AN

IN-DEPTH STUDY
ON

NPA MANAGEMENT
WITH SPECIAL EMPHASIS
ON
SMALL & MEDIUM SCALE ENTERPRISES
AT
STATE BANK OF INDIA

SUMMER INTERNSHIP PROGRAMME

AS A PART OF CURRICULUM
IN
MBA
SUBMITTED TO:

STATE BANK OF INDIA

AHMEDABAD
SUBMITTED BY:
DHATRI DAVE
REENA YESUDAS
JWALIN HALANI
AES POST GRADUATE INSTITUTE OF BUSINESS MANAGEMENT
(HL MBA)
16\1, VIKRAM SARABHAI MARG, NAVRANGPURA,
AHMEDABAD - 09

ABSTRACT OF CONTENTS

Sr.No.
1.

2.

TOPICS
Executive Summary

Ch. 1 : Introduction to Banking sector

1.1 Meaning of Banking

1.2 History of Banking
1.3 Structure of Banking in India
Ch. 2 : Introduction to State Bank of India (SBI)

3.

4.

5.

6.

PAGE NO.

2.1
2.2
2.3
2.4

Origin
First Five Year Pan
About SBI
Annual Result FY 08

1
1
3
8
8
13
14
16

Ch. 3 : Introduction of Loans and Advances

18

3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8

18
18
21
21
22
23
24
24

Meaning of Lending
Basic Principles of Lending
Why Bank Credit
Importance of Lending
Methods of Lending
Priority Sector Advances
Credit Risk Assessment (CRA)
Credit Sanction Process

Ch. 4 : Issues concerning to Banking system

28

Ch. 5 : Small and Medium Scale Enterprises (SMEs)

34

5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9

34
34
36
39
39
40
40
41
42

Introduction
SMEs in India
SMEs Model of Socio Economic Policies of Govt.
Financing SMEs Why?
Financing SMEs Advantages to Banks
Opportunities for Financing SMEs
Classification of Micro, Small and Medium Enterprises
SMEs Govt. Initiatives
SMEs in Gujarat

7.

8.

9.

10.

11.

5.10 SMEs at SBI

5.11 Specific Products for SMEs

43
44

Ch. 6 : Non Performing Assets (NPAs)

38

6.1 Introduction
6.2 What is NPAs
6.3 RBI Guidelines on Interest Recognition
6.4 Nature of Loan
6.5 Norms for Assets Classification
6.6 Analysis of NPA Factors
6.7 Causes of NPA
6.8 Impact of NPA
6.9 RBI Guidelines for Recovery of NPA
6.10 ARCs Issues of Concerns
Ch. 7 : Project 1 Reasons behind defaults by SME
Borrowers and Strategy to recover NPA.
7.1 Survey Report
7.2 Findings of the Survey
7.3 Analysis of the Survey
7.4 Suggested Strategies to reduce NPA
7.5 Conclusions
7.6 Comparative Study
Ch. 8 : Subprime Crisis

45
45
46
47
48
49
51
51
52
53

13.

57
58
62
75
83
84
85

8.1 Causes of Crisis

8.2 Effects of Crisis
8.3 Action to Manage the Crisis
Ch. 9 : Project 2 Survey to find the Reasons why
traders refuses to Bank with SBI
9.1 GVMSAV Odhav
9.2 Findings of the Survey
9.3 Analysis of the Survey
9.4 Suggestions
9.5 Conclusions

85
87
88

Ch. 10 : Learnings from the Project

99

Ch. 11 : Bibliography and References

12.

56

91
91
92
94
96
98

101

11.1 Books
11.2 Website

101
101

Annexure

102

Questionnaire Format 1
Questionnaire Format 2

102
104

PREFACE
The following project has been submitted as a part of the curriculum of the M.B.A. course of
Gujarat University.
At each and every stage of life we require some sort of theoretical knowledge as well as
practical knowledge too. It means only classroom lecture may not be enough to get proper
knowledge. It has to be supplemented with practical experience also. Master of
Administration (MBA) course is one such course that organizes this aspect of education. The
following project is the representation of everything that as a group we learned and
experienced, while undertaking the practical study and it depicts our reflections.
This project report was prepared by three of us, which gave us the opportunity to participate
and assume leadership roles and also the benefits of multiple ideas and views. It taught us the
intricacies of group dynamics.
The topic allotted to us was REASON BEHIND DEFAULTS BY SME BORROWERS IN
REGION-1 & STRATEGY TO RECOVER NPA. We decided to do a survey on this topic
as NPAs is one of the major problems facing Banking Industry today. We have also focused
on the strategies which helps bank to reduce NPAs.
The analysis of our project is supported by information found on internet, through books,
magazines and via survey.

ACKNOWLEDGEMENT
The hurdles were too difficult and deep,
But we had promises to keep,
And miles to go before we sleep..

First of all, we take this opportunity to thank our Heavenly Lord Almighty for all His
abundant blessings that He has descended upon us throughout our training period and the
preparation of this project report.
We are very grateful to our loving parents for their kind support and encouragement to carry
out this project successfully.
Through this acknowledgment, we express our sincere gratitude towards all those people who
helped us with the preparation of this project, which has been a tremendous learning
experience.
We would like to express our immense gratitude to Mr. Sukomal Chakrabarti (DGM SME)
and Mr. Anil Kumar Gupta (AGM REGION 1) for giving us the valuable opportunity to
pursue summer training in this highly esteemed organization.
We express our sincere thanks to:Mr. P.C.Patel, Mr. Harsh Dalal, Mr. Amish Parmar of region I of Ambavadi Branch, Branch
Manager B.R.Shah of Naroda Branch, Branch Manager J.V.Patel of Sahijpur Bogha Branch,
Branch Manager Ranjan Karan of Bapunagar Branch, Branch Manager Sanjay Vasvada of
Shahibaug Branch, Branch Manager Girish Soni of Girdharnagar Branch, Branch Manager
S.K.Rohit of Khanpur Branch, Assistant Manager Sunil Metha of Madhupura Branch
who gave their valuable time to guide us. By their uncompromising demand for quality and
their insistence for meeting the deadline we could do such an excellent work.
We are very thankful to all staff members of various SBI H.O.for their help and guidance, by
extending their valuable time to help us to make this project.
We would like to thank the Director of AES Dr. A. H. Kalro, our supportive faculties, our
librarians and our computer lab instructor, Hitanshu Sir for their invaluable and precious
contribution.
We would also like to thank SBIs customers and every person who have helped us and cooperated us during our training period.
Many others have directly or indirectly provided valuable insights, collegial support, and
ongoing encouragement. We all are very thankful to them.

OBJECTIVE OF THE PROJECT

Reach high for stars lie hidden in your soul.
Dream deep,
For every dream precedes the goal.

If you dont know your goal, then any road can take you there, but we were very clear about
our goal and the destination to reach which is as given below:The objective of the project aims to find the reasons behind defaults by SME borrowers in
Region 1, Ahmedabad and to recommend the strategies to recover NPA. Through this
project we aim to find the causes behind loan defaults, analyze the findings and also suggest
various strategies that can be successfully adopted by the banks in order to arrest the spiraling
proportion of NPAs which is eroding the profits of the bank.
The purpose of project 2 is to survey the traders who refused to bank with SBI in the
industrial estate of GVM Odhav and to study their banking requirements. It was also
undertaken to know the services availed by the traders from their present banks, to find out
the level of satisfaction from the present bank and to assess their further requirements from
the bank. Through this project an attempt has been made to get an idea whether the present
banking facilities at SBI is able to fulfill these requirements or not. We have also suggested
further recommendations for the bank that can be implemented by it in order to provide the
traders of the industrial estate with more satisfying services and which will help remove their
grievances.

METHODOLOGY OF THE PROJECT

Before going to the technicalities of the project and its survey, a brief description has been
given on various topics for the better understanding of the readers on each subject and which
will throw further insight on the project.
METHOD OF SURVEY:
Preparation of Questionnaire: After having a healthy discussion with our project guide and
our AGM Mr. Anil Kumar Gupta, we prepared the questionnaires. The copy of the same is
attached in annexure.
Database Collection: We were allotted the Region 1 of Ahmedabad by L.H.O for the
purpose to conduct our survey. Out of the total 26 areas in Region - 1, 10 areas formed the
database from where the survey was conducted and the necessary conclusions were derived
about the scenario of NPAs. In Project 2 i.e. survey of traders who refused to bank with
SBI, the industrial estate of GVM Odhav formed the database from where the necessary
information was collected and based on which we formulated our findings, recommendations
and conclusions.
Selection of Area: The areas for conducting the survey was allotted to us by the Zonal office,
Ambawadi and our AGM selected the following areas for the purpose of survey:1. Bapunagar
2. Sahijpur Bogha
3. Naroda
4. GIDC Odhav
5. Madhupura
6. Shahibaug
7. Khanpur
8. Girdharnagar
9. Railwaypura
10. Rakhiyal
For the purpose of Project 2, we were allotted the region of GVM Odhav in order to
conduct the survey on the banking habits of industrial estates.

EXECUTIVE SUMMARY
Banking has been a right hand of any business since a long time. Every time a company
enters into a monetary transaction with a customer, the transaction takes place through a
bank. Credit provided by banks is an important driver of national economy. The quantum of
credit extended by the PSBs increased by about 160 times after nationalization. Such a huge
expansion of credit extension without any proper appraisal and verification process and later
on the inefficiency on the part of banks to maintain the follow-up procedures of the
borrowers accounts resulted into a major proportion of NPAs which is one of the serious
concerns facing banks today.
Keeping this objective in mind an attempt has been made with the guidance of SBI bank to
study the reasons of default by SME borrowers and the strategy to contain them. We have
undertaken a survey on the Region 1 of Ahmedabad for the same. Out of the total 26
branches, we have conducted the survey on 10 areas. Strategies were formed after taking into
consideration the findings and reasons that were given by the defaulters. Based on our
findings we have also prepared an analysis of the survey which will provide more insight into
the matter. We have also suggested the various strategies that have been successfully
implemented by other banks.
Our second project talks about the survey conducted at the industrial estate of GVMSAV
Odhav which throws light on the reasons why the traders of the industrial estate refuse to
bank with SBI and prefer other cooperative and commercial banks instead. In that industrial
estate, there were about 297 industries of which 185 do not have a single account with SBI.
The findings are based on the survey and different suggestions have been provided by us
which can be inculcated by SBI in order to improve their services and attract more traders.
Other than our survey report, findings, analysis, suggestions and conclusions, we have also
included topics like the history of banking; brief about SBI; introduction to loans and
advances; issues concerning the banking system; SMEs; NPAs; and we also have talked
about the Subprime crisis that is faced internationally by the US economy.

CH. 1: INTRODUCTION TO BANKING SECTOR

1. 1 MEANING OF BANKING
The banking activities in India are regulated by the banking regulation act, 1949. Under sec
5(b) of the said act, banking means, the accepting, for the purpose of lending or investment,
of deposits of money from the public, repayable on demand, or this business in India is called
a banking company.

1. 2 HISTORY OF BANKING
The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases. They are
as mentioned below: Early phase from 1786 to 1969 of Indian Banks
Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
New phase of Indian Banking System with the advent of Indian Financial & Banking Sector
Reforms after 1991.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established
which started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,
Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank
of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline
the functioning and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949
as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
extensive powers for the supervision of banking in India as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence. In

1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. It formed State Bank of India to act
as the principal agent of RBI and to handle banking transactions of the Union and State
Governments
all
over
the
country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,
1969, major process of nationalization was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership.
The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector 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 III
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. Time is given more importance than
money.
The financial system of India has shown a great deal of resilience. It is sheltered from any
crisis triggered by any external macroeconomics shock as other East Asian Countries
suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their customers have limited
foreign exchange exposure.

1. 3 STRUCTURE OF BANKING IN INDIA

COMMERCIAL BANKS
In organized sector, commercial banks are the oldest institutions. They have wide network of
branches and command utmost public confidence. In the total banking operations commercial
banks have the biggest share. These banks were established as corporate bodies with
shareholdings by private individuals. Later on these banks were put under state ownership
and control. Formerly, the main function of commercial banks was financing organized trade,
commerce and industry. But now they provide finance to agriculture, small scale business
and borrowers also.
PUBLIC SECTOR BANKS
To come to its present position in Indian Banking the public sector has undergone three
stages. In the first stage, the Imperial bank of India was converted into State Bank of India in
1955and soon its seven subsidiary banks were also established. In second stage, there was
nationalized of 14 major commercial banks in july 1969. In the last stage there was
nationalization of 6 more commercial banks in 1980. one of the bank, the New bank of India,
was sub subsequently merged with the Punjab National Bank. The nationalized banks
constitute at present the public sector of Indian Commercial Banking.
NEW PRIVATE BANKS
After nationalization of banks, new banks in the private sector could not be established in
India, yet there was no legal bar to that effect. Narasimham Committee on financial sector
made a recommendation for setting up new private sector banks in the country. Such banks
can be classified as Indian banks and foreign banks. Indian banks owned and controlled by
Indian Entrepreneurs while foreign banks are incorporated outside India but have a place of
business in India.
REGIONAL RURAL BNAKS
Such banks have been established under the Regional Rural Banks Act, 1976. They have
been set up fro the development of rural economy by providing credit and other facilities to
small and marginal farmers, agriculturists, artisans and small entrepreneurs. Every Regional
Rural Bank must have the authorized capital of 5 crores and issued capital of 1 crore. Fifty
percent of the issued capital is to be subscribed by the central government, while 15% by the
state government and 35% by the sponsor bank.
COOPERATIVE BANKS
A cooperative credit institution is a voluntary association of members for self-help. It meets
the financial needs on a mutual basis. In the field of rural credit, cooperatives are an
important constituent of multi-agency approach. The cooperative structure in India comprises
of State Cooperative Banks (SCBs) at state level, District Central Cooperative Banks (DCBs)
at district level and Primary Agriculture Credit Societies (PACs) at village level. Urban
Cooperative Banks finance small business in urban areas. The Credit Guarantee Scheme of
Reserve Bank of India has been extended to cooperative banks to enhance public confidence

in

cooperative

banking

system.

INDUSTRIAL DEVELOPMENT BANK OF INDIA

This bank, the supreme banking institution for long term industrial finance, was established
in 1964. it was then a wholly owned subsidiary of the Reserve Bank but in 1976 its entire
share capital was transferred to the central government. It was then delinked form the
Reserve Bank. Today it is the principal financial institution to coordinate the functions and
activities of all India term-lending institutions and, to a certain extent, the public sector banks
Development banks are of two types: 1. All India Development Banks which include the Industrial Finance Corporation of India
(IFCI), the Industrial Credit & Investment Corporation of India (ICICI) and the small
Industries Development Bank of India (SIDBI)
2. The state level Development Bank which include the State Financial Corporations
(SFCs) and State Industrial Development Corporations (SIDCs).
LAND DEVELOPMENT BANKS
The long term credit needs of agricultural sector are met by another type of cooperative
institutions known as Land Development Banks. The structure of these banks is two tire one
at State Level, there are Central Development Banks and at the district level there are
Primary Land Development Banks.
INDUSTRIAL INVESTMENT BANK OF INDIA
The Industrial Reconstruction Bank of India Ltd. was set up in 1971 as a primary agency for
rehabilitation of sick units. It was renamed as the Industrial Reconstruction Bank of India
(IRBI) by an Act of Parliament with effect from march 20, 1985.IRBI functions as the
principal credit and reconstruction agency for industrial revival by undertaking
modernization, expansion, reorganization, diversification or rationalization of industry and
also coordinates similar work of other institutions engaged therein and to assists and
rehabilitate
industrial
concerns.

STRUCTURE OF BANKING IN INDIA

CH. 2: INTRODUCTION TO STATE BANK OF INDIA (SBI)

2. 1 ORIGIN

The origin of the State Bank of India goes back to the first decade of the nineteenth century
with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later
the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A
unique institution, it was the first joint-stock bank of British India sponsored by the
Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1
July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern
banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921.
Primarily Anglo-Indian creations, the three presidency banks came into existence either as a
result of the compulsions of imperial finance or by the felt needs of local European
commerce and were not imposed from outside in an arbitrary manner to modernize India's
economy. Their evolution was, however, shaped by ideas culled from similar developments
in Europe and England, and was influenced by changes occurring in the structure of both the
local trading environment and those in the relations of the Indian economy to the economy of
Europe and the global economic framework.
BANK OF BENGAL:

Head Office
Establishment
The establishment of the Bank of Bengal marked the advent of limited liability, joint-stock
banking in India. So was the associated innovation in banking, viz. the decision to allow the
Bank of Bengal to issue notes, which would be accepted for payment of public revenues
within a restricted geographical area. This right of note issue was very valuable not only for
the Bank of Bengal but also its two siblings, the Banks of Bombay and Madras. It meant an
accretion to the capital of the banks, a capital on which the proprietors did not have to pay
any interest. The concept of deposit banking was also an innovation because the practice of
accepting money for safekeeping (and in some cases, even investment on behalf of the
clients) by the indigenous bankers had not spread as a general habit in most parts of India.
But, for a long time, and especially upto the time that the three presidency banks had a right
of note issue, bank notes and government balances made up the bulk of the investible
resources of the banks.
The three banks were governed by royal charters, which were revised from time to time. Each
charter provided for a share capital, four-fifth of which were privately subscribed and the rest
owned by the provincial government. The members of the board of directors, which managed
the affairs of each bank, were mostly proprietary directors representing the large European
managing agency houses in India. The rest were government nominees, invariably civil
servants, one of whom was elected as the president of the board.

Group Photograph of Central Board (1921)

Business
The business of the banks was initially confined to discounting of bills of exchange or other
negotiable private securities, keeping cash accounts and receiving deposits and issuing and
circulating cash notes. Loans were restricted to Rs.one lakh and the period of accommodation
confined to three months only. The security for such loans was public securities, commonly
called Company's Paper, bullion, treasure, plate, jewels, or goods 'not of a perishable nature'
and no interest could be charged beyond a rate of twelve per cent. Loans against goods like
opium, indigo, salt woolens, cotton, cotton piece goods, mule twist and silk goods were also
granted but such finance by way of cash credits gained momentum only from the third decade
of the nineteenth century. All commodities, including tea, sugar and jute, which began to be
financed later, were either pledged or hypothecated to the bank. Demand promissory notes
were signed by the borrower in favor of the guarantor, which was in turn endorsed to the
bank. Lending against shares of the banks or on the mortgage of houses, land or other real
property
was,
however,
forbidden.
Indians were the principal borrowers against deposit of Company's paper, while the business
of discounts on private as well as salary bills was almost the exclusive monopoly of
individuals Europeans and their partnership firms. But the main function of the three banks,
as far as the government was concerned, was to help the latter raise loans from time to time
and also provide a degree of stability to the prices of government securities.

Old Bank of Bengal

Major change in the conditions
A major change in the conditions of operation of the Banks of Bengal, Bombay and Madras
occurred after 1860. With the passing of the Paper Currency Act of 1861, the right of note
issue of the presidency banks was abolished and the Government of India assumed from 1
March 1862 the sole power of issuing paper currency within British India. The task of
management and circulation of the new currency notes was conferred on the presidency
banks and the Government undertook to transfer the Treasury balances to the banks at places
where the banks would open branches. None of the three banks had till then any branches

(except the sole attempt and that too a short-lived one by the Bank of Bengal at Mirzapore in
1839) although the charters had given them such authority. But as soon as the three
presidency bands were assured of the free use of government Treasury balances at places
where they would open branches, they embarked on branch expansion at a rapid pace. By
1876, the branches, agencies and sub agencies of the three presidency banks covered most of
the major parts and many of the inland trade centers in India. While the Bank of Bengal had
eighteen branches including its head office, seasonal branches and sub agencies, the Banks of
Bombay and Madras had fifteen each.

