1.

1 INTRODUTION TO THE TOPIC DEFINITION OF NPAs: A NPA is a loan or an advance where; Interest and/ or installment of principal remain overdue for a period of more th an 90 days in respect of a term loan. The account remains out of order in respect of an overdraft/ cash credit. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. The installment or interest remains overdue for two crop seasons in case of shor t duration crops and for one crop season in case of long duration crops.

1.2 STATEMENT OF THE PROBLEM NPA is a grave issue for banks because it directly affects the business of the b anks and economy of the country as well thats the reason I have selected the topi c Non Performing Assets Management, so my topic throw light on the major reasons that are responsible for the increase of NPA. The topic also enables the effect of NPAs on banks and it is also responsible for failure of the banks. NPA has it s impact on profitability of the banks. Therefore the banks have to take necessary corrective actions in order to cope u p with the situation of NPA and it should be controlled. 1.3 OBJECTIVE OF THE STUDY The basic idea behind undertaking the Grand Project on NPA was to: To know about the concept of NPA. Study the Prudential Norms with respect to Income Recognition, Asset Classificat ion and Provisioning norms. To identify the Causes of Non-Performing Assets and their Impact on Dena Bank. To study the remedial measures taken by Dena bank to reduce NPA. To study the reason behind the growth of NPAs. To study the comparison of loans & advances of peer group banks. To study the past trends of NPA in Dena Bank with reference to 3 sectors 1.4 SIGNIFICANCE OF THE TOPIC In the world of competition, fund plays a very important role these fund are not always available in abundance with every individual. This particular problem is solved by borrowers is one of the major activities. These fund when lend have to be recovered profitably and within the stipulated t ime so as to redirect them toward some other gainful activity. Such recovery pro cess is an essential task of the financial institution as there non-recovery giv es rise to NPA. NPA Management is a grave issue that has to be addressed with du

e importance. Thus the topic throw light on the core facts of the banking industry for which t he project work has been taken up. NPA is a grave issue for the bankers therefore to overcome from this problem the bankers have to adopt certain practices with respect to sanctioning the loans a nd advances. They should monitor the projects for which they have approved the l oan amount.

1.5 FUTURE SCOPE & LIMITATIONS Future Scope A banker is a dealer in money and credit. The business of banking consists of bo rrowing and lending. Bank acts as financial intermediaries between savers (lende rs) and investor (borrowers) by accepting deposit of money from the large number of the customer and the lending a major portion of accumulated "POOL" of money to those who wish to borrow. In this process bank give reasonable return to the saver, makes funds available to investor at a cost and earn a profit for themsel ves after covering the cost of funds and paying or providing for corporate tax to the government banks serving both private sectors as their deposit and lendin g services are utilizes by the shareholder, companies and government agencies. Limitations Following are the limitations for carrying out this project work. As the project was restricted for the period of two months, hence the data obtai ned may not be sufficient for interpretation. The study was related to the Financial Services sector where the Financial Insti tution did not give each & every information of their working procedure. The study is based on the past data & may not be true indicator of future perfor mance.

2.1 CONCEPTS RELATING TO STUDY TOPIC LOANS AND ADVANCES Loan and advances is a major service provided by the banks. The major portion of the bank deposits is employed by the way of loans and advances, which is the mo st profitable employment of its funds. Loans may be provided for a short-term, long-term and medium term. The loans may be new venture, housing purpose, for expansion for personal purpose. Normally t hese loans are paid in installments. Therefore the loan can be classified as Personal loans Housing loans Term loans A. Short term

B. Medium term C. Long term Loan against hypothecation Loan against FDR etc. Before granting a loan to any borrower bank has to scrutinize the project or the various documents. If this is not taken due care of the asset may turn into a b ad debts thus resulting into losses for the bank i.e. a default.

NON PERFORMING ASSETS (NPA) 2.2 INTRODUCTION OF THE TOPIC Non-performing asset means an asset or account of borrower ,which has been clas sified by bank or financial institution as sub standard , doubtful or loss asset , in accordance with the direction or guidelines relating to assets classi fication issued by RBI . An amount due under any credit facility is treated as past due when it is not be en paid within 30 days from the due date. Due to the improvement in the payment and settlement system, recovery climate, up gradation of technology in the banki ng system etc. it was decided to dispense with past due concept, with effect from March 31, 2001. Accordingly as from that date, a Non performing asset shall be a n advance where: Interest and/or installment of principal remain overdue for a period of more t han 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) Bill remains overdue for a period of more than 180 days in case of bill purchase d or discounted. The Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultu ral purpose ,and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts Out of order An account should be treated as out of order if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. In case where the out standing balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period ,these account should be treated as out of order. Overdue Any amount due to the bank under any credit facility is overdue if it is not paid on due date fixed by the bank. 2.3 INCOME RECOGNITION Income Recognition Policy The policy of income recognition has to be objective and based on the record of recovery. Internationally income from nonperforming assets (NPA) is not recognise d on accrual basis but is booked as income only when it is actually received. Th erefore, the banks should not charge and take to income account interest on any NPA. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life p olicies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of renegotiations or resched

uling of outstanding debts should be recognised on an accrual basis over the per iod of time covered by the renegotiated or rescheduled extension of credit. If Government guaranteed advances become NPA, the interest on such advances shou ld not be taken to income account unless the interest has been realized. Reversal of income If any advance, including bills purchased and discounted, becomes NPA, the entir e interest accrued and credited to income account in the past periods, should be reversed if the same is not realized. This will apply to Government guaranteed accounts also. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to pa st periods, if uncollected. 2.4 ASSET CLASSIFICATION Banks are required to classify non performing assets further into the following f our categories based on the period for which the asset has remained non performin g and the reliability of the dues: The assets are classified into the following broad groups, viz. (i) Standard Assets (ii) Sub-standard Assets (iii) Doubtful Assets (iv) Loss Assets 1 Standard Asset A Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA. 2 Sub-standard Assets (I) An asset is classified as sub-standard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower s or guarantors or the current market value of the security charged is not enoug h to ensure recovery of the dues to the banks in full. In other words, such assets have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility th at the banks will sustain some loss, if deficiencies are not corrected. (ii) An asset where the terms of the loan agreement regarding interest and princ ipal have been rescheduled after commencement of production should be classified as sub-standard and should remain in such category for at least 12 months of sa tisfactory performance under the rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condit ion. 3 Doubtful Assets An asset is classified as doubtful, if it has remained NPA for more than 12 mont hs. A loan classified as doubtful has all the weaknesses inherent as that class ified as sub-standard, with the added characteristic that the weaknesses make co llection or liquidation in full, highly questionable and improbable. 4 Loss Assets A loss asset is one where loss has been identified by the bank or internal or ex ternal auditors or by the Co-operation Department or by the Reserve Bank of Indi a inspection but the amount has not been written off, wholly or partly. In other words, such an asset is considered un-collectible and of such little va lue that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

2.5 GUIDELINES FOR CLASSIFICATION OF ASSETS Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high val ue accounts. The banks may fix a minimum cut off point to decide what would cons titute a high value account depending upon their respective business levels. The cutoff point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any r eason 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 guidel ines. 2.5.1. Availability of security / net worth of borrower/ guarantor The availability of security or net worth of borrower/ guarantor should not be t aken into account for the purpose of treating an advance as NPA or otherwise, ex cept to the extent provided as income recognition is based on record of recovery . 2.5.2. 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 ad equate drawing power based on the latest available stock statement, balance outs tanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines: i) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the st ock statement which is current. However, considering the difficulties of large b orrowers, stock statements relied upon by the banks for determining drawing powe r should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would b e deemed as irregular. A working capital borrower account will become NPA if such irregular drawings ar e permitted in the account for a continuous period of 90 days even though the un it may be working or the borrower s financial position is satisfactory. ii) Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the due date/date of ad hoc sanction. In case of constrai nts such as non-availability of financial statements and other data from the borr owers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account w here the regular/ ad hoc credit limits have not been reviewed/ renewed within 18 0 days from the due date/ date of ad hoc sanction will be treated as NPA. 2.5.3. Accounts regularized near about the balance sheet date The asset classification of borrower accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and witho ut 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 gen uine cases, the banks must furnish satisfactory evidence to the Statutory Audito rs/Inspecting Officers about the manner of regularization of the account to elim inate doubts on their performing status. 2.5.4. Asset Classification to be borrower-wise and not facility-wise i) It is difficult to envisage a situation when only one facility to a borrower/ one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a ba nk to a borrower and investment in all the securities issued by the borrower wil l have to be treated as NPA/NPI and not the particular facility/investment or pa

rt thereof which has become irregular. ii) If the debits arising out of devolvement of letters of credit or invoked g uarantees are parked in a separate account, the balance outstanding in that acco unt also should be treated as a part of the borrowers principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. iii) The bills discounted under LC favouring a borrower may not be classified as a Non-performing advance (NPA), when any other facility granted to the borrower is classified as NPA. However, in case documents under LC are not accepted on p resentation or the payment under the LC is not made on the due date by the LC is suing bank for any reason and the borrower does not immediately make good the am ount disbursed as a result of discounting of concerned bills, the outstanding bi lls discounted will immediately be classified as NPA with effect from the date w hen the other facilities had been classified as NPA. iv) The overdue receivables representing positive mark-to-market value of a deri vative contract will be treated as a non-performing asset, if these remain unpai d for 90 days or more. In case the overdue arising from forward contracts and pl ain vanilla swaps and options become NPAs, all other funded facilities granted t o the client shall also be classified as non-performing asset following the prin ciple of borrower-wise classification as per the existing asset classification n orms. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain va nilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystalized or might crystallize in future and is / becomes receivable from the client, should be parked in a separate account main tained in the name of the client / counterparty. This amount, even if overdue fo r a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classificati on, though such receivable overdue for 90 days or more shall itself be classifie d as NPA, as per the extant IRAC norms. The classification of all other assets o f such clients will, however, continue to be governed by the extant IRAC norms. v) In cases where the contract provides for settlement of the current mark-to-ma rket value of a derivative contract before its maturity, only the current credit exposure (not the potential future exposure) will be classified as a non-perfor ming asset after an overdue period of 90 days. vi) As the overdue receivables mentioned above would represent unrealized incom e already booked by the bank on accrual basis, after 90 days of overdue period, the amount already taken to Profit and Loss a/c should be reversed. 2.5.5. Advances under consortium arrangements Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the a ccount will be treated as not serviced in the books of the other member banks an d therefore, be treated as NPA. The banks participating in the consortium should , therefore, arrange to get their share of recovery transferred from the lead ba nk or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. 2.5.6. Accounts where there is erosion in the value of security/frauds committed by borrowers In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existenc e of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classif ied as doubtful or loss asset as appropriate: Erosion in the value of security can be reckoned as significant when the realiza ble value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such

