on March 2008.

• Provision coverage maintained at 74.58%.

• Cost to Income Ratio has improved substantially from 41.68% to 36.18%.

• Return on Assets jumped from 1.25% to 1.49 %.

• Total Income for the Quarter rose to Rs.5278 Crore from Rs.4155 Crore , showing a growth of 27.03%.

• Bank has made adequate provisions for terminal benefits, in line with AS 15 requirements. Rs. 384.60 Cr estimated and provided .

• CASA amounted to Rs. 48637 crores constituting 31% of Total Deposits

• Earnings per share for 12 months goes up sharply from Rs. 40.83 to Rs.57.26.

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• Book value per share rises from Rs. 164.05 to Rs.211.89.

• Capital Adequacy Ratio rises to 13.01% from 12.04%as per Basel II .

• Deposits grew by 26.46% on YoY basis to Rs.1,89,708 crores.

• Advances rose by 26.08% to reach Rs.1,44,732 crores.

• Total no of branches are 3021.

• 2593 branches are functioning on CBS platform covering above 97% of the business, spanning over 700 cities & towns.

• Agricultural Debt Waiver & Debt Relief Scheme, 2008 fully implemented.

• Networth of the Bank surpasses Rs.11100 crores.

OTHER HIGHLIGHTS

• Bank of India has been selected as the Top Indian Company under the ‘Banks’

sector for the Dun & Bradstreet – Rolta Corporate Awards 2008.

• Bank of India has won the TOP PUBLIC SECTOR BANK under BEST BANK

category and OVERALL BEST BANK in the DUN and BRADSTREET

BANKING AWARDS 2009.

• Bank of India records outstanding performance under Collateral Free Lending with

CGTMSE Guarantee Scheme of SIDBI for the year 2008-2009.

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BIBLIOGRAPHY

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BIBLIOGRAPHY

Books Referred

• Banking and Law Practices (S L Gupta)

• Macro economics (D N Dwivedi)

Journal Referred

• Journal of Reserve Bank of India

• Banking Finance

• Udyog Pragati (The Journal for Practising Managers)

Websites visited

• www.bankofindia.com

• www.rbi.org.in

• www.businesstandard.com

Research Reports

• Indian bank association report

• Antique research

• Indiabulls report

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ABBREVIATION

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ABBREVIATION

NPAs : Non Performing Assets

BOI : Bank of India

CDR : Credit Deposit Ratio

CAR : Capital Adequacy Ratio

GDP : Gross Domestic Product

EFTPOS : Electronic Funds Transfer at Point of Sales

OD/CC : Overdraft / Cash Credit

OTM : Optical Translation Measurement

ROI : Return On Investment

EWS : Early Warning Systems

DRTs : Debt Recovery Tribunals

CIBIL : Credit Information Bureau (India) Limited

SWIFT : Society for Worldwide Interbank Financial Telecommunication

BSE : Bombay Stock Exchange

STCI : Securities Trading Corporation of India Limited

CIBIL : Credit Information Bureau

SRFAESI act : The Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interests Act.