Bank of Madras Note Dated 1861 for Rs.10

PRESIDENCY BANKS ACT:
The presidency Banks Act, which came into operation on 1 May 1876, brought the three
presidency banks under a common statute with similar restrictions on business. The
proprietary connection of the Government was, however, terminated, though the banks
continued to hold charge of the public debt offices in the three presidency towns, and the
custody of a part of the government balances. The Act also stipulated the creation of Reserve
Treasuries at Calcutta, Bombay and Madras into which sums above the specified minimum
balances promised to the presidency banks at only their head offices were to be lodged. The
Government could lend to the presidency banks from such Reserve Treasuries but the latter
could look upon them more as a favor than as a right.

Bank of Madras
The decision of the Government to keep the surplus balances in Reserve Treasuries outside
the normal control of the presidency banks and the connected decision not to guarantee
minimum government balances at new places where branches were to be opened effectively
checked the growth of new branches after 1876. The pace of expansion witnessed in the
previous decade fell sharply although, in the case of the Bank of Madras, it continued on a
modest scale as the profits of that bank were mainly derived from trade dispersed among a
number
of
port
towns
and
inland
centers
of
the
presidency.

India witnessed rapid commercialisation in the last quarter of the nineteenth century as its
railway network expanded to cover all the major regions of the country. New irrigation
networks in Madras, Punjab and Sind accelerated the process of conversion of subsistence
crops into cash crops, a portion of which found its way into the foreign markets. Tea and
coffee plantations transformed large areas of the eastern Terais, the hills of Assam and the
Nilgiris into regions of estate agriculture par excellence. All these resulted in the expansion
of India's international trade more than six-fold. The three presidency banks were both
beneficiaries and promoters of this commercialisation process as they became involved in the
financing of practically every trading, manufacturing and mining activity in the subcontinent. While the Banks of Bengal and Bombay were engaged in the financing of large
modern manufacturing industries, the Bank of Madras went into the financing of large
modern manufacturing industries; the Bank of Madras went into the financing of small-scale
industries in a way which had no parallel elsewhere. But the three banks were rigorously
excluded from any business involving foreign exchange. Not only was such business
considered risky for these banks, which held government deposits, it was also feared that
these banks enjoying government patronage would offer unfair competition to the exchange
banks which had by then arrived in India. This exclusion continued till the creation of the
Reserve Bank of India in 1935.

Presidency Banks of Bengal

The presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in
1921 to form the Imperial Bank of India. The triad had been transformed into a monolith and
a giant among Indian commercial banks had emerged. The new bank took on the triple role of
a commercial bank, a banker's bank and a banker to the government.
But this creation was preceded by years of deliberations on the need for a 'State Bank of
India'. What eventually emerged was a 'half-way house' combining the functions of a
commercial
bank
and
a
quasi-central
bank.
The establishment of the Reserve Bank of India as the central bank of the country in 1935
ended the quasi-central banking role of the Imperial Bank. The latter ceased to be bankers to
the Government of India and instead became agent of the Reserve Bank for the transaction of
government business at centers at which the central bank was not established. But it
continued to maintain currency chests and small coin depots and operate the remittance
facilities scheme for other banks and the public on terms stipulated by the Reserve Bank. It
also acted as a bankers' bank by holding their surplus cash and granting them advances
against authorized securities. The management of the bank clearing houses also continued
with it at many places where the Reserve Bank did not have offices. The bank was also the
biggest tendered at the Treasury bill auctions conducted by the Reserve Bank on behalf of the

Government.
The establishment of the Reserve Bank simultaneously saw important amendments being
made to the constitution of the Imperial Bank converting it into a purely commercial bank.
The earlier restrictions on its business were removed and the bank was permitted to undertake
foreign exchange business and executor and trustee business for the first time.
IMPERIAL BANK:
The Imperial Bank during the three and a half decades of its existence recorded an impressive
growth in terms of offices, reserves, deposits, investments and advances, the increases in
some cases amounting to more than six-fold. The financial status and security inherited from
its forerunners no doubt provided a firm and durable platform. But the lofty traditions of
banking which the Imperial Bank consistently maintained and the high standard of integrity it
observed in its operations inspired confidence in its depositors that no other bank in India
could perhaps then equal. All these enabled the Imperial Bank to acquire a pre-eminent
position in the Indian banking industry and also secure a vital place in the country's economic
life.

Stamp of Imperial Bank of India

When India attained freedom, the Imperial Bank had a capital base (including reserves) of
Rs.11.85 crores, deposits and advances of Rs.275.14 crores and Rs.72.94 crores respectively
and a network of 172 branches and more than 200 sub offices extending all over the country.

2. 2 FIRST FIVE YEAR PLAN

In 1951, when the First Five Year Plan was launched, the development of rural India was
given the highest priority. The commercial banks of the country including the Imperial Bank
of India had till then confined their operations to the urban sector and were not equipped to
respond to the emergent needs of economic regeneration of the rural areas. In order,
therefore, to serve the economy in general and the rural sector in particular, the All India
Rural Credit Survey Committee recommended the creation of a state-partnered and statesponsored bank by taking over the Imperial Bank of India, and integrating with it, the former
state-owned or state-associate banks. An act was accordingly passed in Parliament in May
1955 and the State Bank of India was constituted on 1 July 1955. More than a quarter of the
resources of the Indian banking system thus passed under the direct control of the State.

Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State
Bank of India to take over eight former State-associated banks as its subsidiaries (later named
Associates).
The State Bank of India was thus born with a new sense of social purpose aided by the 480
offices comprising branches, sub offices and three Local Head Offices inherited from the
Imperial Bank. The concept of banking as mere repositories of the community's savings and
lenders to creditworthy parties was soon to give way to the concept of purposeful banking
sub serving the growing and diversified financial needs of planned economic development.
The State Bank of India was destined to act as the pacesetter in this respect and lead the
Indian banking system into the exciting field of national development

2. 3 ABOUT SBI
State Bank of India (SBI) is the largest bank in India. If one measures by the number of
branch offices and employees, SBI is the largest bank in the world. Established in 1806 as
Bank of Bengal, it is the oldest commercial bank in the Indian Subcontinent. SBI provides
various domestic, international and NRI products and services, through its vast network in
India and overseas. With an asset base of $126 billion and its reach, it is a regional banking
behemoth. The government nationalized the bank in 1955, with the Reserve Bank of India
taking a 59% ownership stake.
SBI MISSION
To retain the banks position as the premier Indian financial services group, with world class
standards and significant global business, committed to excellence in customer, shareholder
and employee satisfaction and to play a leading role in the expanding and diversifying
financial services sector while continuing emphasis on its development banking role.
ASSOCIATE BANKS
There are seven other associate banks that fall under SBI. They all use the "State Bank of"
name followed by the regional headquarters' name. These were originally banks belonging to
princely states before the government nationalized them in 1959. In tune with the first Five
Year Plan, emphasizing the development of rural India, the government integrated these
banks with the State Bank of India to expand its rural outreach. The State Bank group refers
to the seven associates and the parent bank. All the banks use the same logo of a blue
keyhole. Currently, the group is merging all the associate banks into SBI, which will create a
"mega bank", and one hopes, streamline operations and unlock value.
1-State Bank of Bikaner and Jaipur (SBBJ)
2-State Bank of Hyderabad (SBH)
3-State Bank of Indore (SBIR)
4-State Bank of Mysore (SBM)
5-State Bank of Patiala (SBP)
6-State Bank of Saurashtra (SBS)
7-State Bank of Travancore (SBT)

Today, State Bank of India (SBI) has spread its arms around the world and has a network of
branches spanning all time zones. SBI's International Banking Group delivers the full range
of cross-border finance solutions through its four wings - the Domestic division, the Foreign
Offices division, the Foreign Department and the International Services division.

FOREIGN OFFICES
State Bank of India is present in 32 countries, where it has 84 offices serving the international
needs of the bank's foreign customers, and in some cases conducts retail operations. The
focus of these offices is India-related business.
FOREIGN BRANCHES
SBI has branches in these countries:

Australia
Bahrain
Bangladesh
Belgium
Canada
France
Germany
Hong Kong
Israel
Japan
People's Republic of China
Republic of Maldives
Singapore
South Africa
Sri Lanka
Sultanate of Oman
The Bahamas
United Arab Emirates
U.K.
U.S.A
GROWTH
State Bank of India has often acted as guarantor to the Indian Government, most notably
during Chandra Shekhar's tenure as Prime Minister of India. With 10,000 branches, and a
further 4000+ associate bank branches, the SBI has extensive coverage. Following its archrival ICICI Bank, State Bank of India has electronically networked most of its metropolitan,
urban and semi-urban branches under its Core Banking System(CBS), with over 4500
branches being incorporated so far. The bank has the largest ATM network in the country
having more than 5600 ATMs. The State Bank of India has had steady growth over its
history, though the Harshad Mehta scam in 1992 marred its image.

In recent years, the bank has sought to expand its overseas operations by buying foreign
banks. It is the only Indian bank to feature in the top 100 world banks in the Fortune Global
500 rating and various other rankings. According to the Forbes 2000 listing it tops all Indian
companies.
FORTUNE GLOBAL 500 RANKING 2007
SBI debuted in the Fortune Global 500 at 498 in 2006. In 2007 it moved up to 495.
GROUP COMPANIES

SBI Capital Markets Ltd

SBI Mutual Fund(A Trust)
SBI Factors and Commercial Services Ltd
SBI DFHI Ltd
SBI Cards and Payment Services Pvt Ltd
SBI Life Insurance Co. Ltd- Bancassurance(Life Insurance)
SBI Funds Management Pvt Ltd
SBI Canada

2. 4 ANNUAL RESULTS FY 08
1. SBI GROUP NET PROFIT AT RS 8,960 CRORE (USD 2.24 BN)
2. SBI STAND ALONE NET PROFIT FOR FY 08 CROSSES RS 6,700 CRORE

Net Profit for FY 08 at Rs 6,729 crore, up by 48.2% from Rs 4,541 crore in FY 07

Net Profit for Q4 08 at Rs 1,883 crore, up by 26.1% from Rs 1,493 crore in Q4 07

3. TOTAL BUSINESS GROWTH OF OVER RS 1, 81,000 CRORE

Deposits up by Rs 1,01,885 crore, a 23.4% growth from Rs 4,35,521 crore in FY 07

to Rs 5,37,406 crore in FY 08;
Market share in deposits has increased from 14.8% to 15.4% driven by low
cost deposits where market share has increased from 13.9% to 17.4%

Advances up by Rs 79,949 crore, a 23.4% growth from Rs 3,42,232 crore in FY 07

to Rs 4,22,181 crore in FY 08
Mid corporate advances grow by 24.4%
SME advances grow by 26.3%
Agriculture advances grow at 24.6%, bank achieves 18% benchmark
Home loans grow by 18.7%, auto loans by 29.9% and education loans by
33.6%
International advances up by 50.4% y-o-y; SBI largest non-rupee provider of
corporate syndicate credit to Indian corporates.

4. OPERATING PROFIT INCREASED BY 31.1% TO RS 13,107 CRORE IN FY 08

NII increased by 13.0% for the financial year to Rs. 17,021 crore in FY 08
Advances interest increased by 41.8%, driven by growth and increase in yields
Income from investments increased by 7.9%

Interest expense increased by 43.9%; interest expense includes

Rs.1,710 crore of interest on Tier 2 capital bonds which will be contained
going forward as rights issue will create capital cushion in the short
term.
NIM at 3.07% for FY 08 vs. 3.09% (excluding one time items) for FY 07

Other income increased by 28.5% to Rs. 8,695 crore; core fee income increased
by Rs. 1,110 crore. FY 08 saw a decline in dividend income by Rs. 401 crore

Operating costs increased by only 6.6% to Rs 12,609 crore, despite redesign of

2,000 metro and urban branches, addition of nearly 1,000 branches leading to
branch network crossing the 10,000 mark, increase in number of ATMs by
nearly 1,500 to a total of 5,842 and rollout of core banking system to cover 9,390
branches and 98.3% of business
Migration to new efficient operating architecture (redesigned branches to
focus on sales and service, 400 central processing centers) is almost
complete; customer service in branch and outside has improved even as
productivity and efficiency have increased
Q-o-Q
Growth FY 07 FY 08-o-Y
Growth Comment

5. PERFORMANCE OF ASSOCIATES AND SUBSIDIARIES HAS BEEN

STRONG

Associate bank net profit increased 12.1% to Rs 2,277 crore

SBI Life grew NBP by 108%, of which Rs 1,450 crore was through the SBI
bancassurance channel. SBI Life was one of the few private sector companies to
make profits- FY 08 profit of Rs. 34.3 crore
SBI MF improved its position to 6th with a growth rate of 58% in AUMs; net
profit of Rs. 69.7 crore in FY 08
SBI CAPS increased profit by nearly 100% to Rs 142 crore; retained position as
the largest rupee syndicator of Project Finance
Post acquisition of GTF, SBI group has more than 70% share in factoring and
net profits from the business in excess of Rs 100 crore
SBI Factors: net profit of Rs. 28.4 crore in FY 08
GTF: net profit of Rs. 73.6 crore in FY 08

CH. 3: INTRODUCTION TO LOANS AND ADVANCES

3. 1 MEANING OF LENDING

As per the definition in Indian Banking Act, Banking is a service regarding the acceptance
of financial deposits from the public with the objective of giving advances with the condition
to return this on demand or on some fixed date as agreed before.
Thus the very definition of banking stresses the importance of lending function. When it
defines banking as Borrowing for the purpose of lending. Hence the basic objective of
bank is presupposed to be lending & for that purpose, it is expected to mobilize resources by
borrowing from the public.
When a bank agrees to place funds at the disposal of the borrower either against a tangible
security or not, but against promise to repay the amount at a future date with the interest for
the amount used for the period, bank is said to have lent the money.
Lending of money is one of the two basic function of a banking company, the other being
acceptance of deposits. It is also a principle source of income for the bank because 80% of
revenue of bank is derived from interest and discount. The strength of the bank is judged
primarily by the soundness and quality of its advances portfolio. Advances constitute a very
large proportion of the banks total assets and along with investment form the backbone of the
banks structure.
Besides, this banks advance is not only intended to generate profits for the banks but also to
promote the development of national economy. All types of business activity that is trade,
industry & agriculture are largely dependent on bank finance in one form or the other. By
channelising saving of the non productive areas into productive uses, banks help in creating
more avenues for employment and thus raising the standard of living of the people of India.

3. 2 BASIC PRINCIPLES OF LENDING

The concept of principle of lending has changed over the years. The traditional principles of
good lending popularly known as 4Cs are:1) Character
Character is the most important asset of a person. It signifies to repay a loan. If a persons
integrity is questionable, even if he offers a good security, a banker will avoid him. Apart
from honesty, character also signifies the sobriety, good habits, personality, the ability and
willingness to carry a project with efficiency as well as the reputation of the people with
whom he deals.

2) Capacity
The capacity of a borrower refers to his experience in the business, the insight he has
acquired over the years, his knowledge of business & his capacity to judge people. If a
customer has no capacity to run his business, there are greater chances of making losses than
of profits.
3) Capital

A borrower must bring in his own capital as his stake in the business, as there can not be any
absolute certainty of the business and in case if there is a loss, the customers capital should
enable him to meet the challenge without putting the losses on his creditors.
4) Collateral
Banks usually support their loans and advances by asking the borrower to provide approved
securities to guard against unforeseen contingencies which provides a cushion to fall back in
case of emergency. It may however be noted that tangible security provided may not fetch
sufficient funds to recover the loans. Moreover in case of forced sale, the security faces a
low price.

The above principles still hold good and will continue to remain the canons of good lending
in the changed banking and economic environment. Safety, liquidity, purpose, security &
profitability have emerged as the other key factors relating to sound lending decision & these
are briefly elaborated in the following paragraph:Since the growth and prosperity of the bank largely depends to a large extent on the quality of
advances, individual banks frame appropriate credit policies in accordance with the national
priority guidelines of RBI. The basic norms of good lending are:

Safety
Liquidity
Purpose
Profitability
The lending or placement of funds is either by way of Demand Loan or Term Loan. It can
also be by the way of an old loan where the credit limit up to the amount to be lent is set in
the credit account or a cash credit account, where against security of stocks or receivables
LIMIT up to sectional level of lending is made available to the borrowers in the form of
running account allowing withdrawals up to limit as per his requirements. Lending can also
take form of bill discounting. All these lending transactions narrated above involve fund
based credit deployed.
There are certain kinds of advances which dont indulge in deployment of funds at least in the
initial stages. These are called as non fund based credit. A performance guarantee and letter
of credit are some of the example of this type of finance which will be dealt with separately at
later stage:-

1) Safety
As per the norms, the banks lend the funds constructed in it by the depositors, and the first &
the foremost principle of lending is to ensure the safety of the funds lent. By safety, its
meant that the borrower is in a position to repay the loan, along with the interest according to
the terms & conditions of the loan contract. The repayment of loan depends upon the
borrowers:-

 Capacity to pay: It depends upon his tangible assets and the success of his business; if he is
successful in his efforts, he earns profit & can repay the loan promptly or the loan is
recovered from the sale proceeds of his tangible assets.
Willingness to Pay: It depends upon the honesty & the character of the borrower. The
banker should therefore take utmost care in ensuring that the enterprise or business for which
the loan is sought is a sound one and the borrower is capable of carrying it out successfully.
2) Liquidity
Since the banks use public funds for lending operations, it is essential for it to repay the
deposits on demand or on maturity. It is for this reason that banks lending are essentially
short term in nature. This ensures that banks dont enter into asset liability mismatch by
lending for usually long periods and the funds are recycled properly & periodically. Many
types of banks advances are self liquidating in nature. Such bills are purchased or bills are
discounted where the amount lent against bills are recovered on payment of the bills by the
drawers. Likewise advances by the way of cash credit against the agriculture commodities in
any case before the advent of the new crop.
3) Purpose
Another important criterion for lending loans is to examine whether the purpose for which the
funds lent is in conformity with the economic policies of the government and the RBI. Banks
have to reorient their lending policies, suitably to achieve the objectives set by authority. The
advance should be granted as per the lending policy and credit risk policy of the bank may be
approved from time to time.
4) Profitability
Commercial banks are profit earning institutions; the nationalized banks are no exception to
this. They must employ their funds profitability so as to earn efficient income out of which;
to pay interest to the depositors, salaries to staff & meet various other establishment expenses
& distributes dividends to the shareholders. The rates of interest changed by banks were in
fact primarily dependent on the directives issued by RBI. Now banks are free to determine
their own interest rate over 2 lakhs. The variations in the interest rates changed from
different customers depend upon the degree of risk involved in lending to them.
A customer with a high reputation is charged low rate of interest compared to an ordinary
customer. The sound principles of lending are not sacrifice safety or liquidity for the sake of
high profitability. That is to say that the bank should not grant advances to unsound parties
with undoubtful repaying capacity, even if they are ready to pay a very high rate of interest.

3. 3 WHY BANK CREDIT ?

Credit provided by commercial banks is an important driver of national economy. In the
olden days, when the commercial banking had not taken the present shape, individual or
families traditionally doing the banking business provided credit to the needy. However, the
present day economy is vastly different from old economy. The olden economy is driven by
the technology and the most important variable of the economy is the consumption demand
of vast population as well as the supply machineries to meet the demand. The sources of

supply no longer confine to the areas where the demand exist with the improvement in the
transport and communication system. This demand can be easily met by supplies made from
the sources located in the far-flung areas. Today, the total output by our industrial & non
industrial sector is very large. So the role of modern commercial banks has changed as
providers of credit to the economy.