NPAs may be straightaway classified under doubtful category and provisioning sh ould be made as applicable to doubtful assets. If the realizable value of the security, as assessed by the bank/ approved value s/ RBI is less than 10 per cent of the outstanding in the borrower accounts, the existence of security should be ignored and the asset should be straightaway cl assified as loss asset. It may be either written off or fully provided for by th e bank. 2.5.7. Advances to PACS/FSS ceded to Commercial Banks In respect of agricultural advances as well as advances for other purposes grant ed by banks to PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS which is in default for a period of two crop seas ons in case of short duration crops and one crop season in case of long duration crops, as the case may be, after it has become due will be classified as NPA an d not all the credit facilities sanctioned to a PACS/ FSS. The other direct loan s & advances, if any, granted by the bank to the member borrower of a PACS/ FSS outside the on-lending arrangement will become NPA even if one of the credit faci lities granted to the same borrower becomes NPA. 2.5.8. Advances against Term Deposits, NSCs, KVP/IVP. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all oth er securities are not covered by this exemption. 2.5.9. Loans with moratorium for payment of interest In the case of bank finance given for industrial projects or for agricultural pl antations etc. where moratorium is available for payment of interest, payment of interest becomes due only after the moratorium or gestation period is over. T herefore, such amounts of interest do not become overdue and hence do not become NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected. In the case of housing loan or similar advances granted to staff members where i nterest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classif ied as NPA only when there is a default in repayment of installment of principal or payment of interest on the respective due dates. 2.5.10. Agricultural advances A loan granted for short duration crops will be treated as NPA, if the installme nt of principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops will be treated as NPA, if the installment of p rincipal or interest thereon remains overdue for one crop season. For the purpos e of these guidelines, long duration crops would be crops with crop season longer than one year and crops, which are not long duration crops would be treated as shor t duration crops. The crop season for each crop, which means the period up to har vesting of the crops rose, would be as determined by the State Level Bankers Comm ittee in each State. Depending upon the duration of crops raised by an agricultu rist, the above NPA norms would also be made applicable to agricultural term loa ns availed of by him. In such cases of conversion or re-schedulement, the term loan as well as fresh sh ort-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revi sed terms & conditions and would be treated as NPA if interest and/or installmen t of principal remain overdue for two crop seasons for short duration crops and for one crop season for long duration crops. For the purpose of these guidelines , "long duration" crops would be crops with crop season longer than one year and crops, which are not long duration" would be treated as "short duration" crops . While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Financ e Scheme, banks should ensure that the interest/installment payable on such adva nces are linked to crop cycles. 2.5.11. Government guaranteed advances

The credit facilities backed by guarantee of the Central Government though overd ue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income. The requirement of invocat ion of guarantee has been delinked for deciding the asset classification and pro visioning requirements in respect of State Government guaranteed exposures. With effect from the year ending 31 March 2006 State Government guaranteed advances and investments in State Government guaranteed securities would attract asset cl assification and provisioning norms if interest and/or principal or any other am ount due to the bank remains overdue for more than 90 days. 2.5.12. Takeout Finance Takeout finance is the product emerging in the context of the funding of long-ter m infrastructure projects. Under this arrangement, the institution/the bank fina ncing infrastructure projects will have an arrangement with any financial instit ution for transferring to the latter the outstanding in respect of such financin g in their books on a predetermined basis. In view of the time-lag involved in tak ing-over, the possibility of a default in the meantime cannot be ruled out. The n orms of asset classification will have to be followed by the concerned bank/fina ncial institution in whose books the account stands as balance sheet item as on the relevant date. If the lending institution observes that the asset has turned NPA on the basis of the record of recovery, it should be classified accordingly . The lending institution should not recognize income on accrual basis and accou nt for the same only when it is paid by the borrower/ taking over institution (i f the arrangement so provides). 2.5.14. Post-shipment Supplier s Credit In respect of post-shipment credit extended by the banks covering export of goods to countries for which the ECGCs cover is available, EXIM Bank has introduced a guarantee-cum-refinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days from the day t he bank invokes the guarantee after the exporter has filed claim with ECGC. Accordingly, to the extent payment has been received from the EXIM Bank, the adv ance may not be treated as a nonperforming asset for asset classification and pro visioning purposes. 2.5.15. Export Project Finance In respect of export project finance, there could be instances where the actual importer has paid the dues to the bank abroad but the bank in turn is unable to remit the amount due to political developments such as war, strife, UN embargo, etc. In such cases, where the lending bank is able to establish through documentary e vidence that the importer has cleared the dues in full by depositing the amount in the bank abroad before it turned into NPA in the books of the bank, but the i mporter s country is not allowing the funds to be remitted due to political or o ther reasons, the asset classification may be made after a period of one year fr om the date the amount was deposited by the importer in the bank abroad. 2.5.16. Advances under rehabilitation approved by BIFR/ TLI Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been renegotiated unless the package of renegotiated terms has worked satisfactorily for a period of one year. While the existing credit f acilities sanctioned to a unit under rehabilitation packages approved by BIFR/te rm lending institutions will continue to be classified as substandard or doubtful as the case may be, in respect of additional facilities sanctioned under the re habilitation packages, the Income Recognition, Asset Classification norms will b ecome applicable after a period of one year from the date of disbursement 2.6 REASONS FOR GROWTH OF NPA The development and proliferation in the activities of the bank has led to everincreasing non-performing assets that have mounted to an enormous amount during the last decade or so. The quantum of NPAs has been calculated and put at differ

ent figures mainly due to absence of proper statistics and the method on the bas is adopted for calculating the percentage of NPAs in relation to either the tota l assets of the bank or the amount of loan portfolio or on the basis of the numb er of the accounts or the size of the outstanding advances. But till recently li ttle attention was paid to the real reasons as to why and how non-performing ass ets have appeared in the books of the banks and also the books of many of the fi nancial institutions. For a large number of years, the banks have been taking cr edit in its books, on basis of accrued interest income, even for the amount of p eriodic interest that was not actually paid by the borrower. This was done by r aising debit in suspense account and crediting amount equal to the periodic inte rest in the loan account of the borrower. After objections from the auditors an d income tax authority the banks changed strategy and started giving additional loans to the defaulting borrowers for the purpose of making payments to the bank for adjustment of the over dues, in many cases the due dates of payments were p ostponed and even the entire duration of the loan was extended further again and again. As if to add fire to the fuel, ambitious programmed for branch developme nt and extension of banking services led to new recruitments, transfers, relocat ion and unhealthy competition amongst offices of the same bank, but at the same time adequate facilities available for training of the staff were not expanded. In the anxiety to achieve business targets the rules and procedures for prudent banking were conveniently forgotten. Even the higher management setup convenien tly relaxed the rules for proper appraisal of the loan proposals, the provisions of standard bank sanction letter, errors in execution of the loan agreements, d eeds of hypothecation and mortgages were more often overlooked for compliance in the hurry for disbursement and achievement of targets for purposes of building up record of achievements and reporting. There are several reasons for an account becoming NPA. 2.6.1. Internal factors Internal factors: These are the factors which are within the control of the bank management or the borrower and attributable to them. A) Due to fault of the bank: 1. Poor credit appraisal: Irrespective of the size of the project, almost 70-75 percent of the investment is financed by banks and financial institutions and 25-30 percent comes from the promoters as their contribution in form of capital. In other words, banks and f inancial institutions finance major part of the investment in all the projects. It is thus the job of the banker to properly scrutinize the projects and stay aw ay from unviable ones. He should screen the potential projects to determine expe cted risk and return. Future growth prospects of the project and that of the ind ustry, effects of various government policies, environment etc. should also be c onsidered. There may be situations where many borrowers hide information while b orrowing and once the loans are granted they default. Adverse selection of the p rojects without properly scrutinizing their viability has led to substantial acc umulation of NPA in the banks. 2. Poor credit monitoring: Once lending decisions are made, ongoing monitoring needs to be done with a view to prevent moral hazard or otherwise in order to assure the maximum possibility of repayment. A very strong credit monitoring system needs to be in place to do the post sanction follow up. It can identify in advance whether a loan is turni ng bad. However many banks fail in this aspect. They fail to do the post sanctio n follow up. Unless a close watch is kept on the accounts irregularities cannot be detected. This is also a major reason for rising NPAs in banks. 3. Lack of organizational learning in the bank - repeated lending to the sa me person or group of persons with similar dubious characteristics: Organizational learning on the part of the bank is very important in controlling the growth of NPA. It is obvious that with the experience of repeated lending o ver a period of time to varieties of borrowers, a bank can identify a particular type of borrower who is more likely to default. But in practice it fails to lea rn from the past. Due to several constraints, whether internal or external, like