3. 4 IMPORTANCE OF LENDING
Lending by the banking sector assumes greater importance, because only banks can make
credit available to the needy borrowers. Banks have to play an important role in employment
generation, poverty alleviation & nation building. Lending by banks has helped many
industries to sustain their business.
With liberalization & deregulation government is steadily withdrawing from many areas and
is encouraging private enterprises. Infrastructure projects are now being taken up by private
corporate sector. Government funding which was available in oil, transport, or telecom
sector is being reduced, with the new opportunities now available to the private sector, there
is a challenge before them to raise resources to fund these projects. Besides other avenues
there is a great demand from banking sector for financing new projects. Hence, lending
function will continue to occupy a prime position in any bank. The list of some of the
important aspects of lending is as below: It constitutes major part of bank assets.
It earns maximum incomes to the banks by the way of interest, discount & commission.
The borrowers to whom bank finance, generally give deposits & other ancillary but
remuneration business to the bank, like remittances, collection, foreign exchange, merchant
banking etc.
Banks also get non-fund based credit business from these customers like guarantee, letters of
credit etc. on which bank can earn handsome interest.
Its very essential to note that credit is a very dynamic area which undergoes many changes
based on the various economic factors, but the basic tents of any lending like character/
capacity/ capital/ security/ safety of advances remain constant.
Bank has to follow them carefully to efficiently, profitably manage its credit portfolio &
maximize its yield.
Loans are given against or in exchange of the ownership of various types of tangibles items.
Some of the securities against which the banks lend are:

Commodities
Debts
Financial Instruments
Real Estate
Automobiles
Consumer Durables Goods
Document of Title
Apart from the above categories, the banks also lend to people on the basis of their perceived
personal worth. Such loans are called clean loans and the banks are understandably cautious
about extending such loans.

3. 5 METHODS OF LENDING
TANDON COMMITTEE
Like many other activities of the banks, method and quantum of short-term finance that can
be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control
was exercised on the lines suggested by the recommendations of a study group headed by
Shri Prakash Tandon.
The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National
Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading
banks, financial institutions and a wide cross-section of the Industry with a view to study the
entire gamut of Bank's finance for working capital and suggest ways for optimum utilization
of Bank credit. This was the first elaborate attempt by the central bank to organize the Bank
credit. The report of this group is widely known as Tandon Committee report. Most banks in
India even today continue to look at the needs of the corporates in the light of methodology
recommended by the Group.
As per the recommendations of Tandon Committee, the corporates should be discouraged
from accumulating too much of stocks of current assets and should move towards very lean
inventories and receivable levels. The committee even suggested the maximum levels of Raw
Material, Stock-in-process and Finished Goods which a corporate operating in an industry
should be allowed to accumulate these levels were termed as inventory and receivable norms
NAYAK COMMITTEE
Another group headed by Sh. P.R. Nayak (Nayak Committee) was entrusted the job of
looking into the difficulties faced by Small Scale Industries due to the sophisticated nature of
Tandon & Chore Committee recommendations. His report is applicable to units with credit
requirements of less than Rs.50 lacs.
CASH FLOW METHOD
Cash Flow Analysis is designed specifically for credit union Professionals involved in
business lending. This study will delve further into the analytical techniques required to
determine the most fundamental skill in business lending whether sufficient cash flow
exists to repay the proposed debt. While this sounds simple on the surface, cash flow analysis
is a skill that often takes years to perfect. Cash Flow Statement helps to:

Have a better understanding of all the details behind the debt service ratio
Be able to calculate cash flow ratios from business tax returns and financial statements
Understand book-tax differences and cash flow timing issues
Learn various types of unusual tax items and how to address them in your analysis
Save the credit union money through better screening of business lending opportunities
Be able to defend your loan analysis and decisions with confidence to Examiners
PROJECTED BALANCESHEET
The question is how to implement projected cash flows. This can be overcome by building up
industry wise data and the financials of the borrower. Information such as credit exposure in

terms of sector, industry, security and region wise to all the credit appraisers in the institution
should be uniformly made available with reasonable up-date so as to enable them to price,
dispense, manage and monitor. This information is then studied in detail and loan is
sanctioned accordingly.

3. 6 PRIORITY SECTOR ADVANCES

The priority sector advances broadly comprise advances to (i) agriculture, (ii) small scale
industries, (iii) other activities/borrowers such as small transport operators, retail trade, small
business, professional & self employed persons, housing, education, micro-credit, etc.
The Bank has been financing priority sector activities in a focussed manner besides providing
assistance by way of management inputs and equity support to the deserving units. In order to
qualify for the Banks assistance under priority sector advances, the following two basic
parameters are to be complied with:a)

the unit must be engaged in one or more of the activities listed by the Reserve
Bank of India (RBI) under different segments of priority sector; and

b)

it must satisfy the tenets of the Banks loan policy.

3. 7 CREDIT RISK ASSESSMENT (CRA)

The credit risk assessment (CRA) is central to the credit appraisal drill and pricing of the
credit. Assets classified as Standard Assets only are expected to be risk rated. The major
factors that go into appraising the risk associated with a loan are categorized broadly under
FINANCIAL, INDUSTRIAL, and MANAGEMENT RISKS, and rated separately. In
order to arrive at the overall risk rating, the factors duly weighted are required to be
aggregated and calibrated to arrive at a single point indicator of the risk associated with the
credit decision.

3. 8 CREDIT SANCTION PROCESS

PRE-SANCTION CREDIT PROCESS (PCP):
The pre-sanction credit process comprises three stages viz., appraisal & recommendation,
assessment and sanction.
1) Appraisal: The list of steps involves are as follows:a. Preliminary Appraisal
b. Detailed Appraisal
c. Present relationship with Bank
d. Credit risk rating
e. Opinion reports
f. Existing charges on assets of the unit
g. Structure of facilities and terms of sanction
h. Review of the proposal
i. Proposal for sanction
j. Assistance to assessment

2) Assessment: The activities involved is this stage are as given below: Review the draft proposal together with the back-up details/notes, and the borrower's
application, financial statements and other reports/documents examined by the appraiser.
Interact with the borrower and the appraiser.
Carry out pre-sanction visit to the applicant company and their project/factory site.
Peruse the financial analysis (Balance Sheet/ Operating Statement/ Ratio Analysis/ Fund
Flow Statement/ Working Capital assessment/Project cost & sources/ Break Even
analysis/Debt Service/Security Cover, etc.) to see if this is prima facie in order. If any
deficiencies are seen, arrange with the appraiser for the analysis on the correct lines.
Examine critically the following aspects of the proposed exposure.

Bank's lending policy and other guidelines issued by the Bank from time to
time

RBI guidelines

Background of promoters/ senior management

Inter-firm comparison

Technology in use in the company

Market conditions

Projected performance of the borrower vis--vis past estimates and

performance

Viability of the project

Strengths and Weaknesses of the borrower entity.

Proposed structure of facilities.

Adequacy/ correctness of limits/ sub limits, margins, moratorium and

repayment schedule

Adequacy of proposed security cover

Credit risk rating

Pricing and other charges and concessions, if any, proposed for the
facilities

Risk factors of the proposal and steps proposed to mitigate the risk

Deviations proposed from the norms of the Bank and justifications

therefore.

To the extent the inputs/comments are inadequate or require modification, arrange for
additional inputs/ modifications to be incorporated in the proposal, with any required
modification to the initial recommendation by the Appraiser
Arrange with the Appraiser to draw up the proposal in the final form.
Recommendation for sanction: Recapitulate briefly the conclusions of the appraisal and state
whether the proposal is economically viable. Recount briefly the value of the companys (and
the Groups) connections. State whether, all considered, the proposal is a fair banking risk.

Finally, give recommendations for grant of the requisite fund-based and non-fund based
credit facilities.

3) Sanction: The activities involved in the sanction function are as follows: Peruse the proposal to see if the report prima facie presents the proposal in a comprehensive
manner as required. If any critical information is not provided in the proposal, remit it back to
the Assessor for supply of the required data/clarifications.
Examine critically the following aspects of the proposed exposure in the light of
corresponding instructions in force:

Bank's lending policy and other relevant guidelines

RBI guidelines
Borrower's status in the industry
Industry prospects
Experience of the Bank with other units in similar industry
Overall strength of the borrower
Projected level of operations
Risk factors critical to the exposure and adequacy of safeguards proposed
there against.
Value of the existing connection with the borrower
Credit risk rating
Security, pricing, charges and concessions proposed for the exposure and
covenants stipulated vis--vis the risk perception.

Accord sanction of the proposal on the terms proposed or by stipulating modified or

additional conditions/ safeguards, or Defer decision on the proposal and return it for
additional data/clarifications, or Reject the proposal, if it is not acceptable, setting out the
reasons therefore.
POST SANCTION CREDIT PROCESS:
The post-sanction credit process can be broadly classified into three stages viz., follow-up,
supervision and monitoring, which together facilitate ensuring an efficient and effective
credit management and maintaining high level of standard assets.Broadly, the objectives of
the three functions are as under:a) Follow up function
To ensure the end-use of funds.
To relate the outstandings to the assets level on a continuous basis.
To correlate the activity level to the projections made at the time of the sanction/renewal of
the credit facilities.
To detect deviation from terms of sanction.

 To make periodic assessment of the health of the advances by noting some of the key
indicators of performance like profitability, activity level, and management of the unit and
ensure that that the assets created are effectively utilised for productive purposes and are well
maintained.
To ensure recovery of the instalments of the principal in case of term loan as per the
scheduled repayment programme and all interest.
To identify early warning signals, if any, and initiate remedial measures thereby averting the
incidence of incipient sickness.
To ensure compliance with all internal and external reporting requirements covering the
credit area.
b) Supervision function
To ensure that effective follow up of advances is in place and asset quality of good order is
maintained.
To look for early warning signals, identify incipient sickness and initiate proactive remedial
measures.
c) Monitoring function
To ensure that effective supervision is maintained on loans/advances and appropriate
responses are initiated wherever early warning signals are seen.
To monitor on an ongoing basis the asset portfolio by tracking changes from time to time;
Chalking-out and arranging for carrying out specific actions to ensure high percentage of
Standard Assets.

CH. 4: ISSUES CONCERNING TO BANKING SYSTEM

The enhanced role of the banking sector in the Indian economy, the increasing levels of
deregulation and the increasing levels of competition have placed numerous demands on
banks. Operating in this demanding environment has exposed banks to various challenges.
They are as follows:1) Customer service
It is no longer adequate for banks to provide only traditional banking services. Apart from
providing the conventional banking services, banks have begun offering a bouquet of
financial services to their clients, including cross selling of financial products. The aim is to
offer a one-stop-shop for meeting varied customers financial needs. Some banks have begun
employing customer relationship management systems to not only retain the existing
customers but also to attract new customers.
The establishment of new private sector banks and foreign banks have rapidly changed the
competitive landscape in the Indian consumer banking industry and placed greater demands
on banks to gear themselves up to meet the increasing needs of customers. For the discerning
current day bank customers, it is not only relevant to offer a wide menu of services, but also
provide these in an increasingly efficient manner in terms of cost, time and convenience.
While banks are focusing on the methodologies of meeting the increasing demands placed on
them, there are legitimate concerns in regard to the banking practices that tend to exclude
rather than attract vast section of population, in part pensioners, self employed and those
employed in unorganized sector. While commercial customers are no doubt important, bands
have been bestowed with several privileges, especially of seeking public deposits on a highly
leveraged basis and consequently they should be obliged to provide banking services to all
segments of the population on equitable basis.
2) Branch banking
Traditional banks have been looking to expansion of their branch network to increase their
business. Against this background, it is interesting to observe that the new private sector
banks as well as the foreign banks have been able to achieve business expansion through
other means. It has been realized that it might not be necessary to establish a wider brick and
mortar network to reach a wider population.
Banks are therefore examining the potential benefits that may accrue by tapping the agency
arrangement route and the outsourcing route. While proceeding in this direction banks ought
not to loose sight of the new risks that they might be assuming and hence put in place
appropriate strategies and systems for managing these new risks.

3) Competition

With the ever increasing pace and extent of globalization of the Indian economy and the
systematic opening up of the Indian banking system to global competitors, banks need to
equip themselves to operate in the increasingly competitive environment. This will make it
imperative for the banks to enhance their systems and procedures to international standards
and also simultaneously fortify their financial positions.
4) Technology
A few banks which have impressive branch networks have not been able to meet their
customer expectations due to inefficiencies arising out of inadequate investment in
technology and consequently faced an erosion of their market shares. The beneficiaries are
those banks which have invested in technology.
Another distinct advantage of use of technology is the ability to effectively use quantitative
techniques and models which can enhance the quality of the banks risk management systems.
Recognizing the benefits of modernizing their technology infrastructure, banks is taking the
right initiatives. The challenge in this regard will be for banks to ensure that they derive
maximum advantage out of their investment in technology and to avoid wasteful expenditure
which might arise on account of: Uncoordinated and piecemeal adoption of technology
Adoption of inappropriate\inconsistent technology
Adoption of obsolete technology
5) Basel II implementation
Basel II is the revised framework for capital adequacy for banks. Implementation of Basel II
is seen as one of the significant challenges facing the banking sector in many jurisdictions.
With the introduction of capital charge for market risks with effect from the year ended
March 31, in the year 2005, banks in India are compliant with all elements of Basel I.
Commercial banks in India will start implementing Basel II with effect from March 31, 2007.
They will initially approach the Standardized Approach for credit risk and the Basic Indicator
Approach for operational risk. After adequate skills are developed, both by the banks and also
by the supervisors, some banks may be allowed to migrate to the Internal Rating Based (IRB)
Approach.
Implementation of Basel II will require more capital for banks in India due to the fact that
operational risk is not captured under Basel I, and the capital charge for market risk was not
prescribed until recently.
With a view to ensuring migration to Basel II in a non disruptive manner, a consultative and
participative approach has been adopted for both designing and implementing Basel II in
India. A Steering Committee comprising of senior officials from 14 banks (public, private
and foreign) has been constituted wherein representation from the Indian Banks Association
and the RBI has also been ensured. The Steering Committee had formed sub groups to
address specific issues. Though Basel II implementation is considered as a challenge
generally, the above approach has lightened the burden on banks in India.

Notwithstanding the above, capacity building, both in banks and the regulatory bodies is a
serious challenge, especially with regard to adoption of the advanced approaches.
6) Improving risk management systems
With the increasing degree of deregulation and exposure of banks to various types of risks,
efficient risk management systems have become essential. As a step towards further
enhancing and fine tuning risk management systems in banks, RBI has issued guidelines on
asset liability management and risk management systems in banks and Guidance Note on
Credit Risk Management and Market Risk Management and the Guidance Note on
Operational risk management. Though Basel II focuses significantly on risks its
implementation should not be seen as an end in itself. It should be seen as a medium whereby
the risk management systems in banks are constantly upgraded to address the changing
environment.
At the initial stages of development of the risk management systems, banks were managing
each risk in isolation. The current business environment demands a more integrated approach
to risk management. It is no longer sufficient to manage each risk independently or in
functional silos. Enterprises worldwide are, therefore, now putting in place an integrated
framework for risk management which is proactive, systematic and spans across the entire
organization. Banks in India are also moving from the individual silo system to an enterprise
wide risk management system. This is placing greater demands on the risk management skills
in banks and has brought to the forefront the need for capacity building. While the first
milestone would be risk integration across the entity, banks are also aware of the desirability
of risk aggregation across the group both in the specific risk areas as also across the risks.
Banks would be required to allocate significant resources towards this objective over the next
few years.
The RBI has adopted the risk based approach to supervise since 2003 and has brought about
23 banks under the fold of risk based supervision (RBS) on a pilot basis. On the basis of the
feedback received from the pilot project, the RBS framework has now been reviewed. The
risk based approach to supervision is also serving as a catalyst to banks migration to the
integrated risk management systems. In view of the relevance of improved risk management
systems under the changing circumstances and the larger emphasis placed on risk
management systems in banks under Basel II, it is essential that the RBS stabilizes at an early
date and serves as an important feedback not only to bank managements but also to RBI.
However, taking into account the diversity in the Indian banking system, stabilizing the RBS
as an effective supervisory mechanism will be a challenge to the RBI.
7) Implementation of new accounting standards
Derivative activity in banks has been increasing at a brisk pace. While the risk management
framework for derivative trading, which is a relatively new area for Indian banks, is an
essential pre-requisite, the absence of clear accounting guidelines in this area is matter of
significant concern. It is widely accepted that as the volume of transactions increases, which
is happening in the Indian banking system, the need to upgrade the accounting framework
needs no emphasis. The World Banks ROSC on Accounting and Auditing in India has
commented on the absence of an accounting standard which deals with recognition,
measurement and disclosures pertaining to financial instruments.

The Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) is
considering issue of Accounting Standards on the above aspects pertaining to financial
instruments. These will be the Indian parallel to international accounting standards 32 and 39.
The proposed accounting standards will be of considerable significance for financial entities
and could therefore have implications for the financial sector. The formal introduction of
these accounting standards by the ICAI is likely to take some time in view of the processes
involved. In the meanwhile, the Reserve Bank is considering the need for banks and financial
entities adopting the broad underlying principles of IAS 39. Since this is likely to give rise to
some regulatory\prudential issues all relevant aspects are being comprehensively examined.
The proposals in this regard would, as is normal, be discussed with the market participants
before introduction. Adoption and implementation of these principles are likely to pose a
great challenge to both the banks and the Reserve Bank.
8) Transparency and Disclosures
In pursuance of the financial sector reforms introduced since 1991 and in order to bring about
meaningful disclosure of the true financial position of banks to enable the users of financial
statements to study and have a meaningful comparison of their positions, a series of measures
were initiated. The disclosure requirements broadly covered the following aspects:

Capital adequacy
Asset quality
Maturity distribution of select items of assets and liabilities
Profitability
Country risk exposure
Risk exposures in derivatives
Segment reporting
Related party disclosures
With a view to moving closer towards international best practices including international
accounting standards (IAS) and the disclosure requirements under Pillar 3 of Basel II,
Reserve Bank has proposed enhanced disclosures which lay a greater emphasis on disclosure
of certain qualitative aspects. Transparency and disclosure standards are also recognized as
important constituents of a sound corporate governance mechanism. Banks are required to
formulate a formal disclosure policy approved by the Board of directors that addresses the
banks approach for determining what disclosures it will make and the internal controls over
the disclosure process. In addition, banks would implement a process for assessing the
appropriateness of their disclosures, including validation and frequency.

9) Supervision of financial conglomerates

In view of increased focus on empowering supervisors to undertake consolidated supervision
of bank groups and since the Core Principles for effective banking supervision issued by the
Basel Committee on banking supervision have underscored consolidated supervision as an
independent principle, the Reserve Bank had introduced, as an initial step, consolidated
accounting and other quantitative methods to facilitate consolidated supervision. The
components of consolidated supervision include, consolidated financial statements intended
for public disclosure, consolidated prudential reports intended for supervisory assessment of
risks and application of certain prudential regulations on group basis. In due course,
consolidated supervision as introduced above would evolve to cover bands in nixed

conglomerates, where the parent may be non-financial entities or parents may be financial
entities coming under the jurisdiction of other regulators.
The financial landscape is increasingly witnessing entry of some of the bigger banks into
other financial segments like merchant banking, insurance etc., which has made them
financial conglomerates. Emergence of several new players with diversified presence across
major segments and possibility of some of the non banking institutions in the financial sector
acquiring large enough proportions to have systematic impact make it imperative for
supervision to be spread across various segments of the financial sector.
In this direction, an inter-regulatory working group was constituted with members from RBI,
SEBI and IRDA. The framework proposed by the group will be complementary to the
existing regulatory structure wherein the individual entities are regulated by the respective
regulators and it identifies financial conglomerates would be subjected to focused regulatory
oversight through a mechanism of inter-regulatory exchange of information. As a first step in
this direction, an inter-agency working group on financial conglomerated (FC) comprising
the above three supervisory bodies identified 23 FCs and a pilot process for obtaining
information from these conglomerates has been initiated. The complexities involved in the
supervision of financial conglomerates are a challenge not only to the RBI but also to the
other regulatory agencies, which need to have a close and continued coordination on an ongoing basis.
10) Know Your Customer (KYC) Guidelines Anti Money Laundering Standards
Banks were advised in 2002 to follow certain customer identification procedure for opening
of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it
to appropriate authority. These Know Your Customer guidelines were revisited in the
context of the recommendations made by the financial action task force of anti money
laundering standards and on combating financing of terrorism. These standards have become
the international benchmark for framing anti money laundering and combating financing of
terrorism policies by the regulatory authorities. Compliance with these standards both by the
banks\financial institutions and the country has become necessary for international financial
relationships.
Detailed guidelines based on the recommendations of the financial action task force and the
paper issued on customer due diligence for banks by the Basel committee on banking
supervision, with indicative suggestions wherever considered necessary, were issued to
banks. Banks were required to ensure that a proper policy framework on Know your
Customer and anti-money laundering measures is formulated and put in place with the
approval of the Board within three months and be fully compliant with these guidelines
before December 31, 2005. Compliance with the above is a significant challenge to the entire
banking industry to fortify itself against misuse by anti-social persons\ entities and thus
project a picture of solidarity and financial integrity of the Indian banking system to the
international community.
11) Corporate Governance
Banks are special as they not only accept and deploy large amount of uncollateralized
public funds in fiduciary capacity, but they also leverage such funds through credit creation.
Banks are also important for the smooth functioning of the payment system.

In view of the above, legal prescriptions for ownership and governance of banks laid down in
Banking Regulation Act, 1949, have been supplemented by regulatory prescriptions issued by
RBI from time to time. In this context, one must remember that profit motive should not be
the sole criterion for business decisions. Flow of bank finance for productive purposes must
always take priority over the granting of credit for speculative investment no matter how
profitable the latter may be. If bank finance flows increasingly to finance speculative
activities, it will be to the detriment of teal productive investment for research, development
and the production of real goods\services.
One might conclude that such uncontrolled flow would ultimately affect economic growth.
Hence, funding of speculative activities must be subject to prudential limits, even though it
might yield attractive returns. This will be a significant challenge to banks where the
priorities and incentives might not be well balanced by the operation of sound principles of
corporate governance. If the internal imbalanced are not re-balanced immediately, the
correction may evolve through external forces and may be painful and costly to all
stakeholders. The focus, therefore, should be on enhancing and fortifying operation of the
principles of sound corporate governance.

CH.5 : SMALL AND MEDIUM SCALE ENTERPRISES (SMEs)

5. 1 INTRODUCTION
Small and medium enterprises (SMEs), particularly in developing countries, are the backbone
of the nation's economy. They constitute the bulk of the industrial base and also contribute
significantly to their exports as well as to their Gross Domestic Product (GDP) or Gross
National Product (GNP).

5. 2 SMEs IN INDIA
India has nearly three million SMEs, which account for almost 50 percent of industrial output
and 42 percent of Indias total exports.
Special roles for SMEs were earmarked in the Indian economy with the advent of planned
economy from 1951 and the subsequent industrial policy followed by government. By and
large, SMEs developed in a manner, which made it possible for them to achieve the
objectives of:

High contribution to domestic production

Significant export earnings
Low investment requirements
Operational flexibility
Low intensive imports
Capacity to develop appropriate indigenous technology
Import substitution
Technology-oriented industries
Competitiveness in domestic and export markets

It is the most important employment-generating sector and is an effective tool for promotion
of balanced regional development. These account for 50 % of private sector employment and
30 to 40 % of value-addition in manufacturing. It produces a diverse range of products (about
8000 odd items), including consumer items, capital and intermediate goods.
SMEs have been established in almost all-major sectors in the Indian industry such as:

Food Processing
Agricultural Inputs
Chemicals & Pharmaceuticals
Engineering; Electricals; Electronics
Electro-medical equipment
Textiles and Garments
Leather and leather goods
Meat products
Bio-engineering
Sports goods
Plastics products
Computer Software, etc.

SMEs always represented the model of socio-economic policies of Government of India

which emphasized judicious use of foreign exchange for import of capital goods and inputs;
labor intensive mode of production; employment generation; nonconcentration of diffusion of
economic power in the hands of few (as in the case of big houses); discouraging monopolistic
practices of production and marketing; and finally effective contribution to foreign exchange
earning of the nation with low import-intensive operations. It was also coupled with the
policy of de-concentration of industrial activities in few geographical centers.
As a result of globalization and liberalization, coupled with WTO regime, SMEs have been
passing through a transitional period. With enhanced competition from China and a few low
cost centers of production from abroad many units have of late been facing a tough time.
However, those SMEs who had a strong technological base, international business outlook,
competitive spirit and willingness to restructure themselves withstood the current challenges
and came out successful to make their own contribution to the Indian economy.
But however, the SMEs in India, which constitute more than 80 % of the total number of
industrial enterprises and form the backbone of industrial development, are as yet, in
technological backwaters vis--vis advances in science and technology. While most of the
large companies, even in developing countries, have financial as well as technical capacity to
identify technological sources and evaluate alternate technologies that would suit their
requirements, unfortunately, this capacity is conspicuously missing in most SMEs.
It is these features of SMEs that make them an ideal target for technological upgradation
through technological cooperation with foreign and local enterprises, with R&D institutions
and centers of technology development.
So, what these SMEs need today is primarily access to new technology. Poor financial
situations and low levels of R&D, poor adaptability to changing trade trends, non-availability

of technically trained human resources, lack of management skills, and lack of access to
technological
information
and
consultancy
services and isolation from technology hubs, etc. are some of the reasons why these SMEs
are not being able to surge ahead.
Small and Medium enterprises are the backbone of India's economy. They have to now work
hard to get out of this impending scenario. There has to be a major change in policy on how
they are operating. SMEs have to put in more effort on research and development (R&D) and
on ways to use technology at par with the international standards
At the same time one has to understand the limitations of SMEs, which are:

Low Capital base

Concentration of functions in one / two persons
Inadequate exposure to international environment
Inability to face impact of WTO regime
Inadequate contribution towards R & D
Lack of professionalism
In spite of these limitations, the SMEs have made significant contribution towards
technological development and exports.

5. 3 SMEs - MODEL OF SOCIO-ECONOMIC POLICIES OF

GOVERNMENT
Cluster Development Approach
The strong presence of 76 identified manufacturing sectors consisting of a large number of
small and medium scale industries provides a very vibrant manufacturing base for the state.
Each of these sectors is located in clusters spread throughout the state. With increasing extent
of globalization and liberalization, when economies of scale and quality would play
predominant role in the international trade, empowering industries of the state to meet with
such challenges is an imperative need of the present time. The cluster development approach
is therefore an important initiative for empowering the clusters to face the challenges.
The Government therefore, plans to strengthen existing clusters in the state to provide
necessary support to meet with the challenges ahead. A cluster would be defined as a group
of industries manufacturing identical and complimentary products. The Government has
decided to recognize a cluster with a critical mass of a minimum of 50 units located within
the radius of 10 kms at a particular location.
The Government aims to empower the clusters by providing need-based financial assistance
for taking up strengthening activities. For the purpose, individual clusters will be rated by
accredited rating agencies in terms of technical and managerial competence, level of
maturity, administrative set up, past track record, transparency of operations, etc. Based on
the grading, quantum of financial assistance will be decided. The assistance will be provided
for the purpose of helping the clusters in upgradation of both product design and technology,
quality improvement, R&D activities, common branding and marketing facilities,
development of common facilities such as library, testing and certification laboratories, tool
room, soft skill development, capacity building for workers and supervisors in terms of skill

upgradation and productivity, etc besides the upgradation/creation of common infrastructure

facilities.
The Government also has decided to offer concessions in the form of electricity duty
exemption for a period of first five years to the cluster associations if they set up either
common power plants or common effluent treatment plants or waste recycling plants.
SME Sector
Apart from the approach of cluster development as outlined above, the need for strengthening
the existing SME units also assumes importance. However, such assistance should be done in
a manner that good and healthy unit with managerial and financial strengths would feel
encouraged by the recognition of performance. Yet genuine sick and weak units should also
be extended a helping hand. A concept of credit and performance rating would enable
Government to assist such units. This concept should also enable the unit to approach money
market for borrowing at reasonable rates of interest. This will be very useful because of a
feeling of general neglect of SSIs by banking institutions and ailing SFCs.
Assistance for Technology Upgradation
In the times to come, technology would dictate the manufacturing sector in any industry. The
industries with superior technology will ultimately have a cutting edge by being equipped
with the ability to provide quality products and services in a cost effective manner. In todays
world, when the process of technology change has become an unbridled phenomenon, it is
very essential that the industries try to keep pace with the rapid changes in the technology,
identify and adopt ones, which fit the best in their set-up. For the purpose, Government plans
to introduce a scheme to provide an interest subsidy @ 3% on purchase of all capital
equipments necessary to be installed for technology upgradation for a period of 5 years
subject to a maximum of Rs.3 lakhs per year, to the small and medium sector units.
Technology Acquisition and Patent Tracking Fund
Technology Acquisition: Acquisition of technology is also a complex process. It may
perhaps not be possible for individual small units to acquire technology on their own. The
Government therefore plans to create an administrative set up in the Industries
Commissionerate comprising technology experts, to source, assess and acquire appropriate
technologies. For the purpose, the Government has decided to create an initial revolving fund.
The administrative set up will procure the technology and in turn will transfer it to individual
units at reasonable price. This benefit could be extended to recognized clusters as well.
Patent Tracking: In the changing business environment which is likely to impact the export
drive from Gujarat, it is necessary to keep a close track on the details of patent registrations
taking place globally. This fund therefore will also be utilized towards appointing
professional agencies to monitor and make available periodic tracking reports on patent
registrations and their profiles for catering to the information needs of the industry in Gujarat.
Quality Upgradation Scheme
In the new emerging scenario, quality upgradation is a must for every industry to survive, be
it in the small or medium or large sector. The Government of Gujarat also realizes the

importance of this critical factor and therefore, has decided to continue to extend its current
scheme of quality upgradation to reimburse the expenses incurred which will include cost of
acquiring equipments required for testing and R&D connected with quality upgradation and
acquisition of quality marks as well as consultancy fees required if any, to be paid to
recognized R&D institutions/firms. This assistance is also extended for obtaining ISO 9000
and ISO 14000. Assistance will also be offered for various other schemes including GMP,
Six Sigma, HACCP, cleaner technology, Total Productivity Maintenance/Management
(TPM), Just in Time (JIT), CRM/SCM/BPR packages and other sectoral programmes, which
will be notified from time to time. The scheme provides for a maximum of Rs.25,000/- per
scheme as grant from the Government on a matching fund basis with the contribution from
the individual units with an overall ceiling of Rs.1 lakh per SSI unit, once in every five years.
The identified cluster would also avail of the benefit for its units.
Industrial Sickness
Industrial sickness has become a critical but unpleasant feature of the Indian economy. In
order to ensure rapid growth of industrial economy, the sickness should be cured and
subsequently to be eradicated. The Government plans to set up a mechanism to detect the
reasons for possible sickness of a particular industrial sector as a whole over a period of time
through studies so that these reports could serve as whistle-blowing exercises in advance to
enable appropriate Government interventions to be made in time to prevent the sector falling
sick.
Cash Subsidy for common R&D activities
In order to survive and to thrive in the years ahead, activities of research and development
would become an integral part of any industry. Government realizes the importance of R&D
in the industry and have therefore, decided to promote the same in a big way, more so in the
small and medium sectors. The Government has therefore, decided to continue the present
scheme of providing assistance in the form of cash subsidy at the rate of 50% subject to a
maximum of Rs.5 lakhs for the necessary expenditure incurred towards R&D activities.
Identified clusters could also take up collective R&D work under the scheme.
Conservation of Energy and need for Energy Review
The Government plans to encourage energy review in a big way by providing subsidy to
conduct energy review to SMEs. This will help in conservation of precious energy in general
and the unit also to be benefited in terms of cost of operations. For the purpose, the
Government has decided to offer the Energy Review Subsidy. This subsidy will however be
disbursed only after the unit introduces the energy conservation measures as suggested in the
study report. For the purpose, the Government will appoint a large pool of accredited review
agencies.
Interest subsidy
The existing scheme of providing interest subsidy to small scale units will also be continued
with modification in view of fluctuating interest rates. Under the scheme, a new small scale
unit will be offered an interest subsidy @ 5% per annum or Rs.5 lakhs whichever is less
subject to a condition that the unit will have to pay a minimum of 5% of interest per annum.

This benefit will be extended for a period of five years, subject to an overall ceiling of Rs 25
lakhs.

5. 4 FINANCING SMEs: WHY ?

SMEs play dominant role in most economies developed and developing- in shaping their
industrial destiny and path of economic growth.
Innovation has been the unique and biggest strength of SMEs world over. In the Indian
Context, the SSIs symbolize the rich heritage and economic strength of the nation.
In view of the post WTO dynamics and the need to align Indian SME segment with global
trends, SSI units need to grow into Medium Enterprises and policies are being devised to
meet growth objectives.
Large Enterprises are not any more dependent on financial intermediaries, hence immense
potential from SMEs.
SME Sector both in Manufacturing as well as Trade and Services has always played an
important role in the countrys growth engine.
Sector Contributes significantly towards the employment generation, exports, domestic
consumption.
Firms need to constantly upgrade themselves to meet the severe competition on account of
the deregulated economy and also for their own survival.
Increased market access and reduction in tariffs is going to open up markets thereby offering
several opportunities to Indian Companies more so in Textiles, Automobiles, Iron and Steel
and Services Sector.

5. 5 FINANCING SMEs: ADVANTAGES TO BANKS

Higher Yield on Loan Portfolio to the Banks vis--vis large corporate borrowers
Gives diversified portfolio to lenders to withstand any short term/mid term industry specific
set backs.
Financing the SME sector does not require any specific specialisation/expertise by lenders as
the process involved in majority of the industries in the sector is easy to understand.
Many of the businesses are closely held/family run or have been in business for generations.

5. 6 OPPURTUNITIES FOR FINANCING SMEs

SMEs offer abundant opportunities of financing
Even though Conventional instruments of financing the sector served it reasonable well over
the long haul, a very strong need for a paradigm shift in SME financing to meet the
challenges of the present and the expectations of the future is felt.
Depending on requirements of each niche market and the sector, the credit delivery needs to
be innovated.
Interest of Multinationals and Multilateral Agencies in the development of SME Sector and
the inherent strength of these enterprises is expected to change the landscape of SME sector
in India from protection seeking segment to a dynamic force

5. 7 CLASSIFICATION OF MICRO, SMALL AND MEDIUM

ENTERPRISES
Notwithstanding anything contained in section 11B of the Industrial Development and
Regulation Act (IRDA), 1951, the Central Government may, for the purposes of this Act, by
notification and having regard to the provisions of sub-sections (4) and (5), classify any class
or classes of enterprises, whether proprietorship, Hindu undivided family (HUF), association
of persons, co-operative society, partnership firm, company or undertaking, by whatever
name called, [a] In the case of the enterprises engaged in the manufacture or production of goods
pertaining to any industry specified in the first schedule to the Industries Development and
Regulation Act (IRDA), 1951, as:A micro enterprise, where the investment in plant and machinery does not exceed twenty
five lakh rupees;
A small enterprise, where the investment in plant and machinery is more than twenty five
lakh rupees but does not exceed five crore rupees; or
A medium enterprise, where the investment in plant and machinery is more than five crore
rupees but does not exceed ten crore rupees;

[b] In the case of the enterprises engaged in providing or rendering of services, as:A micro enterprise, where the investment in equipment does not exceed ten lakh rupees;
A small enterprise, where the investment in equipment is more than ten lakh rupees but
does not exceed two crore rupees; or
A medium enterprise, where the investment in equipment is more than two crore rupees
but does not exceed five crore rupees.

RBI REDEFINES MICRO, SMALL, MEDIUM ENTERPRISES

According to an RBI notification, the central bank has modified the definitions for micro,
small and medium enterprises such as small road and water transport operators (owning a
fleet not exceeding 10 vehicles), retail trade (with credit limits not exceeding Rs 10 lakh),
among many others.
It has defined these micro enterprises as an enterprise where the investment in equipment
does not exceed Rs 10 lakh; a small enterprise is one where the investment in equipment is
more than Rs 10 lakh but does not exceed Rs 2 crore; a medium enterprise is that where the
investment in equipment is more than Rs 2 crore but does not exceed Rs 5 crore.
While for enterprises engaged in the manufacture or production, processing or preservation of
goods, a micro enterprise is one where investment in plant and machinery does not exceed Rs
25 lakh.

In a medium enterprise, the investment in plant and machinery can be more than Rs 5 crore
but does not exceed Rs 10 crore.

5. 8 SMEs: GOVERNMENT INITIATIVES

New Definition of SME Sector based on turnover as per working group set up by RBI under
chairmanship of Dr A S Ganguly. Report submitted in May 04.
Tiny Sector : Turnover upto Rs.2 crs
Small
: Turnover above Rs.2 crs to Rs.10 crs
Medium : Turnover above Rs.10 crs to Rs.50 crs
Lending to SMEs be focused in identified clusters
Rating mechanisms for designated industrial clusters
Setting up of Dedicated National Level SME Development Fund, Setting up of independent
Technology Bank for the SMEs by SIDBI to facilitate technology transfer and provide
service such as project evaluation etc.

Some Policy Initiatives

Setting up of National Manufacturing Competitive Council with a view to enhancing
competitiveness
506 Items reserved exclusively for SSI sector (31.03.05)
Investment in Plant and Machinery in respect of 7 items of Sports Goods was raised to Rs.
5.00 crs in Oct 2004
Credit Linked Capital Subsidy Scheme further liberalized and ceiling for eligible loan limit
under the scheme raised to Rs.1.00 crs and quantum of subsidy increased to 15%
CIBIL to provide comprehensive credit reports on SSI
Setting up of SMERA by SIBID/Banks for rating SME units.
A New 10% Capital Subsidy Scheme for Textile Processing Sector in addition to normal
benefits under TUF Scheme. For this purpose Cluster development approach for production
and marketing of handloom products. (20 clusters being taken up by Min of Textiles)
Setting up of SME Growth Fund by SIDBI with a corpus of Rs.500 crs and will focus on
SMEs in Knowledge based industry such as life sciences, light engineering, retailing, food
processing, pharma, biotech, IT etc
Limit under Composite Loan Scheme for SSI enhanced to Rs.100.00 lacs.
Setting up of SME Fund and SME Growth Fund (SIDBI nodal agency for giving refinance
and investing in equity and equity linked instruments in the growth sector)
Existing Branches of SIDBI will be re-designated as Small Enterprises Financial Centres and
will coordinate for co-financing of term loan requirements of SSI along with Bank Branches
SIDBI will help in simplifying application forms, documentation and disbursement
procedures. (SLBC will monitor the working of the scheme and will be modified to suit local
conditions.)
New Scheme to accelerate growth of exports called Target Plus introduced wherein exporters
who have achieved a quantum growth in exports would be entitled to duty free credit.
(ranging from 5% to 15% of FOB Value of incremental exports).

5. 9 SMEs IN GUJARAT

Gujarat, since many years has been known as the land of entrepreneurs. It is this
entrepreneurial spirit that ushered the process of emergence of a sector characterized by many
small and medium scale industries in the state.
Small-scale industries are the major contributors to the economy of any region. Looking to
the nature of investment and technology adopted by them, they offer wide scope for
employment opportunities thus helping to alleviate the core problem of unemployment in our
country. The sector has matured over a period of time driven by the business acumen of the
entrepreneurs in terms of their technical skills and capability to run units with lower
overheads.
However, with the Indian economy steadily aligning with the global environment, a need is
now felt to strengthen small and medium sector units in terms of an array of needs like:

Capacity building
Infrastructural support,
Financing,
Technology upgradation,
Research and development activities,
Quality improvement,
Market access and many more
All the above mentioned parameters should be strengthened so as to enable them to have
competitive advantages in the international market.

5. 10 SMEs AT SBI
State Bank of India has been playing a vital role in the development of small scale industries
since 1956.The Bank has financed over 8 lakhs SSI units in the country. It has 55 specialized
SSI branches, 99 branches in industrial estates and more than 400 branches with SIB
divisions.
The Bank finances for Small Business activities which are of special significance to a large
number of people as many of these activities can be started with relatively lower investment
and with no special skills on the part of the entrepreneurs.

INITIATIVES FOR SMEs AT SBI

SBI has been a pioneer in financing the SME sector since the 60s.
Success stories are the Foundry Industry in Agra, Hosiery Industry in Tirupur, Ludhiana, and
Auto Component Industry in Pune are a few examples.
SBI initiated the Entrepreneur Development Program wherein the first time entrepreneur was
trained and also given certain incentives to overcome initial hitches.
SBI set up branches in the Industrial Estates to cater specifically to the units in the Estates.
Branches in almost all the Industrial Estates.