political interference, it cannot bar these potential defaulters. For instance, loans have been extended to, Industries in the negative list circulated by IDBI, department of industries and RBI. Existing accounts, which have gone irregular. A party, which is irregular on existing accounts in a different branch of the sa me bank. Several projects with promoters or directors with doubtful integrity. 4. Improper repayment schedule: The repayment schedule should be decided according to the project and the abilit y of the borrower. It should be such that it does not adversely affect the cash flows of the project. Inefficient decisions have resulted in many newly born pro jects turning sick or closing down. There are instances in which installments an d interest have become due before the commencement of commercial production. Thi s poses a financial burden on the borrower and at times he may borrow more at hi gher cost to service the debt in the initial stages. Thus further repayment of l oan becomes a problem. 5. Contagious Default: When a borrower cannot pay back the due because of the fact that his venture fai led and he escapes any form of penalty, this induces another to default, even wh en he has the capacity to pay back. In such a scenario, occurrence of NPA leads to creation of additional NPA, a phenomenon called contagious default. 6. Forced lending: Banks are not free from this problem. They are forced either by the government o r by the top management to extend loans to borrowers irrespective of requirement , usage of the money, credibility or ability to repay. While devising such progr ammers no methods are devised for recovering loans in case of default. This lead s to the formation of NPA. 7. Targeted lending: Targets are set for lending under certain schemes. Credit is disbursed just to m eet the target and whether the borrower is a potential borrower or not is not co nsidered. Proper credit appraisal is not done before lending. Such accounts in m any cases turn bad. Though loans of small amount may be granted under such schem es, big loans should not be granted. 8. Adverse selection of borrowers: In many cases it so happens that because of high level of NPAs the profitability of the bank gets affected. Thus they are forced to increase their interest rate s on loans. Due to this the genuine borrowers shift to other banks, which offer lower interest rates. In such a case the bank is forced to grant loans to risky borrowers. This increases the risk of further NPAs. The bank gets into a trap wh ere due to existing high NPAs, the chance of further NPAs increases. 9. Inadequacy of trained staff: The bank needs to have highly trained and knowledgeable staff, which can apprais e the loans properly. Absence of these will cause more NPA. It is the responsibi lity of the bank to train its staff properly so that they can carry out function s like risk assessment, credit appraisal and monitoring. B) Due to fault of the borrower: 1. Willful default: There have been a number of borrowers who have strategically defaulted on their debt service obligations realizing that the legal recourse available to creditor s is slow in achieving results. 2. Diversion of funds: Sometimes the borrower may take a loan for a particular purpose and use the loan amount for some other purpose. The borrower may engage in activities that may b e personally beneficial to him but may increase the probability of default and t hus harm the lender. The borrower may invest in unprofitable projects, in projec ts with higher risk, in which the borrower profits if the project succeeds but t he lender bears most of the loss if the project fails. In many cases the borrowe r instead of using the loan amount for the required purpose, uses it mostly for

expansion, diversification, and modernization of the existing plant. Due to this the project for which the loan is taken does not materialize and the loan turns bad. 3. Incorrect financial information: In many cases borrowers submit incorrect financial statements, stock statements, security etc. to get their loans sanctioned. Even during business visits the bo rrower is able to show a good picture. The bank is unaware of the actual facts a nd grants the loan on the basis of documents. These loans ultimately become bad. 4. Inefficient management: Many borrowers do not have the business acumen to do business effectively. In sp ite of the other factors being present like adequate finance the project does no t yield adequate returns because of mismanagement on the part of the promoters. Such promoters do not have effective marketing or financial skills due to which the project fails. This leads to loss to 1 the bank as their advances get stuck in the process. 2.6.2 External Factors: The external factors are those which are beyond the control of the banks and thu s, the banks cannot be held responsible for the defaults caused by these factors . Some external causes are: 1. Natural calamities like floods and accidents: Due to natural calamities the manufacturing units, factories etc. get destroyed and the borrowers are left with no means to repay the loans. The bank cannot enf orce the security on the loan as that also gets destroyed. Thus the advance give n for the projects becomes bad. 2. Change in Government policies: Government policies are responsible to some extent for adding to the volume of n on-performing assets of banks. Projects are undertaken keeping in mind current p olicies. But when the policies are changed the prospects of certain projects get s affected, as the new policy may be different from the earlier one. At this sta ge the project cannot be reversed, thus leading to its failure. 3. Change in technology: Sometimes projects are started keeping in mind that the plant will run on a part icular technology. But the technology may change over time making the old techno logy totally obsolete. Due to these factors the cost of the project increases th ereby affecting the profitability of the unit and the repayment of the loan. 4. Labors problems, non-availability and price escalations of raw materials, p ower shortage: For smooth functioning of the project it is very essential that the operational aspects like raw material, power, labor etc. are available on time. If these are not available on time the prospects of the project fail. Manufacturing gets del ayed and profitability gets affected. Ultimately the loan turns bad. 5. Loan waiver schemes of the government: The government in many cases grants various incentives, concessions and waivers to the loans to people in the rural areas. Due to this people develop an attitud e that they can take benefit of concessions and so they dont repay the loans. Als o those who pay before such waivers are announced feel frustrated and default on the subsequent loans that they take. 6. Defaulter friendly legal system: The legal system in India does not permit early recovery of dues. It is sympathe tic towards borrowers and works against banks interest. These legal procedures ar e a drain on resources and are highly time consuming as the matters get invariab ly delayed with law courts granting adjournments one after another for any small reason. More money is spent than what is hoped to be recovered by pursuing thes e cases in the courts of law. 7. Tax benefits: Our tax policies are such that they encourage debt more than equity. Through deb t financing, the borrower gets a tax shield, which reduces his tax burden. This encourages the businessmen to take more debt and a situation arises when the deb t becomes unmanageable because of the rising interest and installments. Thus the borrower defaults on payment and the account becomes an NPA.

2.7 IMPACT OF NPA Since the banking sector reforms, NPAs have become the most critical factor gove rning the performance of banks. NPAs have various implications on profitability, liquidity and solvency of the banks. Some of the implication is: 2.7.1. Impact on Profitability: Performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact o n banks profitability as legally banks are not allowed to book income on such ac counts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. The enormous provisioning of NP A together with the holding cost of such non-productive assets over the years ha s acted as a severe drain on the profitability of the banks. Also due to the advance becoming bad, interest is not received on it and hence t he income reduces to that extent. They are not merely non-remunerative but also cost absorbing and profit eroding. 2.7.2. Excessive Capital requirement: Writing off of loans requires capital and the banks have to maintain capital ade quacy even on NPAs. The capital adequacy ratio is directly related to the qualit y of loan assets of the Bank. A bank can make losses and requires capital to wri te it off. Since these losses are written off against capital, fresh capital is required whenever any advance is written off. Thus any increase in defaults will require increase in capital whenever they are written off. Every bank has to maintain some amount of capital in the books on the basis of i ts risk-weighted average of assets. If an advance turns bad, it continues to be a part of the assets thus requiring the bank to maintain that much amount of cap ital in the books. No interest is earned on the advance but still the bank has t o maintain capital on assets, which are not yielding any income. 2.7.3. Excessive focus on credit risk management: The most important business implication of NPAs is that it leads to credit risk management assuming priority over the other aspects of banks functioning. The ban ks whole machinery would thus be pre-occupied with recovery procedures rather tha n concentrating on expanding business. 2.7.4. High cost of funds due to NPAs: Banks are profit-making organizations. They lend money after charging a desired spread, which is the gap between the deposit rate and the lending rate. On accou nt of the burden of heavy NPAs, banks are forced to increase the spread on the l oans given to other borrowers to maintain their profitability. Thus genuine borr owers face the difficulties in raising funds from banks due to mounting NPAs. Ei ther the bank is reluctant in providing the requisite funds to the genuine borro wers or if the funds are provided, they come at a very high cost to compensate t he lenders losses caused due to high level of NPAs. 2.7.5. Attitude of bankers towards credit delivery: The fear of NPAs has affected the psychology of the bank managers in entertainin g new projects for credit expansion. The psychology of the banks today is to ins ulate them with zero percent risk and turn lukewarm to fresh credit. The fear ps ychosis has also lead to excessive security-consciousness in the approach toward s lending to the small and medium sized credit customers. 2.7.6. Moral hazard: It is a situation in which the presence of insurance or the expectation of compe nsating policy weakens or distorts incentives to prudent behavior. If the loans that a bank grants are covered by some insurance then the bank may not be bother ed about NPAs. They feel that if a borrower defaults they would get the claim fr om the insurer. Thus they may not give much importance to appraisal. 2.7.7. Slow recycling of funds: The advances that are repaid and the interest on them that a bank gets are recyc led to give further advances. Now if an account turns bad funds are not received thus slowing down the process. Supply of funds gets reduced which affects credi t expansion. Thus there is slow recycling if funds and the bank cannot lend mone

y for productive activities to improve earnings. 2.7. 8. Asset Liability mismatch: Increasing NPAs result in asset liability mismatch. If non-interest earning asse ts i.e. NPAs are funded through short term liabilities there will be a mismatch. To avoid this mismatch NPAs should be funded by long-term liabilities. But it b ecomes difficult to mobilize large amount of long-term funds for these assets. 2.7.9. Reputation risk: The credit rating of a bank may get affected due to disclosures on quantum and m ovement of NPAs, provisions etc. The risk perception of the depositors towards t he bank may increase and the bank may not be able to mobilize enough deposits ev en at a higher rate of interest. This would affect the competitiveness of the ba nk. 2.7.10. Impact on staff morale: High level of NPAs affects the staff morale. There may be a conflict among the d ifferent departments as to who is responsible for the high level of NPA. It may also lead to low productivity because the staff gets involved in the recovery pr ocess and they do not get time to do their normal work. 2.7.11. Impact on the real sector: The growth of the real sector ultimately depends upon the success of the financi al sector. Large level of NPAs may affect the functioning of the banks and hence the main function of the bank of accepting deposits and lending money may get a ffected. Inadequacy of funds will adversely affect the success of the real secto r. 2.8 PROVISIONING NORMS The primary responsibility for making adequate provisions for any diminution (de crease) in the value of loan assets, investment or other assets is that of the b ank managements and the statutory auditors. The assessment made by the inspectin g officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and nec essary provisions in terms of prudential guidelines. In conformity with the prudential norms, provisions should be made on the non-pe rforming assets on the basis of classification of assets into prescribed categor ies as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realizati on of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful a ssets and loss assets as below: 2.8.1. Loss assets: Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. 2.8.2. Doubtful assets: 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depen ding upon the period for which the asset has remained doubtful:

Period for which the advance has remained in doubtful category Provision requirement (%) Up to one year 20 One to three years 30 More than three years 100 Note: Valuation of Security for provisioning purposes With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guide

lines approved by the Board would be mandatory in order to enhance the reliabili ty on stock valuation. Collaterals such as immovable properties charged in favou r of the bank should be got valued once in three years by valuers appointed as p er the guidelines approved by the Board of Directors. 2.8.3. Substandard assets: A general provision of 15 percent on total outstanding should be made without ma king any allowance for ECGC guarantee cover and securities available. The unsecured exposures which are identified as substandard would attract additio provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balan ce. However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classi fied as sub-standard will attract a provisioning of 20 per cent instead of the a foresaid prescription of 25 per cent. To avail of this benefit of lower provisio ning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on these cash flows. The prov isioning requirement for unsecured doubtful assets is 100 per cent. Unsecured expo sure is defined as an exposure where the realisable value of the security, as as sessed by the bank/approved valuers/Reserve Banks inspecting officers, is not mor e than 10 percent, ab-initio, of the outstanding exposure. Exposure shall include a ll funded and non-funded exposures (including underwriting and similar commitment s). Security will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government gu arantees), comfort letters etc. In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks balance sheet, it is advised that the follo wing would be applicable from the financial year 2009-10 onwards: a) For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorizations, etc., cha rged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured. b) However, banks may treat annuities under build-operate-transfer (BOT) model i n respect of road / highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is n ot achieved, as tangible securities subject to the condition that banks right t o receive annuities and toll collection rights is legally enforceable and irrevo cable. c) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been t aken as also the estimated value of such intangible collateral. The disclosure m ay be made under a separate head in "Notes to Accounts". This would differentiat e such loans from other entirely unsecured loans. 2.8.4. Standard assets: (i) The provisioning requirements for all types of standard assets stand as belo w. Banks should make general provision for standard assets at the following rate s for the funded outstanding on global loan portfolio basis: Direct advances to agricultural and small and Micro Enterprises (SMEs) sectors a t 0.25% Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent; Easer rates and restructured advances as indicated in Para 5.9.13 and 5.9.14 res pectively. All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent (ii) The provisions on standard assets should not be reckoned for arriving at n et NPAs. (iii) The provisions towards Standard Assets need not be netted from gross advan ces but shown separately as Contingent Provisions against Standard Assets unde r Other Liabilities and Provisions Others in Schedule 5 of the balance sheet.

2.9 MEASURES TO BE TAKEN TO RECOVER NPA 2.9.1 Legal measure 1. Corporate Debt Restructuring The CDR mechanism was institutionalized in 2001 to provide a timely and transpar ent system for restructuring of the corporate debts due to banks and FIs (of Rs. 20 corer and above involving 2 or more lending institutions). The CDR process en ables viable corporate entities to restructure their dues outside the existing l egal framework and reduce the incidence of fresh NPAs. The CDR structure have be en headquartered in , Mumbai and standing forum and core group for administering the mechanism had been put in place. The Objective of Corporate Debt Restructur ing (CDR) framework IS to ensure timely and transparent mechanism for restructur ing of the corporate debt of viable entities facing problem, outside the purview of BIRD, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporate that are affec ted by certain internal and external factor and minimize the losses to the credi tors and other stakeholder through an orderly and coordinated restructuring prog ramme. Features I. CDR will be a non-statutory mechanism. II. CDR mechanisms will be a voluntary system based on debtor - creditor agr eement and inter creditor agreement. III. The scheme will cover only multiple banking accounts / syndication / con sortium account with outstanding exposure of Rs.20 corers and above by banks and institutions. IV. The CDR systems will be applicable only to standard and substandard acco unts. However , as an interim measure, permission for corporate debt restructuri ng will be made available by RBI on the basis of specific recommendation of CDR "CORE-GROUP", if minimum of 75 percent (by value) of the lender constituting ban ks/financial institution. There would be no requirement of the account/company b eing sick, NPA or being in default for a specified period before reference to th e CDR group. However, potentially viable cases of NPA will get priority. This ap proach would provide the necessary flexibility and facilitate timely interventio n for debt restructuring. Prescribing any milestone (s) may not be necessary, si nce the debt restructuring exercise is being triggered by banks and financial in stitutions or with consent. In no case, the request of and corporate indulging i n willful default or misfeasance will be considered for restructuring under CDR. i) Reference to CDR system could be triggered by (I) any or more of the sec ured creditor who have minimum 20 percent share in either working capital or ter m financial I institution having stake as in (I) above. 2. Debt recovery tribunals The recovery of debts due to bank and financial institution act 1993 was enacted o 26.4.1993 with the main object to provide expeditors adjudications and recove ry of debits due to banks and financial institution. The tribunals are empowered to adjudicate the suit with claim of Rs. 10.00 lakh and above with a vive to gi ve further thrust for speedy disposal of the suits, more tribunals and appellate were established during the last two years. This is expected to ensure better d isposal of suits and execution of recovery certificates. The act was amended in 2000 has helped in strengthening ad functioning of DRTs. Provision for placement of more than one recovery provisions for disobedience of tribunals order of any terms of the order and appointment of receiver with powe r of realization, management, protection and preservation of property provide ne cessary teeth to the DRTs, apart from expediting the recovery of NPAs on the tim es to come, there are now 29drts set up at major centers in the country with app ellate tribunals located in five centers viz. Allahabad, Mumbai, Delhi, Kolkata and Chennai. 3 Asset Reconstruction Company The ARC is expected to purchase the NPAs of banks and then make an effort to rec over them. When ARCs purchase NPA from bank bank s NPAs is reduced & liquidity a lso improved. However many time ARCs purchase NPAs at heavy discount. Therefore,

bank has to booked loss. Asset Reconstruction Company are not merely vehicles to realize bed loans but th ey are alive to resurrecting the bad loans it says that a securitization company or reconstruction company may, for the purpose of asset reconstruction, having regard to the guidelines framed by the reserve bank in this behalf, provides for any one or more of the following measures, namely. i) The proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower. ii) The sale or lease of a part or whole of the business of the borrower. iii) Rescheduling of payment of debts payable by the borrower. iv) Enforcement of security interest in accordance with provision of this ac t. v) Settlement of dues payable by the borrower. vi) Taking possession of secured asset in accordance with provision of this act. 4. Lok Adalat Lok Adalat institution helps banks to settle disputes involving accounts in dou btful and loss categories with outstanding balance of Rs. 5 lakh for compromise settlements under Lok Adalats. The settlement of NPAs pertaining to banks through Lok-Adalat is already vogue. However, on taking revive it is observed that expected advantages of Lok Adalat, has not been derived by the banks for settlement of NPAs. By using the forum of Lok Adalat to recover the dues I NPAs byway of compromise settlements, the foll owing distinct advantages can be derived i) The Lok Adalat can take cognizance of any exiting suit in the court as w ell as look into & adjudicate upon fresh disputes. ii) If no settlement is arrived at, the parties can continue with court proc eedings. iii) The decrees passed by Lok Adalat have legal status and binding. 5. SARFAESI Act, 2002: The Securitization and Reconstruction of Financial Assets and Enforcement of Sec urity Interest Act.2002 (here-in-after referred to as The Securitization Act) ha s been enacted with an intention to strengthen the creditors rights through forec losure and enforcement of securities by the banks and financial institutions (he re-in-after FI) by conferring on the creditors the right to seize the secured as set and sell of the same in order to recover dues promptly bypassing the costly and very time consuming legal process through courts. Banks have started issuing notices under the Securitization Act, 2002 directing the defaulter to either payback the dues to the bank or else give the possessing of the secured assets mentioned in the notice. However, there is a potential th reat to recovery if there is substantial erosion in the value of security given by the borrower or if borrower has committed fraud. Under such a situation it wi ll be prudent to directly classify the advance as a doubtful or loss asset, as a ppropriate. A) Important Points Regarding ActThe Act came into force w.e.f. 21/06/2002 This legislation gives powers to secured creditors such as bank & Financial inst itutions and applies only to NPAs duly classified as per RBI norm. The secured creditor may transfer the security interest to a securitization or r econstruction company or enforce the provision on its own. Under Section 13(4) of Act the secured creditor may after 60 days notice either: Take possession of the assets and dispose them off or. Take over the management of the assets or. Claim an amount from acquire of the security who owes a sum on that account to t he borrower. B) Transactions to which securitization Act is not applicableAny security interest for securing repayment of any financial asset not exceedin

g Rs.1 Lack. Any security interest credited in agricultural land. Any case in which the amount due is less than 20% of the principal amount and in terest thereon. C) Provision of the ActIn case of consortium or multiple lending arrangements if 75% of the secured cre ditors in value agree to initiate recovery action, the same is binding on all se cured creditors. If dues are not fully recovered from sale of assets, secured creditor i.e. Banks and Financial Institution may file an application with DRT or suit with compete nt court for recovery of balance. Secured creditor is entitled to proceed against guarantors even without taking c harges of assets. Where the borrowing limited company has been served notice and its management is to be taken over by secured creditor, the secured creditor is required to publi sh a notice in newspaper published in English language and in a newspaper publis hed in an Indian language in circulation in the place where principal office of the borrower is situated. 6. One Time SettlementWhen account declared as NPA instead of filing the suit in Court or Tribunal bor rower agree to repay lump sum amount and if bank or financial institution also a gree then bank accept that amount and settle the amount. 7. Civil Courts Recovery through court is possible provided decrees are awarded early. In th is regard, it is essential to introduce fast track. In addition, certain courts may be identified to exclusively deal with bank cases. 8. CIBIL In order to facilitate sharing of information related to credit matters, credit information bureau (India) limited (CIBIL) was set up in 2000. Reserve bank of I ndia has authorized credit information bureau (India) ltd. (CIBIL) to publish th e defaulters list (suit filed accounts) of Rs.25 lakh and above, as on march 31, 2003 and onwards. Reserve bank of India continues to deal with, as hitherto, data relating to non-suit filed accou nts of defaulters list of Rs.1 corer and above and willful defaulter list of Rs. 25 lakh and above, which were disseminated only to banks for their confidential. 2.9.2. Illegal Measures:1. Compromise Settlement:"Compromise" means the bank is agreeable to waive apart of "principal debt" and/ or "unapplied interest and expenses incurred on the account including legal expe nses incurred on the account including legal expenses" compromise is permissible in all types of NPA, even in suit filed or decreed accounts. The bank can also enter into compromise settlement in NPA accounts, where suit has not been failed . Guidelines for arriving at compromise The following guidelines should be borne in mind while setting an NPA A/c by way of compromise:i) A Compromise should be a negotiated settlement which will unable the ban k to recover the dues to the maximum extent possible, at minimum expenses and ex peditiously. ii) A proper distinction will have to be made between willful defaulters and borrowers who defaulters should due to circumstances beyond their control. Will ful defaulters should not be lured to make payment by offering concessions witho ut adequate justification. iii) While assessing the realizable value of the securities available to the bank proper weight age should be given to the location, condition, marketable ti tle and possession thereof. iv) The means of the borrower and guarantor s vis--vis the amount due to the