Some other initiatives

Tie up with industry majors

Vendor Financing (ex with Sintex)

Dealer Financing (with Sonalika and Escorts Tractors)
Franchisee Financing (with Subway, Apollo Healthcare)
Cluster Financing (Rice Mills)
Specialized Marketing Team for SME sector (Multi Product Sales Force has been set up
under the BPR initiative)
Specialized Processing Centre for SME. (Small and Medium Enterprises Central Processing
Cell)
SBI Exporters Gold Card Scheme
Petro Credit under tie up with Reliance
Tie up with Ashok Leyland, Eicher Motors, Swaraj Mazda, Mahindra and Mahindra for
financing of vehicles with several concessions/benefits
Account Relationship Manager (MERM)
Quicker turnaround time of sanctioning and disbursal
Competitive interest rates

5. 11 SPECIFIC PRODUCTS FOR SME IN MANUFACTURING AND

TRADE AND SERVICES SECTOR

Open Term Loan

Score based products like SME Smart Score and SME Credit Card and SME Credit Plus
School Plus for financing Schools
Restaurant Plus for financing Restaurants
Doctor Plus for financing Doctors
Mortgage Loan for Trade and Services
SBI Shoppe for financing Shops/Showrooms
Auto Clean for financing CNG Vehicles
Standby Line of Credit for meeting exigencies/large orders
Rice Mill Plus/ Dal Mill Plus for financing Mills
Corporate Loan / Flexi Loan to meet various needs

CH. 6 : NON PERFORMING ASSETS (NPAs)

6. 1 INTRODUCTION
NPAs is one of the major issue concerning to Banking system. The primary aim of any
business is to make profits. Therefore any asset created in the course of the conduct of
business should generate income for the business. This applies equally to the business of
banking. The banks, the world over, deal in money, by accepting deposits (liabilities) and out
of such deposits (liabilities), lend\ create loans (assets).
If for any reason such assets created do not generate income or become sticky and difficult of
recovery, then the very position of the banks in repaying the deposits (liabilities) on the due
dates would be at stake and in jeopardy. Banks with such assets portfolio would become
weak and naturally such weak banks will loose the faith and confidence of the investors.
With the introduction of prudential norms for income recognition, assets classification and
provisioning, banks have become quite sensitive and are taking all possible steps to
strengthen their assets acquisition and monitoring systems. There is also a growing awareness
to bring down NPAs as these are having adverse impact on their profitability due to derecognition of interests as well as requirement of heavy loan loss provisions on such assets.
Therefore it would be prudent for banks to manage their assets in such a manner that they
always remain healthy, generate sufficient income and are capable of repayment\recovery on
the due dates.
Management of performing\non performing assets in banks has become an art and science
and virtually a battle of wits between the banker and the borrower with the latter
demanding write off or at least a major sacrifice from the bankers side irrespective of
whether he is in a position to pay or not.

6. 2 WHAT IS NPAs?

An NPA is defined as a loan asset, which has ceased to generate any income for the bank
whether in the form of interest or principal repayment. In India, an asset is classified as NPA
if interest or installments of principal due remain unpaid for more than 180 days. However,
with effect from March 2004, default status would be given to a borrower if dues are not paid
for 90 days. Therefore, this has become what is called as a critical performance area of the
banking sector as the level of NPAs affect the profitability of the banks.
NPA means an asset or account of borrower which has been classified by a bank or financial
institution as sub-standard, doubtful or loss asset, in accordance with the directions or
guidelines relating to asset classification issued by RBI. Such accounts carry more than
normal risk attached to the business and are under threat of loss as recoverability of dues are
in doubt. Action for enforcement of security interest can be initiated only if the secured asset
is classified as non performing asset.

GROSS NPA AND NET NPA

As per RBI circular, Gross advances means, all outstanding loans and advances including
advances for which refinance has been received but excluding rediscounted bills and
advances.
Gross NPA ratio = Gross NPA
x 100
Gross Advances
Following are deducted from Gross NPA to arrive Net NPA.
a) Balance in interest suspense account, if applicable.
b) DICGC/ECGC received and held pending adjustment.
c) Part payment received and kept in suspense account.
d) Total provisions made excluding technical write off made at head office.
Net NPA ratio = Gross NPA provisions
x 100
Gross Advances provisions
The % of gross WRA to gross advances includes interest suspense account where the bank is
following the accounting practice of debiting interest to the customers account and crediting
interest suspense account.

6. 3 RBI GUIDELINES ON INCOME RECOGNITION (INTEREST

INCOME ON NPAs)
As per the prudential norms suggested by the RBI Banks recognize income including interest
income on advances on accrual basis. That is income is accounted for as and when it is
earned.
The prima-facie condition for accrual of income is that it should not be unreasonable to
expect its ultimate collection. However, NPAs involves significant uncertainty with respect
to its ultimate collection.

Considering this fact, in accordance with the guidelines for income recognition issued by the
RBI, banks should not recognize interest income on such NPAs until it is actually realized.

6. 4 NATURE OF LOAN
1) Term Loan
Term Loan is treated as Non Performing Asset as on Balance-sheet date if interest or loan
installment remains overdue for a period of:
4 quarters during year ending - 31st March 1993
3 quarters during year ending - 31st March 1994
More than 180 days during - 31st March 1995-2003
More than 90 days during
- 31st March 2004 onwards
Due date:
Due date is the ultimate date fixed pr stipulated in the sanction letter for repayment of loan
installment or interest. The periodicity of installment may be monthly, half yearly or yearly.
2) Cash Credit
Cash Credit is treated as Non Performing Asset if account remains out of order for the
period of:
4 quarters during the year ending - 31st march 1993
3 quarters during the year ending - 31st march 1994
2 quarters during the year ending 31st march 1995-2003
1 quarter during the year ending from the year ending
31st march 2004
Out of Order:
An account should be treated out of order,
If the outstanding balance remains continuously in excess of the sanctioned limit or drawing
power
In cases where the outstanding balance in the principal operating Account is less than the
standard limit, but these are no credit Continuously for stipulated period or,
Credits are not enough to cover the interest debited during the same period.
3) Bills Purchased/ Discounted Accounts
The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted.
4 quarters during year ending 31st March 1993
3 quarters during year ending 31st March 1994
2 quarters during year ending 31st March 1995-2003
1 quarters during year ending 31st March 2004 onwards

4) Other Credit Facilities

Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.
4 quarters during the year ending 31st March 1994
3 quarters during the year ending 31st March 1993
2 quarters during the year ending 31st March 2004 onwards

6. 5 NORMS FOR ASSET CLASSIFICATION

1) Standard Assets
Standard Assets are those assets which do not disclose any problem. Here not more than
normal risk attached to business. Thus, in general all the current agricultural and nonagricultural loans which have not become NPA.
2) Sub-standard Assets
Any loans where the repayment of interest/ installment delayed beyond 90 days and not
exceeding 1 year.
3) Doubtful Assets
Assets which have remained sub-standard for a period not exceeding 12 months.
Doubtful - 1 - First 12 months in doubtful category
Doubtful - 2 - Further 24 months in the doubtful category
Doubtful 3 NPA for over 48 months.
4) Loss Assets
Asset which becomes uncollectible/ unrecoverable means where loss has been identified but
the amount has not been written off.

MAGNITUDES OF NPAs

YEARS
1999
2000
2001
2002
2003
2004
2005
2006
2007

PUBLIC SEC. BANKS

Gross
Net
16.0
8.2
14.0
7.4
12.4
6.7
11.1
5.8
9.4
4.5
7.8
3.0
5.4
2.1
3.7
1.3
2.9
1.0

FORIGN BANKS
Gross
Net
6.4
2.2
7.0
2.4
6.8
1.8
5.4
1.9
5.3
1.8
4.6
1.5
2.9
0.9
1.9
0.8
1.3
0.6

(In %)
PRIVATE BANKS
Gross
Net
8.7
5.3
8.2
5.4
8.4
5.4
9.6
5.7
8.1
5.0
5.8
2.8
3.9
2.2
2.5
1.0
2.0
0.7

6. 6 AN ANALYSIS OF FACTORS CONTRIBUTING TO NPAs

An analysis of the contributory factors resulting in the emergence of NPAs on a stupendous
scale amongst commercial banks and financial institutions in the preceding decade and
particularly in the early 90s would lead to the following conceptualization:PSBs performed creditably all through in respect of all parameters set for them. But in the
early 90s, the truth emerged that PSBs were suffering from acute capital inadequacy and
many of them were depicting negative profitability. This is because the parameters set for
their functioning were deficient and they did not project the paramount need for these
corporate goals. Incorrect goal perception and identification led them to wrong destination.
Pre-reform era witnessed PSBs functioning under the overall control and direction of the
Finance Ministry. Along with RBI, it decided\directed all aspects of the working of the
banks. Banks were not free to price their products in competition with each other. They could
not freely cater their products to any segment of their choice. They were unable to invest their
funds in the best interest as they considered. It was thus a directed banking and the role of the
Bank management was executory.
Since the 70s, the SCBs of India functioned totally as captive capsule units, cut off from
international banking and unable to participate in the structural transformations, the sweeping
changes, and the new type of lending products emerging in the global banking institutions.
The personnel lacked desired training and knowledge resources required to compete with
international players. Such and other chaotic conditions in parts of the Indian Banking
industry had resulted in the accumulation of assets, which were termed as non-productive in
an unprecedented level.
Major policy decisions were taken externally by the Finance Ministry\RBI. Though Directors
were to be appointed based on their possession of specialized knowledge in Banking and
related discipline, the environment of receiving decisions from a political background as
distinguished from a professional outfit; prevented the best talents coming to occupy the
positions as Directors of PSBs and taking part an active role in the deliberations of the Boards
of these Banks.

Audit and Inspections remained as functions under the control of the executive officers,
which were not independent and were thus unable to correct the effect of serious flaws in
policies and directions of the higher ups.
The quantum of credit extended by the PSBs increased by about 160 times in the 3 decades
after nationalization. The Banks were not developed in terms of skills and expertise to
regulate such stupendous growth in the volume and manage the diverse risks that emerged in
the process.
The need for organizing an effective mechanism to gather and disseminate credit information
amongst the commercial banks was never felt or implemented. The archaic laws of secrecy of
customers information that was binding Bankers in India, disabled banks to publish names of
defaulters for common knowledge of the other Banks in the system.
Effective recovery of defaulters and overdue of borrowers was hampered on account of a
sizeable overhang component arising from infirmities in the existing process of debt
recovery, inadequate legal provisions on foreclosure in the execution of court decrees. But in
India, Legal remedies were beset with too many formalities and too very time-consuming.
Laws continued favouring willful defaulters and the Banks were left helpless.
Effective Corporate management was a concept alien to the corporate houses then. In respects
of PSBs the boards were ineffective and the only\main shareholder was the Government of
India. Government exercised multiple roles and concerns, and the instinct to act as a watchful
shareholder and increase the shareholders value of these corporate bodies (Banks and
Financial Institutions) was never felt\experienced by the Government.
Credit management on the part of the lenders to the borrowers to secure their genuine and
bonafide interests was not based on pragmatically calculated anticipated cash flows of the
borrower concern. While recovery of installments of Term Loans was not out of profits and
surplus generated, but through recourse to the corpus of working capital of the borrowing
concerns. This eventually led to the failure of the project financed leaving idle assets.
Functional inefficiency was also caused due to over-staffing, manual processing of overexpanded operations and failure to computerize Banks in India, when elsewhere throughout
the world; the system was to switch over to computerization of operations.

6. 7 CAUSES OF NPA
In Priority Sectors Advances:
1) Directed and pre-approved natures of loans sanctioned under sponsored
Program.
2) Mis-utilization of loans and subsidies.
3) Diversion of funds.
4) Absence of security.
5) Lack of effective follow-up (post sanction supervision)
6) Absence of Bankruptcy and fore-closure loans.
7) Decrepit legal system.

8) Cost in effective legal recovery measures.

9) Difficulty in execution of decrees obtained.
10) Lack of marketing support.

In Non - Priority Sectors Advances:

1) Improper and Inadequate Credit Appraisal.
2) Demand Recession.
3) Frequent change in Government policies.
4) Industrial sickness and labor problems.
5) Antiquated Legal and Judicial system.
6) Lack of legal reforms (Bankruptcy Foreclosure loss).
7) Diversion of funds.
8) Willful Default.
9) Technology obsolescence.
10) Incompetence management defaults.
11) Fear psychosis among Banks and lack of effective follow up.
12) Political compulsion and corruption.

6. 8 IMPACT OF NPAs

NPAs have chocked off profitability of banks.

NPA has restricted the recycling of fund leading to various Assettiability mismatches.
It has lead to erosion in the capital base of the bank.
Problem of NPA is not a matter of concern for Banks and FIs alone its a matter of grave
concern for the entire public as credit is the catalyst to the economic growth of the country
and any bottleneck in the smooth flow of credit is bound to create adverse repercussions in
the economy.
NPA has affected the profitability, liquidity and competitive functioning of Public and
Private sector Banks and finally the psychology of the bankers in respect of their disposition
towards credit delivery and credit expansion.

6. 9 RBI GUIDELINES FOR RECOVERY OF NPA

Non-Legal Measures:
1) Rehabilitation
Depending on the sick units, need pumping of further funds, providing interest caps,
reschedulement of the overdue for opting for a combination by the banks, provides
opportunity to recover dues. However, it takes a greater commercial lieu with a high default
risk. So it is not very much preferable by banks.
2) Compromise
Through compromise Banks can recover as much as possible debts by negotiation. i.e.
making sacrifice/ concession in interest, repayment etc.

3) Mergers and takeovers

Mergers and Takeovers is a process in which a sick unit is merged with a healthy unit or
sometimes a healthy unit acquires a sick unit. NPA of sick unit will get immediately
converted into a performing asset.
4) Sale of Pledged and Hypothecated Goods
Bank can recover the debts by selling the securities that were given as safety at the time of
taking a loan.
5) Lien and Set off
The greatest advantage of these non-legal remedies is that they are not barred by limitation.
They can resort to this for the recovery even if the limitation for filling suit has expired.
6) Assignment
Banks finance against LIC, Book Debt. And Supply Bills to Government Department in case
of default by the borrower. The bank can recover the debt through this non legal remedy.
7) Lok-adalat
When the borrower and banker are not able to arrive at a compromise Lok-adalat, institutes
help banks to settle disputes involving accounts which are doubtful and loss category
outstanding balance from 5 lakhs to 20 lakhs for compromise settlement under Lok-adalat.

8) Writing-off Bad debts

When the units have been closed and borrower does not have any financial means to pay off
bank dues and the debt is not recoverable by any means, the bank write off such debit and
clear it from the book. Writing off the balance is the last resort to the bank.
Legal Measures:
1) One time settlement schemes (OTS)
One time settlement schemes was launched in 1999 and again reintroduced in 2003. Through
this scheme banks can recover outstanding amount in default upto rs. 10 cr.
2) Debt Recovery Tribunal (DRTs)
DRTs have been set up in the country in 1993 on the NARSHIMHAM COMMITTEE
recommendations under the recovery of debt due to bank and financial institution act. These
tribunals were set up to suits of the value of the recovery over 10 lakh
DRTs officer will recover the amount by attachment or by scale of immovable property or
asset of the defendant or his detention in prison or by appointing a receiver for the
management of the defendant

.
3) Corporate debt restructuring(CDR)
CDR is applicable to structuring of corporate debts of rs.20 cr. and above. It is voluntary
system based on debtor creditor agreement (DCA) and inter creditor agreement (ICA)
4) Filing of suit
This is the last legal option for banks to recover the debt.

6. 10 ARCs - ISSUES OF CONCERN

The following issues are concerned with regard to the ARCs:1) Ability to Dispose off the Acquired Assets
In India, bulk of NPAs relate to units that are either defunct or in Sectors like Steel and
Textiles that have become uncompetitive or obsolete with the opening up of economy,
lowering of tariffs or introduction of modern technology etc. Unless the assets to be
transferred are realisable easily through Bundling, securitization of auction ARCs may not
be quite keen to take up. In India ready market for such assets is yet to be developed. Under
the circumstances, ARCs may not be able to do much for the Recovery of NPAs
2) Problems in Disposing off Land
Land Ceiling Laws & Restrictions applicable in areas often prevent the Use of land for any
purpose other than for which it was originally allotted. Hence, Ceiling of land inn these
areas may be a big problem.
3) No Market for Distressed Assets
Unlike other countries, where there are specialized ARCs for buying out NPAs and for
selling them overtime, there is no market for Distressed Assets in India. Thus ARCs may get
stuck with worthless Assets on their books of accounts.
4) Pricing of Acquired Assets
Whereas banks and financial institutions would like to sell the security Interest at a
reasonable price, ARCs would like to buy them at a huge discount Prising of acquired assets
may pose a serious problem for the success of ARCs.
5) Funds to Buy Assets
ARCs may resort to issuance of bonds against assets transferred from the original creditor
(Banks/ FIs). Who will guarantee these bonds is a critical Question.
Since ARCs are to be privately funded investment decision of promoters would be driven by
profit motive.

6) Lack of Experience to Manage ARCs

ARCs may not have requisite skill/ expertise to manage the acquired Units and this may lead
to further deterioration in the health of the concerned unit The experience of the government
in taking over of sick units is so far not encouraging.
7) Independence of ARCs
The organizational structure of ARCs is equally important. Unless they are given operational
freedom, they may not be successful in running the unit /disposing it off.
8) Recapitalisation Problem
Since ARCs are likely to buy the NPAs at a substantial discount, banks and FIs transferring/
selling the assets may face a capital adequacy problem if they have not kept adequate
provision against the underlying assets.

9) Sharing of Profit and Loss

Pricing and Sharing of profit & loss between banks, financial institutes and ARCs is another
problem that has to be sorted out among parties to sale/ purchase transfer of the distressed
assets.
10) Recurring Problem of NPAs
Since ARCs would be required to maintain Capital Adequacy Ratio of 15% and they could
address only stock problem of banks/ FIs and not the flow problem, they wont recur in
future.
11) ARCs- Not a Special Purpose Vehicle ( SPV )
ARCs should be developed as a Business Model and not as a self-liquidating SPV to tackle a
particular problem. NPAs will continue as natural process, despair stringent checks &
balances, particularly in a growing economy like India.
12) Position of other Creditors
In case of many Corporate, FIs have financed the fixed assets, wherea banks have financed
the current assets and they have their respective first charge on the assets financed by them.
It needs to be clarified what will happen to other creditors after assets are taken over by Arcs.
The act requires approval by Asset Quality Management of NPAs.

CH. 7 : PROJECT 1 REASONS BEHIND DEFAULTS BY

SME BORROWERS IN REGION 1 AHMEDABAD AND
STRATEGY TO RECOVER NPA.
SURVEY REPORT FINDINGS, REASONS OF NPAs, ANALYSIS,
SUGGESTED STRATEGIES AND CONCLUSIONS
The LHO allotted us the Region 1 of Ahmedabad for the purpose of conducting survey
regarding the reasons behind defaults by SME borrowers in that region and to discover the
strategies to recover NPAs. The total no. of defaulters in the 26 branches of Region 1 is as
below:-

No. of Defaulters in Region - I of Ahmedabad

Sr. No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Name of Branch
Bapunagar
Sahijpur Bogha
Naroda
GIDC, Odhav
Madhupura
Shahibaug
Khanpur
Girdharnagar
Railwaypura
Rakhiyal
Saraspur
Shahalam Gate
Patharkuva
Meghaninagar
Naroda I.E.
Maninagar
Kubernagar
Khokhara
Kankaria
Jamalpur
GVMS, Odhav
Civil Hospital
Astodia Road
Amraiwadi
Cantonment
AMCP

7. 1 SURVEY REPORT

No. of Customers
39
28
14
3
46
7
14
240
18
46
15
189
17
81
3
40
21
118
7
91
4
11
85
2
10

A survey was conducted of first ten regions out of twenty-six branches which totals 455 out
of the 1150 total customers as mentioned below:-

SR.NO.