bank should also be taken into account while assessing the compromise amount acc eptable. v) The advantage to the bank form prompt recycling of funds should be weigh ed in comparison to the likely recovery by following legal and protracted course of action. 2. Write off:Write off is of two kinds - prudential write, and Regular write off (Technical w rite off and prudential write off mean the same). The basic difference between p rudential and regular write off is that in prudential write off there is a possi bility of recovery at a distant future even after write off, while in regular wr ite off, there is no possibility of recovery after off or the possibility of rec overy is very remote. 2.1. Prudential write off:Prudential write off is resorted to for accounting purpose when the borrower acc ount is classified [1] Loss Assets and 100% provision is held or [2] is classifi ed as doubtful assets and DICGC claims have been received in the Account; conseq uently, the balance in such account is equal to the provision held plus outstand ing suspense. However, in such accounts there plus balance outstanding interest suspense account. However, in such accounts there are chances of recovery by vir tue of suits having been filed and are pending, guarantees/securities held. In a ll such accounts which have been written off under category of prudential write off; effort for recovery be continued and maximum possible recovery be made. Su ch account after write off are transferred to and retained in Memorandum Ledger. 2.2. Regular write off:Regular write off is off resorted to in borrower accounts classified as loss ass ets as per the Norma and where 100% provision is held against such accounts and competent authority has satisfied that there are no more chances of recovery in such accounts and all possible efforts have been made. 3. Up gradation:In respect of hardcore NPAs, where recoveries during the last 3 years have been virtually "NIL" or negligible, services of outside agencies may be engaged selec tively on payment of charges after obtaining approval from HO, recovery departme nt. The board of Director it its meeting on257/98 had approved a scheme for enga gement of outside agencies for the purpose of recovery. In the matter of engagem ent of outside agency we have been advised recently by IBA that banks availing s ervices of such agencies should take due care from al angels including obligatio n under the law while engaging their service. In particular it is desirable that such agent s firms/legal entities of long standing, enjoying good reputation/re ferences and that employee are members of provident fund. Branches and regional offices should take note of the IBA suggestion in this regard for future guidanc e. 4. Recovery Camps:Holding of recovery camps at periodic intervals play in maximizing recovery in N PA account. It creates a proper climate and consequential awareness the borrower s to repay bank s dues. Regional Mangers/Branches should draw calendar for holid ay recovery camps and organize at least 6-7 camps per branch in a year. Exhausti ve advance preparation should be made for holding recovery camps and 100% borrow ers contact should be ensured. Regional Mangers should attend such recovery camp s so that implementation of concept of ON SPOT DECISION is ensured. Likewise, Branches should participate actively in Lok Adalats and settle cases as per guid elines in this respect.

2.10. RESEARCH DESIGN AND METHODOLOGY Data Collection: The data collected for the project was in the form of written as well as verbal information regarding the loan indication. Primary data: -Data which is collected through a direct source like survey to ob tain the first hand information. Ex- Interview, discussion The information about the bank is gathered from the discussion with the employee s/staff. Secondary data: -Data which consists of information that already exists somewher e and has been collected for specific purpose in the study. The secondary data was collected from The balance sheets as on the date of 31st March of the year 2007, 2008, 2009, 20 10 & 2011. The profit and loss accounts for the year ending on 2007, 2008, 2009, 2010 & 201 1. The classification of advances. The details about organizational structure. The sources of secondary data were- The financial statements i.e. balance sheets and profit & loss accounts were obtained from Accounts Department. Loans Depart ment supplied the loan procedures and details. The information regarding organiz ation structure and services provided by the bank was given by Branch Manager.

INDIAN BANKING SYSTEM 3.1 INDIAN BANKING HISTORY The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three d istinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Re forms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. Phase (1) The General Bank of India was set up in the year 1786. Next came Bank of Hindust an and Bengal Bank. The East India Company established Bank of Bengal (1809), Ba nk of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Eur opeans shareholders. In 1865 Allahabad Bank was established and first time exclu sively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarter s at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank o f Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and bank s also experienced periodic failures between 1913 and 1948. There were approxima tely 1100 banks, mostly small. To streamline the functioning and activities of c ommercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive p owers for the supervision of banking in India as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath depo sit mobilization was slow. Abreast of it the savings bank facility provided by t he Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase (2) Government took major steps in this Indian Banking Sector Reform after independe nce. In 1955, it nationalized Imperial Bank of India with extensive banking faci lities on a large scale especially in rural and semi-urban areas. It formed Stat e Bank of India to act as the principal agent of RBI and to handle banking trans actions of the Union and State Governments all over the country. Seven banks for ming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 19 69, major process of nationalization was carried out. It was the effort of the t hen Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in th e country were nationalized. Second phase of nationalization Indian Banking Sect or Reform was carried out in 1980 with seven more banks. This step brought 80% o f the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1969: Nationalization of 14 major banks with deposits over 50 crore. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000% . Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase (3) This phase has introduced many more products and facilities in the banking secto r in its reforms measure. In 1991, under the chairmanship of M Narasimham, a com mittee was set up by his name which worked for the liberalization of banking pra ctices. The country is flooded with foreign banks and their ATM stations. Effort s are being put to give a satisfactory service to customers. Phone banking and n et banking is introduced. The entire system became more convenient and swift. Ti me is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any ext ernal macroeconomics shock as other East Asian Countries suffered. This is all d ue to a flexible exchange rate regime, the foreign reserves are high, the capita l account is not yet fully convertible, and banks and their customers have limit ed foreign exchange exposure. Nationalization of banks In order to have more control over the banks 14 large commercial banks whose res erves were more than Rs. 50 crore each was nationalized on July 19, 1969. The ba nks were: 1. 2. 3. 4. 5. 6. 7. Central bank of India Bank of India Punjab national bank Canara bank United commercial bank Syndicate bank Bank of Baroda

8. United bank of India 9. Union bank of India 10. Dena bank 11. Allahabad bank 12. Indian bank 13. Indian overseas bank 14. Bank of Maharashtra On April 15, 1980 those private sector banks whose reserves were more than Rs. 2 00 cr. Each was nationalized. These banks were: 1. 2. 3. 4. 5. 6. Andhra bank Punjab &Sindh bank New bank of India Vijaya bank Corporation bank Oriental bank of commerce

INDIAN BANKING STRUCTURE (Fig.-1) Reserve Bank of India (RBI) The central bank of the country is the Reserve Bank of India (RBI). It was estab lished in April 1935 with a share capital of Rs. 5 crores on the basis of the re commendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private sharehold ers in the beginning. The Government held shares of .2, 20,000. Reserve Bank of India was nationalized in the year 1949. The general superintendence and directi on of the Bank is entrusted to Central Board of Directors of 20 members, the Gov ernor and four Deputy Governors, one Government official from the Ministry of Fi nance, ten nominated Directors by the Government to give representation to impor tant elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarte rs at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five membe rs each Central Government appointed for a term of four years to represent terri torial and economic interests and the interests of co-operative and indigenous b anks. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Ac t, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank . 1. 2. 3. 4. 5. 6. 7. Issue of notes Banker to banks Banker to government Custodian of foreign reserves Controller of credit Supervisory functions Promotional functions

Scheduled Banks A scheduled bank is a bank that is listed under the second schedule of the RBI A ct, 1934. In order to be included under this schedule of the RBI Act, banks have to fulfill certain conditions such as having a paid up capital and reserves of at least 0.5 million and satisfying the Reserve Bank that its affairs are not be ing conducted in a manner prejudicial to the interests of its depositors. Schedu led banks are further classified into commercial and cooperative banks. The basi c difference between scheduled commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act. These bank s work according to the cooperative principles of mutual assistance.

Scheduled Commercial Banks (SCBs): Scheduled commercial banks (SCBs) account for a major proportion of the business of the scheduled banks. As at end-March, 2009, 80 SCBs were operational in Indi a. SCBs in India are categorized into the five groups based on their ownership a nd/or their nature of operations. State Bank of India and its associates are rec ognized as a separate category of SCBs, because of the distinct statutes (SBI Ac t, 1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalized banks (19) and SBI and associates (7), together form the public sector banks group an d control around 70% of the total credit and deposits businesses in India. IDBI ltd. has been included in the nationalized banks group since December 2004. Priv ate sector banks include the old private sector banks and the new generation pri vate sector banks- which were incorporated according to the revised guidelines i ssued by the RBI regarding the entry of private sector banks in 1993. As at endMarch 2009, there were 15 old and 7 new generation private sector banks operatin g in India. Foreign banks are present in the country either through complete bra nch/subsidiary route presence or through their representative offices. At end-Ju ne 2009, 32 foreign banks were operating in India with 293 branches. Besides, 43 foreign banks were also operating in India through representative offices. Scheduled Cooperative Banks: Scheduled cooperative banks in India can be broadly classified into urban credit cooperative institutions and rural cooperative credit institutions. Rural coope rative banks undertake long term as well as short term lending. Credit cooperati ves in most states have a three tier structure (primary, district and state leve l). Non-Scheduled Banks Non-scheduled banks also function in the Indian banking space, in the form of Lo cal Area Banks (LAB). As at end-March 2009 there were only 4 LABs operating in I ndia. Local area banks are banks that are set up under the scheme announced by t he government of India in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a maximum of three contiguous districts. LA Bs aid in the mobilization of funds of rural and semi urban districts. All India Financial Institutions National Bank for Agriculture and Rural Development (NABARD) NABARD is an apex development bank in India having headquarters based in Mumbai (Maharashtra) and other branches are all over the country. NABARD was establishe d on the recommendations of Shivaraman Committee, by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development A ct 1981, and its main focus was to uplift rural India by increasing the credit f low for elevation of agriculture & rural non-farm sector and completed its 25 ye ars on 12 July 2007.It has been accredited with "matters concerning policy, plan ning and operations in the field of credit for agriculture and other economic ac tivities in rural areas in India". RBI sold its stake in NABARD to the Governmen t of India, which now holds 99% stake. Small Industries Development Bank of India (SIDBI) SIDBI is an independent financial institution aimed to aid the growth and develo pment of micro, small and medium-scale enterprises in India. Set up on April 2, 1990 through an act of parliament, it was incorporated initially as a wholly own ed subsidiary of Industrial Development Bank of India. Current shareholding is w idely spread among various state-owned banks, insurance companies and financial institutions. Beginning as a refinancing agency to banks and state level financi al institutions for their credit to small industries, it has expanded its activi ties, including direct credit to the SME through 100 branches in all major indus trial clusters in India. Besides, it has been playing the development role in se veral ways such as support to micro-finance institutions for capacity building a nd on lending. Recently it has opened seven branches christened as Micro Finance branches, aimed especially at dispensing loans up to Rs. 5.00 lakh. Export-Import Bank of India (EXIM) EXIM is the premier export finance institution of the country, established in 19

82 under the Export-Import Bank of India Act 1981 to provide financial assistanc e to industrial enterprises. Industrial development bank of India (IDBI) IDBI is an Indian financial service company headquartered Mumbai, India. RBI cat egorized IDBI as an "other public sector bank". It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently 10th largest development bank in the world in terms of reach with 1514 ATMs, 923 branches including one overseas branch at DIFC, Dubai and 621 centers including two overseas centers at Singapo re & Beijing. Some of the institutions built by IDBI are the Securities and Exch ange Board of India (SEBI), National Stock Exchange of India (NSE), the National Securities Depository Limited (NSDL), the Stock Holding Corporation of India Li mited (SHCIL), the Credit Analysis & Research Ltd, the Exim Bank (India Exim Ban k), the Small Industries Development Bank of India (SIDBI), the Entrepreneurship , and IDBI BANK, which is owned by the Indian Government. IDBI Bank is on a par with nationalized banks and the SBI Group as far as government ownership is conc erned. It is one among the 26 commercial banks owned by the Government of India.

DENA BANK 3.2 About the organization Dena Bank was founded on 26th May, 1938 by the family of Devkaran Nanjee under th e name Devkaran Nanjee Banking Company Ltd. It became a Public Ltd. Company in December 1939 and later the name was changed to Dena Bank Ltd. In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisitio n & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Reg ulations Act 1949, in addition to the business of banking, the Bank can undertak e other business as specified in Section 6 of the Banking Regulations Act, 1949. 3.3 Vision, Mission of the organization Vision The Bank will strive to be a financially strong and competitive Bank with main focus towards providing personalized services to its customers with the optimum use o f technology. The key objective shall be to provide Value Maximization to all its stakeholders. In the changing environments, the ethos of the Bank would now be m ore of Self Governance. DENA BANK will emerge as the most preferred Bank of customer choicein its area o f operations, by its reputation and performance

Mission The Banks mission is to be identified and recognized as a dynamic, modern Bank wi th enduring age-old values. A Bank that provides exemplary customer service back ed by professional competence and the latest technology. DENA BANK will provide its Customers - premier financial services of great value, Staff - positive work environment and opportunity for growth and achievement, Shareholders - superior financial returns, Community - economic growth Milestones One among six Public Sector Banks selected by the World Bank for sanctioning a l

oan of Rs.72.3 crores for augmentation of Tier-II Capital under Financial Sector Developmental project in the year 1995. One among the few Banks to receive the World Bank loan for technological up grad ation and training. Launched a Bond Issue of Rs.92.13 crores in November 1996. Maiden Public Issue of Rs.180 Crores in November 1996. Introduced Tele banking facility of selected metropolitan centers. Dena Bank has been the first Bank to introduce: Minor Savings Scheme. Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP). Drive-in ATM counters of Juhu, Mumbai. Smart card at selected branches in Mumbai. Customer rating system for rating the Bank Services.

3.4 Historical background of the organization 1969 - The Bank was brought into existence by an Ordinance issued on 19th July, by th e Central Government. The Bank is a Government of India Undertaking and carries on all types of banking business. 1970 - The Bank Companies Act, 1969, was declared null and void by the Supreme Court on the 10th February and was made effective retrospectively from 19th July, 1969 . Under the Lead Bank scheme the Bank was allotted 9 districts of which 6 were in Gujarat, 2 in M.P. and one in the Union Territories of Dadra and Nagar Havel i. 1971 - Branches were opened in most of the lead districts. Bank took up second stage of the lead bank scheme. District level consultative committees were set up in a ll the districts. 1978 The Bank had set up its first regional rural bank in the Kutch district of Gujar at State in December. 1980 - The second regional rural bank was set up in March at Rajnandgaon in Madhya Pr adesh. 1981 - The Third Regional Rural Bank was set up at Patna. 1984 - The Bank sponsored its fourth Regional Rural Bank at Himatnagar in Gujarat. Rs .12 lakhs of capital subscribed by Government. 1985 - Rs 13.63 crores of capital subscribed by Government. 1986 - Rs 7 crores of capital subscribed by Government. 1989 - Rs 20 crores of capital subscribed by Government. 1990 - Rs 30 crores of capital subscribed by Government.

1991 - Rs 25 crores of capital subscribed by Government. 1993 - Rs.50 crores of capital subscribed by Government. 1994 - Rs.130 crores of capital subscribed by Government. 1995 Rs.6.11 crores of capital subscribed by Government. 1996 Rs 136.29 crores of capital was set off against accumulated losses. 1997 Rs 6.00 crores Equity issued through prospectus to the public at a prem. of Rs 2 0 per share. Dena Bank one of the premier public sector banks, has introduced De na Smart Card, to facilitate anywhere banking. Dena Bank is the first bank to la unch this unique customer friendly product. It is for the first time in India th at a Bank is using Smart Card for storing account details. The new card will be known as Dena Credit Card against Can Card, presently offered by the bank. Dena Bank proposes to start an industrial equipment leasing division during 1997-98, according to Madhukar Umarji, General Manager of the Bank. Dena Bank plans to be come a depository participant with National Securities Depositories Ltd (NSDL). The bank has also signed an agreement with NSDL for dematerialization its scrips. The bank proposes to open 15 branches in the country in the current year. Dena Bank has computerised 250 branches till date out of 1,150 branches and has obtai ned World Bank assistance to the tune of Rs.63 crores. The bank has set up 11 AT Ms throughout the country and 20 more are expected to be installed during the ye ar. The bank has proposed to increase its average staff productivity to Rs 80 la khs per employee from Rs 70 lakhs. A major leap up will be taken in the field of modernization, as 50 more branches will be fully computerised during the curren t year which will make the figure of 95 fully computerised branches. Dena Bank h as tied up with Visa Card International for providing independent credit card fa cility to its customers. Consequently, the bank had decided to call off the cred it card agreement with Canara Bank. Dena Bank is the second bank after Union Ban k of India to break agreement with Canara Bank in connection with credit card fa cility. Dena Bank started ATMs at five of its branches that are hooked to Iwadha n, a shared payment network system in the metropolis spearheaded by Indian Banks Association. 1998 - Dena bank, which is celebrating its diamond jubilee this year, has launched a deposit mobilization month from February 10 to March 10. The rating for the long -term sub-oriented bonds of the Rs.100-crore Dena Bank has been upgraded from LA A- to LAA, indicating high safety. The sub-oriented bonds of Rs.200 crore have b een assigned an LAA rating. Dena Bank has adopted a new logo - a contemporary D anchored by the image of goddess Laxmi. The D stands for a new attitude and a ne w dedication to service. Dena Bank has launched a new term deposit - the Freedo m Deposit Scheme - which provides returns available on term deposits while assu ring the investors with liquidity. Dena Bank on 26.05.98 launched its outstation cheque collections service, Dena Zoom, and inaugurated the Dena Institute of In formation Technology as part of its Diamond Jubilee celebrations. Ramesh Mishra had signed a memorandum of understanding with Visa International on October 2 in Singapore. The bank has also signed an agreement with Equifax Venture InfoTech Ltd for providing the full range of back office support services. Dena Bank prop oses to issue its own independent credit cards and is holding talks with VISA In ternational for this purpose. 1999

- Dena bank has launched Dena Kisan Card and has aligned with Visa Internation al to issue its own credit card. The card will be available to customers soon. D ena Bank has tied-up with Visa International to launch its Visa exclusive credit card. Dena Bank has tied up with United Bank of Switzerland (UBS) and Commerzba nk International of Luxembourg for gold trading, and targets business worth Rs 3 ,000 crore in the first year. Dena Bank has entered into an agreement with UBS A G Zurich and Commerce Bank International SA Luxemburg for supply of gold on a co nsignment basis to enable the bank to retail gold in India. 2000 - The Company has appointed Share pro Services as its R&T agent in place of PCS Indus Ltd. Dena Bank to launch debt card , market insurance products in a bid t o boost its retail banking activity and increase business by over Rs 23,000 cror e by this fiscal. A G Pradhan has joined Dena Bank has chief vigilance officer. Dena Bank has launched a housing loan scheme -- Dena Niwas Loan targetted at h ousing activity in greater Guwahati. Mr. S.C. Vohra, Currently General Manager, Punjab & Sind Bank, has been appointed as a whole-time director. 2001 - The Bank has closed its issue of unsecured non-convertible debentures after ra ising the targeted Rs 75 crore. Dena Bank has entered into an alliance with HDFC Bank to optimize customer service. The employees of Dena Bank observed a token strike on 28th March in protest against the closure of more than 100 branches of the bank. 2002 - Dena Bank has informed that the Central Govt. has appointed Mr. Sudhir Kumudch andra Joshipura, as a Workmen Employee Director on the Board of Directors of Den a Bank for a period of three years. 2003 -Dena Bank issues 190 notices to defaulters comprising of Rs.316crs. Bank member s have elected the directors of the shareholders which includes Shri SubashChand ra Wadhwa, Shri Atul Ashok Galande, Shri Chintaman Mahadeo Dixit and Shri Manu C hadha. Dena Bank introduces two new schemes to suit Indian residents and non-res ident Indians. Dena Bank recovers 16.56cr NPA from 32 parties at a Lok Adalat. C entral Government appoints Mr. T R Reddy as Officer Employee Director of Dena Ba nk. Approved the raising of equity share capital of the Bank by Rs.80.00 crores i.e. to increase the issued, subscribed and paid up capital of the Bank from 20, 68,23,200 shares at Rs.10/- per share i.e. total Rs.2,06,82,32,000/- to 28,68,23 ,200 shares at Rs.10/- per share i.e. Rs.2,86,82,32,000/- by way of Second Publi c Issue. A meeting of the Board of Directors of Dena Bank will be held on Novemb er 27, 2003 to consider inter alia and if thought fit to approve the prospectus to be filed with SEBI in connection with the Banks proposed second public offer. Dena Bank has informed that the Chairman & Managing Director, Shri A.G. Joshi h as retired on December 31, 2003 on attaining the age of superannuation i.e. Dece mber 31, 2003 after close of office hours and ceased to be Director of the Bank. 2004 -Dena Bank has informed that the Central Government has appointed Shri P VijayaB haskar, Chief General Manager, Reserve Bank of India, Mumbai as a Director on th e Board of Directors of Dena Bank with effect from January 09, 2004 and until fu rther orders, in place of Smt. Grace Koshie, Chief General Manager-in-charge, Ex change Control Department, Reserve Bank of India, Mumbai. Dr. Anil K. Khandelwal has taken over as the Chairman and Managing Director of Dena Bank Ltd.Dena Bank signs MoU with International Tractors Ltd for Financing Tractors. Dena Bank has been adjudged the best commercial bank in Gujarat under Nabard s Self Help Grou p Bank Linkage Programme. Dena Bank CMD wins award for women empowerment initiat ives. Dena Bank has signed a MoU with Oriental Insurance Company to distribute t he latter s non-life policies. Dena Bank on July07, 2004 signed a memorandum of understanding with Eicher Tractor for tractor financing. Dena Bank has signed a memorandum of understanding (MoU) with Mahindra Gujarat Tractor Ltd (MGTL), a su