REGIONS

NO. OF CUSTOMERS

1.

BAPUNAGAR

39

2.

SHAIJPUR BOGHA

28

3.

NARODA

14

4.

GIDC ODHAV

5.

MADHUPURA

46

6.

SHAHIBAUG

7.

KHANPUR

14

8.

GIRDHARNAGAR

240

9.

RAILWAYPURA

18

10.

RAKHIYAL

46

TOTAL

455

7. 2 FINDINGS OF THE SURVEY

REASONS OF NPAs (SBI TRADERS)
1) Diversion of working capital
Any one or more of the following events would be construed as diversion of funds:-

 Utilization of short-term WC funds for long-term purposes not in conformity with the terms
of sanction.
Deploying borrowed funds for purposes / activities or creation of assets other than those for
which the loan was sanctioned
Transferring funds to the subsidiaries / Group companies or other corporate by whatever
modalities.
Routing of funds through any bank other than the lender bank or members of consortium
without prior permission of the lender.
Investment in other companies by way of acquiring equities / debt instruments without
approval of lenders.
Shortfall in deployment of funds vis--vis the amounts disbursed / drawn and the difference
not being accounted for.
eg. OXO PUMPS LTD. (Sahijpur Bogha Branch)
CITY GLASS CENTRE (Madhupura Branch)
2) No Flexibility
Traders complain that banks provide no flexibility of payment period even to regular interest
and principal payer.
eg. NARAIN TRADERS (Naroda Road Branch)
3) Problem with other accounts
One of the traders had problem with one of the account name EPC so his CC account was
also declared NPA.
eg. UNITED INDUSTRIES (Norada Road Branch)
4) Problems faced due to devaluation of rupee
There are problems faced by importers and exporters due to devaluation of rupee and
fluctuations of various currencies in international market.
eg. UNITED INDUSTRIES (Norada Road Branch)
5) Strained labor relations
Traders may face loses due to strained labor relations resulting in strikes and lockouts.
eg. VARSHA NATHU BHAI (Sahijpur Bogha Branch)
6) Delay in release of term loan
Due to delay in release of term loans there may cause problem of opportunity loss.
eg. SHREE SHAKTI INDUSTRIES (Rakhial Branch)
. PARAG BHUPENDRABHAI (Shahibaug Branch)
CITY GLASS CENTRE (Madhupur Branch)

7) Lack of Infrastructural facilities

There were traders who could have improved their infrastructural facilities and could have
earned profits. But due to failure of such facilities they were not able to pay the interest and
principal amount.
eg. AMBICA PACK PRINT PVT. LTD. (Bapunagar Branch)
8)

Lack of defaulter friendly legal system

Sometimes banks do not tend to understand traders problems and send threat letters to warn
them. Bank does not have any time to negotiate with the traders and give them some
concessions.
eg. MIRINAL POLYMERS (Bapunagar branch)

9) Multiple finance
The traders who had taken loan from more than one bank were unable to pay their
installments due to the increasing debt burden. The list of those is as follows:eg. CITY GLASS CENTRE (Madhupura Branch)
MANOJ PARMAR (Girdharnagar Branch)
MARUTI TRAVELS (Shahibaug Branch)
SIDDHACHAKRA ART (Madhupura)
PARAG BHUPENDRABHAI (Shahibaug Branch)
NARAIN TEXTILES (Naroda Branch)
10) Willful Defaulters
A willful default would be deemed to have occurred if any of the following events are noted: The Unit had defaulted in meeting its payment / repayment obligations to the Lender even
when it has the capacity to honor the said obligations
The Unit has defaulted in meeting its payment / repayment obligations to the Lender and has
not utilized the finance from the Lender for the specific purposes for which finance was
availed of but has diverted the funds for other purposes.
The Unit has defaulted in meeting its payment / repayment obligations to the Lender and has
siphoned off the funds so that the funds have not been utilized for the specific purposes for
which finance was availed of, nor are the funds available with the Unit in the form of other
assets.
eg. RAVI CHEMICALS (Bapunagar Branch)
SHREE FURNITURE (Madhupura Branch)
VANDANA STORES (Madhupura Branch)
ANIL BHIKABHAI (Girdharnagar Branch)
JAY MADI TRAVELS (Shahibaug Branch)
PARAG BHUPENDRABHAI (Shahibaug Branch)
MARUTI TRAVELS (Shahibaug Branch)
SURESHBHAI (Khanpur Branch)

INDRAVADAN (Khanpur Branch)

11) Siphoning of funds
Siphoning of funds should be construed to occur if any funds borrowed from banks / FIs are
utilized for purposes unrelated to the operations of the borrower, to the detriment of the
financial health of the entity or of the lender.
The decision as to whether a particular instance amounts to siphoning of funds would have to
be a judgment of the lenders based on objective facts and circumstances of the case.
eg. CITY GLASS CENTRE (Madhupura Branch)
DEEP MARKETING (Khanpur Branch)
12) Closure of units
There were many traders whose units were closed or the owners were not available. The list
of those is as follows:eg. GHANSHAYAM METALS (Naroda Road Branch)
EXCELLENT ENGINERING (Sahijpur Bogha Branch)
MEENU TRADERS (Sahijpur Bogha Branch)
SHREE LAXMI INDUSTRIES (Bapunagar Branch)
FITNESS TREND (Khanpur Branch)
SHAHI READYMADE (Madhupura Branch)
TIRTH MARKETING (Khanpur Branch)
MARUTI TRAVELS (Shahibaug Branch)

13) Subsidy amount

Some of the defaulters were not paying their EMIs because they believed that they already
had the subsidy amount lying in the banks. Such defaulters have mainly taken loans for the
CNG autos and comprise mainly of the CNG rickshaw-walas. The list of such defaulters is as
under:eg. YASHWANTBHAI (Girdharnagar Branch)
RAMANBHAI (Girdharnagar Branch)
MANGAJI DAHYAJI (Girdharnagar Branch)
GULABBHAI JAMALBHAI (Girdharnagar Branch)
VINOD VALLABHBHAI (Girdharnagar Branch)
14) Time-consuming
Some of the customers and traders felt that going to banks and waiting in the long ques
consumed a major chunk of their time. So they avoided to go to banks due to this reason in
order to save time which resulted into NPAs.
eg. MAHESHKUMAR SHIVLAL (Girdharnagar Branch)
INTRAGUARD (Shahibaug Branch)

BHARATBHAI BHAGILAL (Girdharnagar Branch)

SHAHI READYMADE (Madhupura Branch)
15) Market failure
The projects of few of the customers had failed due to the market conditions which were
unavoidable and so they were not in a position to repay back the loans of the bank.
eg. M\S MAX ENTERPRISES (Shahibaug Branch)
MR. NARESH RATILAL VYAS (Shahibaug Branch)
SREE FURNITURE (Madhupura Branch)
16) Lack of Entrepreneurial skills
Some of the projects undertaken by the customers failed due to lack of entrepreneurial skills
and on account of that they were unable to pay their EMIs and thus were defaulters which
resulted into NPAs.
eg. SHAHI READYMADE (Madhupura Branch)
SAGAR PRODUCTS (Madhupura Branch)
SIDDHACHAKRA ART (Khanpur Branch)
J. B. SALES (Khanpur Branch)
TIRTH MARKETING (Madhupura Branch)

7. 3 ANALYSIS OF THE SURVEY

CHART 1: REASONS OF TAKING A LOAN

REASONS

NO.OF
CUSTOMERS

NO. OF
DEFAULTERS

NO. OF
DEFAULTERS
(IN %)

137

62

45.255474

97

47

48.4536082

68

38

55.8823529

106

71

66.9811321

47

16

34.0425532

455

234

51.4285714

EXPANSION
RENOVATION
PURCHASING MACHINARY
PURCHASING VEHICLE
WORKING CAPITAL
TOTAL

D E F A U L T E R S (IN % )

REASONS OF TAKING LOAN

80
70
60
50
40
30
20
10
0
EXPANSION:

Series1

RENOVATION:

PURCHASING PURCHASING
MACHINARY:
VEHICLE:

WORKING
CAPITAL:

REASONS

INTERPRETATION:
Here, we can say that majority of the people have taken loan for the purpose of expansion,
but the major no. of defaulters lies in the section of taking loan for purchasing vehicles. The
percentage of defaulters in the section of expansion is comparatively low.
CONCLUSION:
Thus, less no. of loans should be advanced towards purchasing vehicles and if given then its
feasibility should be properly verified.
The advances towards working capital should be encouraged as the chances of it getting
defaulted are low.

CHART 2: COMPARISION OF LOAN AMOUNT OF THE CUSTOMERS AND

DEFAULTS MADE BY THEM

LOAN AMOUNT

NO. OF
CUSTOMERS

NO. OF DEFAULTERS

NO. OF DEFAULTERS
(IN %)

157

112

71.33757962

96

58

60.41666667

78
55

31
18

39.74358974
32.72727273

BELOW 1 LAKH
1-5 LAKH
5-20 LAKH
20-50 LAKH

50 LAKH &
ABOVE
69

15

21.73913043

455

234

51.42857143

TOTAL

LOAN AMOUNT-DEFAULTS

LOA N A MOU N T

50 LAKH & ABOVE

20-50 LAKH
5-20 LAKH

Series1

1-5 LAKH
BELOW 1 LAKH
0

20

40

60

80

NO. OF DEFAULTERS (IN %)

INTERPRETATION:
Here, we can see that the no. of customers who have taken loan below 1 lakh is high
compared to any other section. In the same way, the no. of defaulters in this section is the
highest. We can also say that though the no. of customers in the section of above 50 lakhs is
decent, the no. of customers who are defaulting is lowest.

CONCLUSION:
The loans advanced to customers in the section of below 1 lakh should be sanctioned with
more scrutiny and their credit appraisal should be done rigorously.
More strict actions should be taken against the defaulters belonging to section below 1 lakh
so that the no. of NPAs can be reduced.

CHART 3: ACTIONS TAKEN BY BANK AGAINST NPA ACCOUNT HOLDER

LOAN
AMOUNT

NO. OF
DEFAULTERS

YES

NO

112

11

101

58

17

41

31

21

10

18

12

15

15

234

76

158

BELOW 1
LAKH
1-5 LAKH
5-20 LAKH
20-50 LAKH
50 LAKH &
ABOVE
TOTAL

ACTIONS TAKEN BY BANK

N O. OF D EFA U LTER S

120
100
80

NO. OF DEFAULTERS
YES
NO

60
40
20
0
BELOW 1
LAKH

1-5 LAKH

5-20 LAKH 20-50 LAKH 50 LAKH &

ABOVE
LOAN AMT.

INTERPRETATION:
From this chart, it is seen that the actions taken by the bank in the section of loan amount
given below 1 lakh is less compared to any other sections. This can be due to the expensive
and lengthy legal procedures which nullify the effect of recovering the loan amount. The
bank takes actions against those loans which are of greater amount.
CONCLUSION:
The only solution to this can be to adopt a more effective and efficient credit rating appraisal
system.
Banks must prescribe various types of formats, returns for getting feedback report on the
functioning of their borrowing units.
There should adopt other measures that should be resorted to for recovering NPAs in case of
lower amounts.

CHART 4: NO. OF DEFAULTERS - REGIONWISE

REGIONS

NO. OF
CUSTOMERS

NO. OF
DEFAULTERS

(IN %)

39

15

38.46153846

28

32.14285714

14

21.42857143

NIL

46

18

39.13043478

28.57142857

14

42.85714286

240

156

65

18

38.88888889

46

18

39.13043478

455

234

51.42857143

BAPUNAGAR
SAHIJPUR
BOGHA
NARODA
GIDC, ODHAV
MADHUPURA
SHAHIBAUG
KHANPUR
GIRDHARNAGAR
RAILWAYPURA
RAKHIYAL
TOTAL

NO. OF DEFAULTERS (IN %)

BAPUNAGAR
SAHIJPUR BOGHA
NARODA
GIDC, ODHAV
MADHUPURA
SHAHIBAUG
KHANPUR
GIRDHARNAGAR
RAILWAYPURA
RAKHIYAL

INTERPRETATION:
From the above chart, we can interpret that the no. of defaulters in Girdharnagar area is quite
high. This can be due to the influence of one defaulter on other. While the no. of defaulters in
Naroda region is comparatively low.

CONCLUSION:
In Girdharnagar area, the bank should tighten the follow-up proceedings so that the defaulters
start paying up the loan amount.
The bank can also reduce the amount of loan given to the people of Girdharnagar.
We can encourage the amount of advances given to Naroda and GIDC Odhav area.
In Girdharnagar area, the bank has an option to conduct meetings with the borrowers. And
can discuss about recovery through compromise settlement like providing waivers in the
principal or in the EMI amount.

CHART 5: DEFAULTERS CLASSIFIED ACCORDING TO NORMS OF ASSETS

NORMS FOR ASSET

NO. OF

CLASSIFICATION

DEFAULTERS

SUBSTANDARED ASSETS
114
DOUBTFUL ASSETS
80
LOSS ASSETS
40
TOTAL
234

NORMS FOR ASSET CLASSIFICATON AT SBI

SUBSTANDARED
ASSETS
DOUBTFUL ASSETS
LOSS ASSETS

INTERPRETATION:
On the basis of the above figure, it is seen that the proportion of substandard assets is the
highest comparatively and that of assets falling in the loss category is the lowest. This is due
to the fact that the bank does not take much action against the defaulters in the substandard
stage and as the legal costs involved for the same are also higher it will increase the overall
costs. But as and when the assets enter the doubtful stage, the bank starts taking vigorous
actions in order to recover NPAs. So then, the proportion of NPAs starts decreasing
significantly.

CONCLUSION:

 In order to check this trend bank should lay more stress on monitoring of accounts in standard
category to identify irregular or border line accounts which are likely to slip to NPA category
and initiate timely account specific corrective measures so that these stay healthy.
There should be autonomy in dealing with the NPA accounts and there should be no
interference in the banks method of collecting dues.

CHART 6: NO. OF DEFAULTERS INTERESTED IN REGULARIZING THE

ACCOUNT
RESPONSE

NO. OF
DEFAULTERS

YES
147
NO
87
TOTAL
234

NO. OF PEOPLE WHO WANT TO REGULARIZE

THE ACCOUNT

S
YES
NO

INTERPRETATION:
The above chart reflects that the no. of defaulters who are willing to regularize the account is
maximum. The defaulters who are not interested in regularizing their accounts comprise
mainly of willful defaulters. The borrowers, particularly the willful defaulters, are taking
banks for a ride and not taking back the loans as they have realized that the legal process of
recovery is extremely slow and the cases in the courts can be dragged for years.
CONCLUSION:

 Banks should set up committees at various levels with specifically delegated powers to
approve the compromise proposal and allow concessions to the borrowers, depending upon
the merits of individuals case for recovering their dues, within the policy framework.
Banks should take effective possessions and sale of the securities charged to them for
realization of their dues in case of the loss assets category.
Civil courts should earmark separate benches for dealing with loan recovery cases of
financial institutions.

CHART 7: ANALYZING MAIN REASONS OF NPA

CAUSES

NO. OF DEFAULTERS

WILLFUL DEFAULTING
198
NO FOLLOW UP
118
DIVERSION OF FUNDS
62
SIPHONING OF FUNDS
37
LOSS IN BUSINESS
24
OTHERS
53

WILLFUL DEFAULTING
200
150
OTHERS

100

NO FOLLOW UP

50
0

LOSS IN BUSINESS

DIVERSION OF FUNDS

SIPHONING OF FUNDS

INTERPRETATION:

Series1

After studying the above diagram, it can be observed that the reason of willful defaulting
scores the maximum as compared to all the reasons given by the defaulters. While that of
lack of proper follow-up procedures is also high. And it can also be seen that the loss suffered
by the traders in the business is minimum and it happens in the rarest of the cases.
CONCLUSION:
Banks should strengthen pre-sanction appraisal system and fine-tune the norms for credit
appraisal and risk evaluation so that these are tough but flexible.
Banks should give a lot of importance to credit monitoring and follow-up function so that the
signals of sickness can be detected at an early stage for taking timely corrective action.
The Legal system should be quite rigorous and should not let willful defaulters get away
easily. Such defaulters should be nicely reprimanded for their deeds.
DRTs require immediate strengthening so that the cases referred to them are processed
expeditiously.

CHART 8: SURVEY OF AWARENESS ABOUT ACTIONS TAKEN BY BANK

AGAINST THE DEFAULTERS

PARTICULARS

NO. OF
DEFAULTERS

AWARE
136
UNAWARE
98
TOTAL
234

AWARENESS ABOUT ACTIONS TAKEN BY BANK

YES
NO

INTERPRETATION:
Here, on the basis of the chart it is very clearly evident that most of the defaulters are very
well aware of the actions that can be taken or initiated against them in case of NPAs.
However, the proportion of defaulters who are unaware of the actions that can be taken
against them is also not small.
CONCLUSION:
More awareness programs should be generated and the borrowers should be made aware of
the likely repercussions they may have to undergo in case of NPAs which may instill a deep
crunching fear in them to repay the loans.
Separate meetings should be organized with the defaulters and the concerned authority should
explain calmly and should try to bring them towards the right path of paying loans.

CHART 9: ANALYSIS OF THE SECTORS BELONGING TO NPA

TYPE OF COMPANIES

NO. OF
CUSTOMERS

NO. OF
DEFAULTERS

IN %

152

66

43.42105

52

14

26.92308

106

84

79.24528

140

69

49.28571

MANUFACTURING
INDUSTRIES
PROFESSIONALS
TAXI DRIVERS
RETAIL INDUSTRIES

MINING INDUSTRIES
5

20

455

234

51.42857

TOTAL

NATURE OF DEFAULTERS

MANUFACTURING
INDUSTRIES
PROFESSIONALS
TAXI DRIVERS
RETAIL INDUSTRIES
MINING INDUSTRIES

INTERPRETATION:
The above chart makes it evident that the maximum of defaulters in Region 1 comprise of
taxi drivers. Their accounts become NPAs as they feel that they already have the subsidies
provided by the government and therefore do not pay their EMIs on time.
CONCLUSION:
Scientific tools must be used for appraisals of the project for loan purpose.
Experts should be appointed to gauge the viability of the project.
The banks should prescribe a system of annual renewal of the loan accounts in order to
contain the no. of defaulters in each sector.