bsidiary of Mahindra & Mahindra (M&M) Ltd, for extending financial assistance to farmers buying tractors manufactured by the company. Tie up with Escorts Tracto rs. Dena Bank inks MoU with M&M for tractor loans. 2005 The second public issue opened on January 24, 2005 and closed on January 29, 200 5. The issue had got overwhelming response from investors and substantially over subscribed. Life Insurance Corporation of India signs up 32nd bank assurance agr eement with Dena bank on April 29, 2005. Dena Bank appoints Shri M V Nair as Cha irman & Managing Director (CMD) for a period of five years. Dena Bank inks agree ment with Small Industries Development Bank of India. Dena Bank inks agreement w ith SIDBI. Dena Bank rolls out no frills banking. Dena Bank joins hands with L ICMF. 2006 Dena Bank and Union Bank of India have tied up with Small Farmers Agri-business Consortium (SFAC) to facilitate growth of agri business. 2007 Dena Bank has appointed Mrs. SmitaVijayanandPandit (Chief Manager -IRC & Company Secretary) as Compliance Officer in place of Shri M.G. Sanghvi with immediate e ffect, who will directly liaise with the authorities such as Stock Exchanges, SE BI, and ROC etc. 2010 Dena Bank has nominated Shri Ignatius Marshal, Almeida, Manager Dena Bank as Off icer Employee Director on the Board of Dena Bank, for a period of three years fr om the date of notification and /or up to November 30, 2012 i.e. the date of sup erannuation or until he ceases to be an officer of the Dena Bank, or until furth er orders whichever is the earliest. Dena Bank has Shri A. K. Dutt, as a whole t ime director (designated as Executive Director) of Dena Bank. 2012 The no. of branches is 1231 Main Object of the Bank The main object and business of the Bank, as laid down in the Bank Nationalizati on Act is as under: The main object of the Banking Companies (Acquisition and Transfer of Undertakin gs) Act, 1970 under which the undertaking of the Bank was taken over by the Cent ral Government is as under: An act to provide for the acquisition and transfer of the undertakings of certain Banking Companies having regard to their size, reso urces, coverage and organization, in order to control the heights of the econom y and to meet progressively, and serve better, the needs of the development of t he economy, in conformity with national policy and objectives and for matters co nnected therewith or incidental thereto. The Main Object of the Bank enables it to undertake the activities for which the funds are being raised and the activities, which it has been carrying on till d ate. Business of the Bank The Bank shall carry on and transact the business of banking i.e. Accepting for t he purpose of lending or investment, of deposits of money from the public, repay able on demand or otherwise, and withdraw able by cheque draft, order or otherwi se. As defined under Clause (b) of Section 5 of The Banking Regulation Act, 1949. The Bank may engage in one or more of the other forms of business specified in S ub-section (1) of Section 6 of Banking Regulation Act, 1949. The banking business is governed by Section 3 (7) and Section 3 (5) of Chapter I I of the Banking Companies (Acquisition) Act 1970. Other Business that the Bank may undertake - Section 3 (7) Sections 3 (7) of Chapter II of the Banking Companies (Acquisition & Transfer of Undertakings) Act 1970 provides for the Bank to act as Agent of Reserve Bank [S ection 3 (7)] (I) The Bank shall, if so required by the Reserve Bank of India, a ct as agent of the Reserve Bank at all places in India where it has a branch for : a) Paying, receiving, collecting and remitting money, bullion and securities o

n behalf of the Government of India, b) Undertaking and transacting any other bu siness which the Reserve Bank may from time to time entrust to it. (ii) The terms and conditions on which any such agency business shall be carried on by the corresponding new Bank on behalf of the Reserve Bank shall be such as may be agreed upon. (iii) If no agreement can be reached on any matter referred to in Clause (ii) ab ove, or if a dispute arises between the corresponding new Bank and the Reserve B ank as to the interpretation of any. Corporate Strengths: Consistent track record of posting operating profit since inception. A well-structured organization with properly delegated discretion/authority. Wide network of branches in all major States & Union Territories. Branches located in vantage locations. Over 90% of the business has already been computerized. Availability of V-Sat connectivity & Dena Net (Intra Net). Dedicated manpower base and willingness of staff to support corporate strategies . Well-diversified investment portfolio. Corporate Strategy: The Bank aims at multiplying its business by utilizing IT in an aggressive manne r and promoting marketing strategies. Mobilizing Low Cost Deposits and expanding retail lending by aggressive marketin g efforts. Controlling Non-Interest Expenses in the area of overheads by using Corporate Email Facilities. Improving Capital Adequacy Ratio by augmenting Tier-I Capital 3.5ORGANISATIONAL STRUCTURE

(Fig. - 2)

4.1. DATA ANALYSIS AND INTERPRETATION 4.1.1 CALCULATION OF NET NPA The gross NPA figures are from bank profile (annual reports) and RBI site. There fore the net NPA is calculated from the gross NPA figures. Year 2011 2010 2009 2008 2007 Gross NPA 842.24 641.99 620.77 572.60 744.48 Less a. Provosion held in case of NPAs 290.16 205.18 299.65 347.62 372.58 b. Balance in interest suspense 0.00 0.00 5.03 0.00 3.98 c. DICGC/ECGC claim received 0.05 0.07 0.00 5.63 3.12 d. Other credits (bal. in sundries & suspense) 3.02 7.97 2.71 3.93 0.00 e. Provision for NPV on Restructured NPA a/c. 0.02 1.24 0.00 0.00 0.00 f. Provision for NPV on Restructured STD a/c. 36.87 44.51 0.00 0.00 0.00 g. Total provisions held 330.16 258.97 307.39 357.18 379.68 h. Provision for NPV on Restructured STD a/c. 36.87 44.51 0.00 0.00 0.00

Net NPA (Gross NPA g+h) ( Table-1)

548.87 427.53 313.38 215.43 364.80

NOTE- The gross NPA figures consists of every sector and Ive selected only three sectores i.e. agriculture, MSME, other sec. 4.1.2 Comparative analysis of Loans & advances of Peer banks(Amt. in crores) Year Name of Bank 2011 2010 2009 2008 2007 Dena bank 44,828 United bank of India Punjab & Sind bank Vijaya bank 48,718 Bank of Maharashtra Andhra Bank 71,435 ( Table-2) 35,462 53,502 42,638 41,521 56,059 56,114 28,877 42,330 32,639 35,468 46,880 44,139 23,023 35,393 24,615 31,689 40,314 34,238 18,303 27,858 22,156 18,343 11,738 24,223 34,290 29,285 27,889

4.1.3. Graphical representationloans & advances of Peer banks( Fig.-3) InterpretationAndhra bank sanctioned large amount of loan from the year 2007 to year 2011. Pun jab & Sind bank stood up at 3 place in loan sanction and Dena bank sanctioned mi nimum amount of loans and advances from the financial year 2007 to 2011.

4.1.4. Sector wise loans & advances of (Amt. in crores) Year Sector 2011 2010 2009 2008 Agriculture Sec. 6,389 4,826 MSME Sec. 6,784 5,647 4,775 Other sec. 31,655 24,989 20,251 Total Advances 44,828 35,462 28,877 (Table-3)

Dena Bank 2007 3,851 3,885 16,344 23,023

2,794 3,344 3,158 11,801 18,303

4.1.5. Percentage to total advances sector wiseYear Sector 2011 2010 2009 2008 2007 % to total adv. (agri. sec.) 14.25% 13.60% 13.33% 12.13% 18.27%

% to total adv. (MSME sec.) % to total adv. ( other sec.) (Table-4)

15.13% 15.92% 16.53% 16.87% 17.25% 70.61% 70.47% 70.13% 70.98% 64.47%

4.1.6. Graphical representation of Agriculture sector ( % to total advances)Year Sector 2011 2010 2009 2008 2007 % to total adv. (agri. sec.) 14.25% 13.60% 13.33% 12.13% 18.27% ( Table-4.1) ( Fig.4.1.) InterpretationFrom the year 2007 to 2010 the bank has decreased the amount of loan sanction in agriculture sector but in the year 2011 it has increased and came to 14.25%.

4.1.7. Graphical representation of MSME sector ( % to total advances)Year Sector 2011 2010 2009 2008 2007 % to total adv. (MSME sec.) 15.13% 15.92% 16.53% 16.87% 17.25% (Table-4.2) ( Fig.-4.2.) InterpretationFrom the financial year 2007 to 2011 the percentage of Micro Small Medium Enterp risesto total advances has decreased. In the year 2007 it was 17.25% and in the year 2011 it reached to 15.13%.