7. 4 SUGGESTED STRATEGIES TO REDUCE NPAs

Banks have realised that high level of NPA in their portfolio is a drag on their profitability
which is already under strain. They have initiated various strategies and action points to bring
down their level of NPAs and have achieved some degree of success in terms of recovery and
up- gradation of their existing NPAs. As regards net reduction, there is no progress as the
level of NPAs continues to rise mainly on account of fresh slippage of standard accounts to
NPA category.
We have identified the following strategies and action points, some of which have been
successfully tried by some of the major banks in bringing down their NPAs and some are
based from our experience of the survey which does not exist in the system and are yet to be
put into practice.
1. Creation of proper database
Banks should create proper database of their NPA portfolio well designed formats to provide
meaningful inferences, which would help them in evolving effective strategies as well as
account specific action plan for reduction in NPA.
Banks should develop history sheets of individual NPA which should provide the detailed
position of account.
Creation of scientific database and its periodic updating would also help bank in recovery of
NPAs
NPA data should be computerised for quick retrieval and prompt action.
2. Creating awareness among bank staff
There is an urgent need for creating proper awareness of the adverse impact of NPAs on
profitability among bank staff.
To discuss the subject of NPA banks should conduct regular forums like meetings and
conferences of branch managers/officials from administrative offices.
Banks training colleges should invariably devote one or two sessions to the subject
management of NPAs in every programmed and even organize special seminars on the
subject.
3. Strengthening Pre-Sanction Appraisal
Banks should strengthen pre-sanction appraisal system and fine-tune the norms for credit
appraisal and risk evaluation so that these are tough but flexible.
A proper pre-sanction appraisal of any loan proposal can help assessment of the need based
funds required by the borrowing unit and techno economic viability of its operations.
Any optimism or pessimism on part of the bank in sanction of loan facilities without proper
appraisal may lead to over or under-financing which can have adverse impact on units
functioning.
Appraisal of the projects is a specialised function and therefore banks should conduct regular
training programmes for their officers who have the desired aptitude for the subject.
4. Post-sanction Monitoring and Follow-up system of loan account

 Banks are giving a lot of importance to credit monitoring and follow-up function so that the
signals of sickness can be detected at an early stage for taking timely corrective action.
Banks must prescribe various types of formats, returns for getting feedback report on the
functioning of their borrowing units.
Banks should streamline their post-sanction monitoring and supervision systems to avoid
multiplicity information on functioning and conduct of their borrowal accounts.
Banks should set up separate monitoring departments at the controlling offices at the
periodical review of the accounts and giving feedback to credit sanctioning departments for
taking necessary corrective actions, whenever required.
Banks should evolve a system of on-the-spot study of assisted units by banks own technical
experts periodically.
5. Rehabilitation of potentially viable sick units
Now a day it is seen that banks are reluctant to provide rehabilitation finance even to
potentially viable sick units as these are generally under NPA category.
Rehabilitation of sick units should be undertaken for potentially viable units, which gets into
difficulty mainly due to external reasons beyond the control of management and where
promoters are keen to revive their units and are willing to induct funds for their revival.
Rehabilitation should not be undertaken by banks of those units whose promoters are either
wilful defaulters or of doubtful integrity and sick units are unviable.
6. Review and renewal of loan accounts
Most of the banks have in place a regular system of annual renewal of the accounts availing
working capital facilities at the level of sanctioning authority.
It is suggested that such reviews should be undertaken on half yearly or quarterly basis
keeping in view the NPA classification norms, which are based on two quaters irregularity in
the accounts.
It is necessary that bank should prescribe a system of periodic review of such projects during
implementation stage as well as after completion
They should call for the report on well designed formats which should provide meaningful
information about implementation of the project, functioning of the unit, repayment of loan
etc.

7. Meetings with the borrowers

Bankers should have frequent interactions and meetings with the borrowers for creating better
understanding and mutual trust so that the borrowers keep their bankers informed of any
problem faced by them for initiating timely corrective actions.
Bankers should be more understanding towards their borrowers and provide them the need
based facilities promptly to sustain the increased level of operations or to tide over their
liquidity problems.
8. Checking slippage of standard accounts to NPA category

 Banks have done well in reduction of their existing NPA but due to heavy slippage of
performing accounts to NPA category, their NPA portfolio is on increase.
To check this trend bank should lay more stress on monitoring of accounts in standard
category to identify irregular or border line accounts which are likely to slip to NPA category
and initiate timely account specific corrective measures so that these stay healthy.
9. Recovery/Legal department
Banks should set up independent recovery and legal departments at their corporate
controlling administrative offices manned by well qualified and competent law officers with
adequate supporting staff for elective monitoring of recovery suits and execution of decrees.
These departments may consider write off even if suit filed accounts which are continuing for
long and there are no securities and chances recovery.
It is suggested that banks should standardize the loan documents to cover various types of
facilities and ensure their proper execution by having some system of audit of documents,
preferably in house or from lawyers of repute, before disbursement of the loans.
10. Recovery of dues through compromise settlements
In case a borrower has decided not to peruse the activity or has closed down the unit for one
reason or the other and is also not financially sound to pay the dues in full, it will be proper
for the banks to explore the possibility of recovery of the dues through compromise even if
bank has to make some sacrifice in interest, repayment etc.
Recovery of the dues through compromise route should be preferred over the legal process as
the former is faster and the amount recovered can also be recycled for generating further
income.
Banks should have well defined compromise policy clearly spelling out the sacrifices which
can be allowed at the level of different sanctioning authorities to avoid any objections at the
later date.

11. Bringing attitudinal change

There is general tendency among branch managers not to support the borrowers sanctioned
loans by their predecessors even to tide over their temporary liquidity problems.
Banks are generally reluctant to provide any assistant to such units and prefer to initiate
recovery action since it is an easy way to avoid any risk and personal responsibility.
Banks should take steps to bring about attitudinal change in the branch managers so that they
while dealing with the loan accounts sanctioned by their predecessors, act in a natural and
unbiased manner.
12. Writing-off bad debts
Banks may come across cases where the units have been closed or the promoters are not
traceable.
There may also be borrowers who do not have any financial means to pay off bank dues.
Initiating legal action in such cases would have no meaning since it would involve spending
of substantial amount for recovering bad debts, which are not recoverable.

 It would be advisable that banks may write-off such debts, which are not recoverable and
cleanse their books.
13. Involvement of staff in recovery process
To motivate the staff, banks should also introduce monetary and non-monetary incentive
scheme for them who are able to affect substantial reduction in NPAs.
Non-monetary incentive can be: Weight age in performance appraisal for the staff for promotion.
Giving appreciation letters, shields, etc to individual staff members in
branch officers.
Monetary incentive can be: Special leave and reimbursement of the fare including free stay at
banks holiday room
Reimbursement of limited expenses incurred on travel and
entertainment etc.
14. Filing Claim cases with DI&CGC and ECGC
Banks generally their priority sector loans covered under Deposit Insurance and Credit
Guarantee Corporation (DI&CGC) and to export loans under Export Credit Guarantee
Corporation (ECGC) scheme to protect themselves against the possible losses on account of
inherent risks involved in financing such borrowers.
Banks should promptly lodge the claims with such organisations, where loans are not
recoverable and pursue with them closely till the claims are settled.

15. Government Guaranteed NPAs

It is suggested that RBI should help the banks in expeditious recovery of their dues from the
concerned state government departments, which do not honor their commitment in the case of
invocation of the guarantees by the banks.
16. Delayed payment by central government undertakings
It is expected that the central government undertakings and public sector units should make
payments of the bills raised by their suppliers promptly as per terms of contract.
In practice it is seen that such payments are generally made with lot of delay having adverse
impact on the functioning of the supplier units and in turn slippage of the units to NPA
category.
It is suggested that ministry of finance and RBI should issue instructions to these
organisations to pay the bills raised by the suppliers as per terms of contract and i no case
later than one month from the date of supplies made.
17. Sacrifices made by banks in compromise proposals
Banks are formulating policy on compromise and negotiated settlements of bad debts with
the approval of their board.

 As per policy approved, banks have also set up committees at various levels with specifically
delegated powers to approve the compromise proposal and allow concessions to the
borrowers, depending upon the merits of individuals case for recovering their dues, within
the policy framework.
It is suggested that RBI should formulate a common policy for uniform adoption by the banks
and the cases considered under the same should not be further subject to questioning by the
government investigating and enforcement agencies, etc.
18. Approaching debt recovery tribunals
As legal process for recovery of banks dues has been time consuming and expensive, the
setting up of debt recovery tribunals by the government under the act Recovery of debts due
to Banks and Financial Institutions came as laudable step.
It is seen that DRTs have been set up at some of the state headquarters but the progress of
cases referred to as DRTs for settlement has been quite slow, mainly due to inadequate
presiding and recovery officers and supporting staff provided to them.
The DRTs require immediate strengthening so that the cases referred to them are processed
expeditiously.
Further these tribunals also have not been set up in some of the states and government should
take urgent steps to set up DRTs in all the states.
It is also suggested that DRTs should be given more powers to pass orders for attachment of
the assets even during the pendency of DRT proceeding, to execute decrees, to order service
of summons by hand/registered post and by publication simultaneously, to appoint the
receivers and to issue orders etc. to make their functioning more effective.
19. Possession and sale of asset of the borrowers
The borrowers, particularly the wilful defaulters, are taking banks for a ride and not taking
back the loans as they have realised that the legal process of recovery is extremely slow and
the cases in the courts can be dragged for years.
Banks are findings it difficult to even take effective possessions and sale of the securities
charged to them for realization of their dues.
It is suggested that civil courts should earmark separate benches for dealing with loan
recovery cases of financial institutions.
20. Creation of Asset Reconstruction Fund
The Asset Reconstruction Company will concentrate on the recovery of the dues to realise the
maximum value for the asset transferred to them.
Narasimham committee in its report recommend for setting up of Asset Reconstruction Fund
for taking over bad debts of the banks accumulated over the years at discount to cleanse their
balance sheets and save them from long drawn and time consuming litigation.
21. Strengthening of Board for Industrial and Financial Reconstruction (BIFR)
BIFR was set up under Sick Industrial Companies Act 1985 for expeditious rehabilitation of
potentially viable sick industrial sick industrial companies.
BIFR in the past has been quiet effective in bringing various financial and governmental
agencies together for supporting rehabilitation packages for revival of sick companies or
dealing future course of action for recovery of the dues.

 Of late it is seen that the BIFR is losing effectiveness as banks are not keen in revival of the
companies as it results in increasing their NPA portfolio.
There is a need to improve the functioning of the BIFR should be amended suitably.
22. Approaching Lok Adalats
In case a borrower is found to be wilful defaulter, the banks should resort to legal action for
recovery of its dues without loosing time.
Banks should also remain in touch with the borrowers or his lawyers and if they are agreeable
to settle the dues, Lok Adalats which are held by local Judicial Authorities in some states be
approached for such settlements.
It is suggested that Lok Adalats be set up on permanent basis at all the district headquarters
and should be properly equipped with adequate staff and infrastructure.
23. Subsidizing Provisions made by banks for loan under weaker sector and government
sponsored schemes
As per government and RBI instructions banks are required to achieve national goals of
providing loans to weaker section of the society and under self employment schemes of
government for unemployed youths, etc.
These loans, in addition to carrying low interest rate, thereby generating less income for the
banks are also quite risky in nature.
It is suggested that government should subsidize the losses caused on account of income
derecognizing, provisions and write-off of loan sanctioned under government sponsored
schemes from the budgetary allocations.
24. State debt recovery act
Some of the states have passed an act to provide speedy recovery of bank loans from the
borrowers who have defaulted in repayment of the same by treating the same as arrears of
land revenue.
It is suggested that such an act should be passed by all the states and state government should
provide adequate staff and infrastructure for effective implementation of the Act and recovery
of dues from the defaulter borrowers.
25. Recovery of loans to road transport operators
Many of the loans given by banks to road transport operators are in default and in NPA
category.
It is suggested that central government to issue some directives to the licensing authorities to
renew the license or permit transfer of the vehicles of transporters only after production of
No Dues Certificate from the financing bank.
Such a certificate if made mandatory for renewal of licenses by licensing authority will prove
quite helpful in recovery of loans from the transporters.
26. Improve quality of appraisal
Scientific tools must be used for appraisals of the project for loan purpose.
Experts should be appointed to gauge the viability of the project.

27. Autonomy in dealing with NPAs

It is seen that due to interference from RBI/Government banks has to compromise with its
profit.
Adequate autonomy must be provided to banks so that banks could take steps to recover the
loss amount and decide on the people to whom they must give loan.
28. Healthy Banker Borrower Relationship
A healthy Banker Borrower relationship should be estabhlished. Many instances have been
reported about forceful recovery by the banks, which is against corporate ethics.
Debt recovery will be much easier in a congenial environment.

29. Training for development of entrepreneurial skills

Assisting and training the borrowers in developing his entrepreneurial skills will not only
establish a good relation between the bank and the borrowers, but will also help the bankers
to keep a track on their funds.
30. Providing tax incentives
Some tax incentives like capital gain tax exemption, carry forward the losses to set off the
same with other income of the Qualified Institutional Borrowers(QIBs), should be granted so
as to ensure their active participation by way of investing sizeable amount in distressed assets
of banks.

The strategies for reduction of NPAs as discussed are illustrative and not exhaustive in nature
and each bank should evolve its own policy guidelines to tackle and manage their NPA
portfolio.

7. 5 CONCLUSIONS
Expansion of credit is must for a country like India, but high credit growth may lead to high
NPAs. Policymakers therefore face the dilemma as to how to minimize such risks that arise
from dilution in credit quality, while still allowing bank lending to contribute to higher
growth and efficiency. We have therefore suggested some strategies to control the mounting
proportion of NPAs based on our observations from the survey.
As per our findings, we would like to conclude that SBI should make efforts to recruit more
staff members for the follow up purpose & be strict in recovery process so that it sets as an
example to other borrowers. We would also like to suggest that Loan sanction procedure
should be well structured so that SBI could reduce no of defaulters.
Rehabilitation should be provided to sick units so that they are revived & could earn profits to
pay the remaining amount. Bank should adopt the strategy of compromise for the borrowers
of small amount rather than indulging in long & expensive legal procedure. Bank should
give more flexibility to the borrowers for the payment of EMI period.
In some cases where the borrower is not able to pay the full amount of interest & principal,
bank should cooperate by waiving off some amount of interest.
It is not only the implementation of the above strategies but also the SBI staff should take
responsibility of sanctioning loans and proper follow up proceedings of borrowers accounts.
Staff should be trained and well versed with the entire procedure of credit appraisal, risk
analysis and decision making. In case of new borrowers, especially corporate borrowers,
proper analysis of the cash flow statements of the last five years is to be done carefully.
There is no gainsay in the fact that every commercial organization exists with the motive of
earning profit and banks are no exception. The objective function therefore, is to maximize
the profit and this can be done by taking corrective steps to bring down the level of NPAs.
Our efforts will only be considered fruitful when the bank will take into consideration the
strategies crafted by us. We understand it is difficult to implement all the strategies at a time,
but this is a small cost that the bank will be paying for its efficiency and increased profits.

7. 6 COMPARATIVE STUDY
(Rs m)

ICICI Bank
HDFC Bank
UTI Bank
IDBI Bank
SBI
Corp. Bank
BOB
ICICI
HDFC

Gross NPAs Gross NPAs as a % Net NPAs as a % of

of total loans
total loans
Private sector banks
4,210
6.0%
2.2%
1,468
3.2%
0.4%
2,258
4.7%
3.8%
1,500
4.8%
3.1%
Public sector banks
158,750
14.0%
6.0%
4,847
5.6%
2.0%
41,860
15.3%
6.8%
FIs
59,880
9.9%
4.9%
3,001
2.3%
0.9%

Provision coverage*

63.4%
85.9%
19.7%
36.0%
56.9%
64.7%
55.8%
50.2%
62.4%

CH.8 : SUBPRIME CRISIS

The term subprime lending refers to the practice of making loans to borrowers who do not
qualify for market interest rates owing to various risk factors, such as income level, size of
the down payment made, credit history, and employment status. The value of U.S. subprime
mortgages was estimated at $1.3 trillion as of March 2007.
The subprime mortgage crisis is an ongoing economic problem manifesting itself through
liquidity issues in the global banking system owing to foreclosures which accelerated in the
United States in late 2006 and triggered a global financial crisis during 2007 and 2008. The
crisis began with the bursting of the US housing bubble and high default rates on "subprime"
and other adjustable rate mortgages (ARM) made to higher-risk borrowers with lower income
or lesser credit history than "prime" borrowers. Loan incentives and a long-term trend of
rising housing prices encouraged borrowers to assume mortgages, believing they would be
able to refinance at more favorable terms later. However, once housing prices started to drop
moderately in 20062007 in many parts of the U.S., refinancing became more difficult.
Defaults and foreclosure activity increased dramatically as ARM interest rates reset higher.
The mortgage lenders that retained credit risk (the risk of payment default) were the first to
be affected, as borrowers became unable or unwilling to make payments. Major Banks and
other financial institutions around the world have reported losses of approximately U.S. $379
billion as of May 21, 2008. The widespread dispersion of credit risk and the unclear effect on
financial institutions caused lenders to reduce lending activity or to make loans at higher
interest rates.

8. 1 CAUSES OF CRISIS
1. The housing downturn
Subprime borrowing was a major contributor to an increase in home ownership rates and the
demand for housing. The overall U.S. homeownership rate increased from 64 percent in 1994
to a peak in 2004 with an all time high of 69.2 percent.
This demand helped fuel housing price increases and consumer spending. Between 1997 and
2006, American home prices increased by 124%. Some homeowners used the increased
property value experienced in the housing bubble to refinance their homes with lower interest
rates and take out second mortgages against the added value to use the funds for consumer
spending. U.S. household debt as a percentage of income rose to 130% during 2007, versus
100% earlier in the decade. This excess supply of home inventory places significant
downward pressure on prices. As prices decline, more homeowners are at risk of default and
foreclosure.

2. Role of borrowers
Easy credit, combined with the assumption that housing prices would continue to appreciate,
encouraged many subprime borrowers to obtain ARMs (Adjustable rate mortgages) they

could not afford after the initial incentive period. Once housing prices started depreciating
moderately in many parts of the U.S., refinancing became more difficult.
Some homeowners were unable to re-finance and began to default on loans as their loans
reset to higher interest rates and payment amounts. Other homeowners, facing declines in
home market value or with limited accumulated equity, are choosing to stop paying their
mortgage.
3. Role of financial institutions
Financial institutions in order to earn higher profits provided loans at high risks which cost
heavily to them in the form of huge debts.
4. Role of securitization
Securitization is a structured finance process in which assets, receivables or financial
instruments are acquired, classified into pools, and offered as collateral for third-party
investment. Asset securitization began with the structured financing of mortgage pools in the
1970s. Securitization of home loans for people with poor credit not the loans themselves
were to blame for the current global credit crisis.
5. Role of mortgage brokers
Mortgage brokers do not lend their own money. There is not a direct correlation between loan
performance and income. They have big financial incentives for selling complex, adjustable
rate mortgages (ARMs), since they earn higher commissions. Brokers profited from a home
loan boom but didn't do enough to examine whether borrowers could repay.
6. Role of mortgage underwriters
Underwriters determine if the risk of lending to a particular borrower under certain
parameters is acceptable. 40 percent of all subprime loans were generated by automated
underwriting. This lead to fake documentation and wrong procedures of sanctioning loans
which became the main cause of default.
7. Role of government and regulators
Government policy actually encouraged the development of the subprime debacle through
legislation like the Community Reinvestment Act, which they say forces banks to lend to
otherwise uncreditworthy consumers.
8. Role of credit rating agencies
Credit rating agencies are now under scrutiny for giving investment-grade ratings to
securitization transactions (CDOs and MBSs) based on subprime mortgage loans. Higher
ratings were justified by various credit enhancements including over collateralization
(pledging collateral in excess of debt issued), credit default insurance, and equity investors
willing to bear the first losses. Critics claim that conflicts of interest were involved, as rating
agencies are paid by the firms that organize and sell the debt to investors, such as investment
banks.

9. Role of central banks

Central banks are primarily concerned with managing the rate of inflation and avoiding
recessions. They are also the lenders of last resort to ensure liquidity. They are less
concerned with avoiding asset bubbles, such as the housing bubble and dot-com bubble.
Central banks have generally chosen to react after such bubbles burst to minimize collateral
impact on the economy, rather than trying to avoid the bubble itself. This is because
identifying an asset bubble and determining the proper monetary policy to properly deflate it
are not proven concepts.

8. 2 EFFECTS OF CRISIS
1. Effect on stock markets
On July 19, 2007, the Dow Jones Industrial Average hit a record high, closing above 14,000
for the first time. By August 15, the Dow had dropped below 13,000 and the S&P 500 had
crossed into negative territory year-to-date. Similar drops occurred in virtually every market
in the world, with Brazil and Korea being hard-hit. Crisis has caused panic in financial
markets and encouraged investors to take their money out of risky mortgage bonds and shaky
equities and put it into commodities as "stores of value".
2. Effect on financial institutions
Many banks, mortgage lenders, real estate investment trusts (REIT), and hedge funds
suffered significant losses as a result of mortgage payment defaults or mortgage asset
devaluation. Companies from around the world, such as IKB Deutsche Industriebank, have
also suffered significant losses and scores of mortgage lenders have filed for bankruptcy. Top
management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup were
forced to resign within a week of each other. Various institutions follow-up with merger
deals.
3. Effect on insurance companies
There is concern that some homeowners are turning to arson as a way to escape from
mortgages they can't or refuse to pay.
4. Effect on home owners
As home prices have declined following the rise of home prices caused by speculation and as
re-financing standards have tightened, a number of homes have been foreclosed and sit
vacant. These vacant homes are often poorly-maintained and sometimes attract squatters
and/or criminal activity with the result that increasing foreclosures in a neighborhood often
serve to further accelerate home price declines in the area. Rents have not fallen as much as
home prices with the result that in some affluent neighborhoods homes that were formerly
owner occupied are now occupied by renters.
5. Effect on jobs of the financial sector

According to Bloomberg, from July 2007 to March 2008 financial institutions laid off more
than 34,000 employees.
6. Effect on minorities
There is a disproportionate level of foreclosures in some minority neighborhoods. About 46%
of Hispanics and 55% of African Americans who obtained mortgages in 2005 got higher-cost
loans compared with about 17% of whites and Asians, according to Federal Reserve data.
Other studies indicate they would have qualified for lower-rate loans.
7. Effect on tenants
Many renters have been forced from their homes by foreclosures due to their landlords
defaulting on loans. Foreclosure voids any lease agreement, and renters have no legal right to
continue renting.
8. Effect on world economy
Because of the global economy, and the huge Subprime "pool" of mortgages that was bought
by investors world wide, the International Monetary Fund (IMF) "says that the worldwide
losses stemming from the US subprime mortgage crisis could run to $945 billion." It has yet
to be seen if the US's stimulus plan will be enough to help the global economy too.