4.1.8. Graphical representation of Other sector ( % to total advances)Year Sector 2011 2010 2009 2008 2007 % to total adv. ( other sec.) 70.61% 70.47% 70.13% 70.98% 64.47% (Table-4.3.) ( Fig.-4.3) InterpretationThe bank rescheduled the limit of loan sanctioning in other sectors it resulted in to increase in percentage of loan sanction in to other sector. In the financi al year 2007 the bank had sanction 67.47% loan of total advances, it has increa sed to 70.61% in the year 2011.

4.2. NPA ASSET WISE ( figures from balance sheet) (Amt. in Crore) Year

Asset

2011 2010 2009 2008 2007 22450.4 17558.52

Standard 43985.76 34820.08 28256.23 Sub-Standard 416.64 319.72 272.42 240.02 257.74 Doubtful 357.22 253.82 282.42 245.88 375.66 Loss 68.38 68.38 65.93 86.70 111.08 ( Table-5) 4.2.1. Percentage to total advances asset wiseYear Asset 2011 2010 2009 2008 2007 % % % % ( to total to total to total to total Table-6. adv. (Standard) adv.(Sub-standard) adv. (Doubtful) adv. (Loss) 0.15% ) 98.12% 0.93% 0.80% 0.19% 98.19% 0.90% 0.72% 0.23% 97.85% 0.94% 0.98% 0.38%

97.51% 95.93% 1.04% 1.40% 1.05% 2.05% 0.60%

4.2.2. Graphical representation of Standard Assets ( % to total advances)Year Asset 2011 2010 2009 2008 2007 % to total adv. (Standard) (Table-6.1.) 98.12% 98.19% 97.85% 97.51% 95.93%

(Graph-5.1.) InterpretationThe standard asset of the bank increased from the year 2007 to 2011 i.e. 95.93% to 98.12%. Its a sign that bank has decreased the no. of NPA accounts from the 20 07 to 2011. 4.2.3. Graphical representation of Sub-Standard Assets ( % to total advances)Year Asset 2011 2010 2009 2008 2007 % to total adv.(Sub-standard) (Table-6.2.) 0.93% 0.90% 0.94% 1.04% 1.40%

(Graph-5.2.) InterpretationThe bank has lower down the percentage of sub standard assets from the financial year 2007 to 2010 but in the 2011 it has increased from 0.90% to 0.93%.

4.2.4. Graphical representation of Doubtful Assets ( % to total advances)Year Asset 2011 2010 2009 2008 2007 % to total adv. (Doubtful) (Table-6.3.) 0.80% 0.72% 0.98% 1.05% 2.05%

(Graph-5.3.) InterpretationIn the year 2007 the bank had 2.05% Doubtful assets and in the year 2010 it reac hed to 0.70% but in the year 2011 again it increased by 0.08% and reached to 0.8 0%.

4.2.5. Graphical representation of Loss Assets ( % to total advances)Year Asset 2011 2010 2009 2008 2007 % to total adv. (Loss) 0.15% (Table-6.4.) 0.19% 0.23% 0.38% 0.60%

(Graph-5.4.) InterpretationIn the year 2007 the percentage of loss assets was 0.60% but from the financial year 2007 to 2011 it decreased and reached to 0.15%. It helped the bank in lower ing down the percentage of NPAs. 5.1 . SUMMARY OF STUDY

It is not possible to eliminate totally the NPAs in the banking business but can only be minimized. It is always wise it follow the proper policy appraisal, sup ervision and follow-up of advances to avoid NPAs. The banks should not only take steps for reducing present NPAs, but necessary pr ecaution should also be taken to avoid future NPAs. The borrowers ability to repay the loan and past performance (if any) should be t aken into account before loan sanction.

5.2. MAJOR FINDINGS 1. Dena bank achieved a Compound Average Growth Rate (CAGR) of 23.93% between 20 07 2011 from 8.91% during 2000 & 2005. 2. To reduce the NPA bank has reorganize the limit of loan sanction for agricult ure sector because the majority of non performing assets arise from mortage sect or. The repayment of loan is expected from the seasonal crops. 3. The bank has cut down the limit of loan sanction in Micro Small Medium Enterp rises because sometimes the borrowers of MSME sector couldnt repay the interset a nd principal amount of loan sanctioned as the repayment is expected from the pro ject in which they have invested the loan amount and in case of failure of proje ct the borrowers unable to repay the loan amount. 4. Dena bank has achieved gross NPA at 1.80% in 2011-12. 5.The bank calculated Net NPA at 1.21% in the financial year 2011-12. 6. The bank has scale down the sub standard assets from 1.40% to 0.93% during the year 2007 to 2011. 7. The percentage of doubtful assets increased from the financial year 2010 to 2011 because the bank had sanction more loans and due to inflation rate, in the financial year 2010 & 2011.

5.3. SUGGESTIONS OR RECOMMENDATIONS Pre-sanction supervision and follow up Discretion and responsibilities Post-sanction supervision and follow-up Quarterly Review Sheet Quarterly Monitoring System (QMS) Surveillance System Review/Renewal of sanction A] Pre-sanction supervision and follow up Before granting any advance under their own delegated powers or while forwarding proposals for sanction to higher authority, managers must satisfy themselves or provide such information as may be necessary to take a prudent credit decision and give their own definite recommendations. The means of the applicants and gua rantor should be verified by independent enquires and if possible by examination of their books. The details of the assets of the applicants, with specific reference to his liqu id assets viz. Cash, book debts, stocks etc. The details of the liabilities of the applicants- whether short-term or long-ter m. The extent of the margin available with the applicants, which is indicated by th e excess of liquid assets over the current liabilities. The experience of the applicants in the business or the line of activity in whic h he proposes to utilize the money to be borrowed from the bank.

 The purpose for which the advance is required and probable date of the repayment . The advance should for productive purposes and not for speculative purpose. The profitability projections/repayment schedule submitted by the applicants sho uld be critically analyzed so as to ensure that the projections are not optimist ic. The details of the primary and collateral security offered to secure the loan ne ed to be ascertained. The amount of the advance is need based and is in relation to the applicant s me ans. The same should also bear a reasonable relationship to the amount of the se lf-owned capital provided by him. B] Discretion and responsibilities In order to expedite the decision on Loan Proposals and quicker dispensation of credit, Head Office from time to time should lay down the powers of the official s at various levels in regard to granting of various types of advances, guidelin es for exercising these powers, the discretion regarding submission of returns e tc. It is expected that the loaning powers are used judiciously with due care an d in good faith having regards to duties and responsibilities attached to the po st held by the sanctioning authority. Sanctioning officials must exercise prudence and a wise discretion in the use of powers delegated to them, and must thoroughly satisfy themselves that all advan ces sanctioned by them are for genuine business requirements and that in all cas es the bank s interests are fully safeguarded. C] Post-sanction supervision and follow-up Supervision and follow-up of bank credit has assumed considerable significance p articularly after introduction of new norms of asset classification, provisionin g and Deracination of interest income on NPAs, affecting profitability. System o f supervision and follow up can be defined as the systematic evaluation of the p erformance of the borrower accounts to ensure that it operates at viable level, and if problem arise, to suggest practical solutions. It helps in keeping a watc h on the conduct and operational/financial performance of the borrower accounts. Further, it also help in detecting signals/symptoms of sickness and deteriorati on, if any, taking place in the conduct of the account for initiating timely cor rective actions to check slippage of account to NPA category. Some of the important points regarding post-sanction follow-up to be adapted are as follows: Keep watch on the project during implementation stage so that there are no cost and time overruns. Ensure that funds released are utilized for purpose for which these have been pr ovided and there is no diversion of funds. Evaluate operational and financial results, such as production, sales, profit/lo ss, flow of funds, etc. and comparing these with the projections/estimates given by the borrowers at the time of sanction of credit facility. Ensure that terms and conditions as stipulated in the sanction have been complie d with. Monitor operations in the account particularly cash credit facility which indica tes the health of the account. Obtain market report on the borrower, to gather information like reputation/fina ncial standing etc. Detect signals and symptoms of sickness or deterioration taking place in conduct of the account. Ensure that the unit s management and organizational set up is effective. Keep a check on aspects like accumulation of statutory liabilities, creditors, d ebtors, raw material, stock in process, finished goods etc. D] Quarterly Review Sheet Each branch should prepare a Quarterly Review Sheet, which is in form of Quarter ly statement and submitted to the sanctioning authority. It will enable the sanc tioning authority to form an opinion about position of the account and operation /financial performance of the unit. Incumbent must take personal care to ensure that review sheets are properly comp lied and no material information is left out and timely remedial steps are taken

, wherever necessary. E] Quarterly Monitoring System (QMS): Bank must accept quarterly monitoring system for monitoring performance of big b orrower accounts enjoying working capital facilities of Rs. 1 cores and above. QMS may include the submission of the data on the prescribed formats depending u pon the economic activities of the borrower. F] Surveillance System System for surveillance should be in place for borrower enjoying fund based work ing capital limits of Rs. 1 cores and above. Under the system, certain officers can be identified as Surveillance Officer (S.O.) and posted if in the branch to monitor day to day operations/conducts of the account. G] Review/Renewal of sanction All working capital facilities are to be reviewed at least once in a year or as per terms of sanction. Timely review and renewal of sanction helps in knowing ab out borrower s performance and his financial position.

5.4. CONCLUSION The management of NPAs is very crucial from the banks point as non-performing as sets if not managed with due diligence and sincerity can turn the bank insolvent . The Non-Performing Assets reduce a substantial portion from the profitability of the banks balance sheet. The increase in the number of NPA accounts indirectly points towards the inefficiency and casual approach of bank officials while san ctioning loan as well as failure to recover the loan or interest accrued on it. The prudential norms for asset classification, income recognition and provisioni ng introduced by the RBI have helped in reflecting the true financial health of the banks. BIBLIOGRAPHY AND REFERENCES BOOK Management of Banking & Financial Services- Justin Paul & Padmalata Suresh Advance Finance Management By Dr. Pradip Kumar Sinha MAGAZINES Pratiyogita Darpan monthly, November 2011/869,impact of NPA on Indian Banking Sys tem. NEWSPAPERS Financial Express The Economics Times WEBSITES www.google.co.in www.iba.org.in www.nic.gov.in www.rbi.org.in

www.dena.com www.moneycontrol.com