8. 3 ACTIONS TO MANAGE THE CRISIS

1. The Federal Reserve
The U.S. central banking system, the Federal Reserve, in partnership with central banks
around the world, has taken several steps to address the crisis. Federal Reserve Chairman Ben
Bernanke stated in early 2008: "Broadly, the Federal Reserves response has followed two
tracks: efforts to support market liquidity and functioning and the pursuit of our
macroeconomic objectives through monetary policy."
Between September 18, 2007 and April 30, 2008, the target for the Federal funds rate was
lowered from 5.25% to 2% and the discount rate was lowered from 5.75% to 2.25%, through
six separate actions.
The Fed and other central banks have conducted open market operations to ensure member
banks have access to funds (i.e., liquidity). These are effectively short-term loans to member
banks collateralized by government securities. Central banks have also lowered the interest
rates charged to member banks (called the discount rate in the U.S.) for short-term loans.
The Fed is using the Term auction facility (TAF) to provide short-term loans (liquidity) to
banks. The Fed increased the monthly amount of these auctions to $100 billion during March
2008, up from $60 billion in prior months.
Fed Chairman Bernanke advocated several solutions, including the reduction of loan
principal amounts.
In March 2008, the Fed also provided funds and guarantees to enable bank J.P. Morgan
Chase to purchase Bear Stearns, a large financial institution with substantial mortgage-backed
securities (MBS) investments that had recently plunged in value.

Federal Reserve hosted a meeting that included discussion of a central clearing house for
processing credit default swaps (CDS) and the incorporation of a protocol for managing
defaults into existing and future credit derivatives contracts.
2. Loan modification
Lenders and homeowners both may benefit from avoiding foreclosure, which is a costly and
lengthy process. Some lenders have taken action to reach out to homeowners to provide more
favorable mortgage terms (i.e., loan modification or refinancing). Homeowners have also
been encouraged to contact their lenders to discuss alternatives.
3. Bank financial health
Major financial institutions had obtained over $260 billion in new capital (i.e., cash
investments) as of May, 2008. Such capital is used to help banks maintain required capital
ratios (an important measure of financial health), which have declined significantly due to
subprime loan. This capital was raised by issuing such instruments as bonds or preferred
stock to investors in exchange for cash. Such capital raising has been advocated by the
leaders of the U.S. Federal Reserve and the Treasury Department.
Well-funded banks are in a better position to loan at favorable interest rates, which offsets the
liquidity and uncertainty aspects of the crisis. That banks and securities firms have been able
to place such large volumes of debt with investors is an indication to some analysts that these
firms will survive the credit crisis.

4. Credit rating agencies

Credit rating agencies help evaluate and report on the risk involved with various investment
alternatives. The rating processes can be re-examined and improved to encourage greater
transparency to the risks involved with complex mortgage-backed securities and the entities
that provide them. Rating agencies have recently begun to aggressively downgrade large
amounts of mortgage-backed debt. In addition, rating agencies have begun taking action to
address perceived or actual conflicts of interest, including additional internal monitoring
programs, third party reviews of rating processes, and board updates
5. Regulation
Regulators and legislators are considering action regarding lending practices, bankruptcy
protection, tax policies, affordable housing, credit counseling, education, and the licensing
and qualifications of lenders. Regulations or guidelines can also influence the nature,
transparency and regulatory reporting required for the complex legal entities and securities
involved in these transactions. Congress also is conducting hearings help identify solutions
and apply pressure to the various parties involved.
6. Law enforcement
The number of FBI agents assigned to mortgage-related crimes increased by 50 percent
between 2007 and 2008. In June 2008, The FBI stated that its mortgage fraud caseload has

doubled in the past three years to more than 1,400 pending cases. Between 1 March and 18
June 2008, 406 people were arrested for mortgage fraud in an FBI sting across the country.
People arrested include buyers, sellers and others across the wide-ranging mortgage industry.
On 19 June 2008, two former Bear Stearns managers were arrested by the FBI, and were the
first Wall Street executives arrested related to the subprime lending crisis. They were
suspected of misleading investors about the risky subprime mortgage market.

CH.9 : PROJECT 2 SURVEY TO FIND THE REASONS

WHY TRADERS REFUSE TO BANK WITH SBI
9. 1 GVMSAV ODHAV
GVM Odhav comprises of a large industrial estate which has various industries under it
manufacturing different types of products like various steel products, rubber, dyes, gum,
pharmacy products, ayurvedic products, metal and alloy products, carbon rings, water pumps,
fibers, auto accessories, etc.
GVM Odhav was established in 17th October, 1961. At present there are total 297 industries.
Out of these, only 112 industries have small accounts at SBI and no major transactions takes
place. There are 185 industries which do not have a single account at SBI.
Our Zonal office allotted the task to find out the reasons\causes behind the lack of interest of
the industrialists/ traders to open and maintain an account with SBI. We were also required to
find out what facilities the traders would like to be included at SBI in order to meet their
various needs. We conducted a survey on all the 297 industries and our findings and
suggestions are as follows:-

9. 2 FINDINGS OF THE SURVEY

REASONS OF NOT BANKING WITH SBI
1) Delayed services
Majority of customers complained that they had to wait in long ques in order to avail the
facility of services like depositing a cheque, issuing a cheque, making up a draft, withdrawing
money, opening of an account, sanctioning of a loan, etc.
eg. SUPER INDUSTRIES
PRIMA PUMPS PVT. LTD.
SHRI PARSHAWANATH INDUSTRIES
SUNIL PRODUCTS
KAMAL PLASTIC
2) Lack of communication
The bank fails to inform the customers at the time of return of cheque, delay in depositing the
amount in the account. There is also a lack of response between the bank and the customers.
eg. PRECISIONLAP INDUSTRIES
METAL PRODUCTS
SUPER INDUSTRIES
3) Lack of computer skills
As per the branch manager of GVM Odhav, Mr. B.S. Rangey, Private banks were born
with laptops and PSU banks were born with ledgers. Many customers strongly felt that the
staff of SBI lacked in sufficient computer knowledge. So they take a lot of time in simple
procedures and that results into the breakdown of the system.

eg. AMBICA ENTERPRISE

PANKAJ PATEL CORPORATION
G. F. INDUSTRIES
SHRI SWASTIK GUM INDUSTRIES
KAVERI INDUSTRIES
AHMEDABAD METAL ROLLING MILL
4) Lengthy paperwork
The documentation procedure of SBI is quite lengthy as compared to the other private banks.
So customers find it very clumsy and time consuming to transact with SBI.
eg. BIPIN METAL INDUSTRIES
PAN AUTO LTD.
ANUPAM TRADING CORPORATION
LAKSHMI FOUNDRY
SHANTILAL METAL LTD.
SUNIL PRODUCTS
5) Uncooperative staff
The SBI staff does not respond to the queries of customers. This complaint was made by
most of the customers and due to this reason they shifted to other private and cooperative
banks that offered enough services to cater to the different needs of the customers.
eg. NIBIN PHARMACEUTICALS
GUJARAT AYURVED VIKAS MANDAL
MAHALAKHMI PACKAGING AND TRADING CORPORATION
G. R. INDUSTRIES
GANESH CONSULTANTS PVT LTD.
HARSH ENGINEERS PVT. LTD
6) Good relations with other banks
Many customers had good and long lasting relations with other banks like Karnavati cooperative bank, Bank of Baroda, Dena bank, Oriental bank of commerce, HDFC bank, Bank
of India, and Canara bank. So the customers prefer to continue their services in their
respective banks and they did not wish to experiment with other banks.
eg. ATE ENTERPRISE LTD.
KADAMBARI WORKS
AIA ENGINEERING PVT LTD.
RAJSHEELA STEEL INDUSTRIES LTD.
SAKRIYA METAL ROLLING MILL
GUJARAT INDUSTRIES LTD.
7) Non flexible timings
The working hour of banks as well as the working hour of the industries clash which make
difficult for the traders to transact with the bank. The bank should provide more flexibility to
the traders for example ICICI provides services to its customers from 8am to 8pm.
eg. GUJARAT AYURVED VIKAS MANDAL
PAN AUTO LTD.
8) Too many accounts of workers

It was a complaint of many traders that SBI bank is too busy to serve small workers so they
have no time for the traders. The workers form most part of the queue so it takes long time
for the trader to get their work done in short period of time.
eg. SHRI PARSHAWANATH INDUSTRIES
SUNIL PRODUCTS
PANKAJ PATEL CORPORATION

9. 3 ANALYSIS OF THE SURVEY

CHART 1 : SURVEY OF THE TRADERS WHO REFUSE TO PREFER SBI FOR
BUSINESS PURPOSES

SBI
BANK

OTHERS

TOTAL

84

213

297

BANKS PREFERED BY TRADERS

SBI BANK
OTHERS

INTERPRETATION:
From the above graph we can say that there is less no. of traders who prefer SBI for banking
transactions due to reasons like delayed services, lengthy paperwork, lack of
communications, uncooperative staff and good relations with other banks.
CONCLUSION:
SBI should make efforts to speed up services in order to give more convenience to the
traders.

 Traders should be regularly updated about their banking transactions so that they remain well
informed and take require measures to maintain the same.
The staff should be well trained to look after the needs of the traders and to remove their
grievances.
CHART 2: ANALYSIS OF REASONS OF NOT BANKING WITH SBI

REASONS

NO. OF CUSTOMERS

DELAYED SERVICES
207
LACK OF COMMUNICATIONS
123
LACK OF COMPUTER SKILLS
67
LENGTHY PAPERWORK
90
UNCOOPERATIVE STAFF
139
OTHERS
60

250
200
150

Series1

100

REASONS

OTHERS

UNCOOPERATIVE
STAFF

LENGTHY
PAPERWORK

LACK OF
COMPUTER
SKILLS

LACK OF
COMMUNICATIONS

50
DELAYED
SERVICES

NO. OF CUSTOMERS

REASONS OF NOT BANKING WITH SBI

INTERPRETATION:
The above diagram reflects that the main reason given by the traders of not banking with SBI
is delayed services. While lack of computer skills scores the lowest. Uncooperative staff also
poses a problem as depicted in the graph.
CONCLUSION:
Recruitment and training of additional staff can solve the problems of delayed services and
lack of communication.
Meeting should be conducted with the traders to maintain good relations so that traders could
become more interested to bank with SBI.
Training should be provided to the staff in order to increase their computer proficiency
knowledge.
The staff should be continuously in touch with the traders and should keep them updated with
their banking needs.

9. 4 SUGGESTIONS
1. New Recruitment
State Bank of India is facing a huge exigency of trained staff members. Many experienced
people left the bank after Voluntary Retirement Scheme. Bank should follow a diligence
process to recruit the young people who are have higher degrees and comfortable with
computers. It will reduce the time of transactions and at last bank as well as the customers
will be facilitated.
2. ATM Usage
We surveyed the people of Odhav GVM. They are not familiar with ATM machines. So
they stand in long queues to withdraw their money. They are ready to use the facility of ATM
machine if they are been properly guided. Branch manager should train a sub-staff person to
take this responsibility. It will reduce long queues and other works like depositing the money,
issuing drafts will take less time.
3. Flexible Timings
The Odhav Branch remains open from 10:30 to 4:00. Other private banks work from 8 to 8.
Most of the industries of the Odhav GVM work from 9:00 to 9:00. So they face a problem in
depositing and issuing the drafts after banking hours. The bank can change the timings to
meet the demand of the traders.

4. Relation with Traders

Branch manager should conduct a meeting with the traders of the Odhav GVM on monthly
interval. In this way, traders problems can be solved, they can be properly guided and they
remain in touch with bank officials. Good relations will help to get customer satisfaction.
Branch may get new business from reference of the traders.
5. Better Services
Bank services are really very slow. Customers have to wait for two hours if they want to issue
a draft. Customers are not properly guided if they have any problem. So, customers open their
accounts in other bank to get better services. Branch manager should arrange training
programs for clerical staff and officers.
6. New Schemes
State Bank of India does not facilitate the traders by giving them new schemes at regular
intervals. While private banks and co-operative banks offer new schemes to their regular
customers
.eg. Private Banks offers the facility of issuing higher amount of drafts to their regular
customers. But State Bank of India does not have this facility.
7. Computerization
In this computer age, still State Bank of India highly depends on the paper work. The work
continues at a snails pace because of the lengthy paper work. Sometime it happens that
papers get destroyed due to fire or any other emergency. Then it becomes impossible to get
all the past data. So, computerization is the only way to get fast work and safety.

9. 5 CONCLUSIONS
SBI bank is a very renowned bank all over India and Abroad also. The bank has taken a very
wise step to survey the industries in order to find out the reasons behind traders not banking
with SBI and to study the banking requirements of the industries and their satisfaction with
the present bank.

There are so many banks coming up, but very few are able to provide services that are upto
the expectations of the industries. If this will continue, a time will come when the banking
sector will saturate and there would be no scope for further development.
We had great learning from the project as we had frank conversation with the managers of
each industry which helped us to find out the reasons of their not banking with SBI.
Recruitment of additional staff should be able to solve maximum problem that SBI faces
today. It will be easy for SBI to reduce the lengthy queues of the customers by offering
proper training to them with relation to the usage of ATMs.
As far as possible the bank should try to computerize all its operations so that the traders are
not faced with any inconvenience and it would also contribute in speeding up the operations
of the bank. The staff should be provided with adequate computer training so that they
become adept at the usage of the computers.
The findings and recommendations of the survey clearly reveal that there is a need of proper
understanding of the services on the part of the industries in the industrial estate areas. This
effort on the part of SBI bank to keep customers at the centre and understand their needs will
surely prove as a bulls eye in the progress of the bank as well the banking sector as a whole.
With proper referencing, monitoring and examination of the weak points, the bank can pitch
into the prospective sectors and slowly and gradually capture the market as a whole.
This positive note concluded the report. May this prove to be useful to the bank for achieving
new heights. Wishing all the very best to the bank and its extremely dedicated staff.

CH.10 : LEARNINGS FROM THE PROJECT

This two months training period has certainly added a lot of depth to our shallow knowledge
of the banking sector as well as the working of small and medium scale industries and we got
an in-depth learning on the topic of NPA management. The research work undertaken by us
at ten different regions gave us a clear picture of the mentality and attitude of the borrowers
in each region and we also became aware to a great extent about the reasons of defaults by
SME borrowers. We also got to know about the entire functioning related to NPAs. Thus,
based on the outcome of the survey we were very well able to judge the reasons of NPA, the
analysis of the survey and have also derived the strategies which can be successfully
implemented by the bank to recover the mammoth proportion of NPAs.

Another major value addition to our knowledge was regarding the project 2 survey i.e. to
find the reasons why traders refuse to bank with SBI. This survey was undertaken in the
region of GVM Odhav which comprises of a large industrial estate with about 297 industries
in it. This survey helped us tremendously in giving us a vast exposure to the working and
functioning of various industries and has very much contributed to our knowledge of
industries. This survey helped us in reflecting why industrial traders refused to bank with SBI
and based on it we have framed our reasons, analysis and have also suggested few
recommendations to the bank in order to improve its facilities so that more no. of traders can
be attracted.
Another contributing factor to our knowledge lies in the fact that proper selection of criteria
is a must for any survey to be worthwhile. Keeping this in mind, for our survey of NPA
management in Region 1, out of 26 areas we selected those crucial 10 areas where we were
able to get the true picture and the maximum information regarding NPAs. In the same
manner even for project 2, we selected GVM Odhav as our main region to conduct the
survey so that we could be able to derive the actual picture and would be able to reach to the
roots of the problem.
Finally, these two projects have given us a tremendous level of self- confidence, the spirit to
work in teams and the ability to manage things independently. Moreover, it has helped us
groom ourselves into a professional, which is a pre- requisite in this competitive world.
It is good to learn from experience as long as it is others. The experience of the highly
qualified staff of SBI has taught us the art of dealing with people and the organization of the
goal to be achieved. Especially the learning sessions and discussions conducted by our AGM
Mr. Anil Kumar Gupta have really been an enriching and enlightening experience for us. All
this has certainly been useful to us during the project and will always be useful in achieving
many more endeavors in future.

LIMITATIONS OF THE PROJECT

Our survey was conducted only of region 1 so the reasons and the strategies are only
applicable to region 1.
Our survey has not considered those people who have not answered the questions we have
asked them. Proportion is taken into consideration for those who have not answered.
The strategies mentioned in the project may not be applicable to all the banks because only
SBI was taken into consideration.
Some of the data has been taken from bank, internet and books. Those data are not at our
discretion.

CH.11 : BIBLIOGRAPHY AND REFERENCES

11. 1 BOOKS
1) Management of Non-Performing Assets S.N.Bidani.
2) Management of Non-Performing Assets Vibha Jain.
3) Restructuring of Indian Banks Falguni. C. Shastri
4) Financial Management Prassanna Chandra
5) Financial Management I. M. Pandey
6) Credit Appraisal, Risk Analysis & Decision Making D.D.Mukherjee
7) SBI Database
8) Banking Law and Practice P.N. Varshney
9) Laws of Banking Negotiable Instruments Avtar Singh
10) Tannans Banking M. L. Tannan

11. 2 WEBSITES
1)
2)
3)
4)
5)
6)
7)

www.crisil.com
www.arcil.co.in
www.rbi.org.in
www.cibil.com.
www.statebankofindia.com
www.iiiglobal.org
www.google.com

ANNEXURE
QUESTIONNAIRE FORMAT: - PROJECT 1

1. NAME:
2. ADDRESS
3. BUSINESS/ PROFESSION:
4. ACTUAL EXPENDITURE :
5. INCOME FROM THE BUSINESS :
6. DO YOU TAKE LOAN FROM BANK?
YES

NO

7. IF YES, THEN WHICH BANK DO YOU PREFER?

PRIVATE

PUBLIC

OTHER INSTITUTION

7. REASON BEHIND TAKING LOAN :

EXPANSION:
RENOVATION:
PURCHASING MACHINARY:
PURCHASING VEHICLE:
REGULAR DEBT:
8. LOAN AMOUNT :
0-1lakh
1-5lakh
5-20lakh
20-50lakh
50lakh & more

9. EQUAL MONTHLY INSTALLEMENT :

0-5000
5000-7500
7500-10000
10000 & more

10. DO YOU REGULARLY PAY YOUR INSTALLEMENT?

YES

NO

11. IF NO, THEN NO OF MISSED EMIS:

ONCE________,
TWICE ________,
THRICE ____________,
MORE THAN THRICE __________

12. CAUSES BEHIND NPAs:

WILLFUL DEFAULTING
NO FOLLOW-UP
DIVERSIFICATION OF FUNDS
SIPHONING OF FUNDS
LOSS IN BUSINESS
OTHERS

13. ACTION
TAKEN
AGAINST
NPA:__________________________

YOU

IN

CASE

OF

14. ARE YOU AFFECTED BY THE ACTIONS TAKEN BY THE BANK?

YES

NO

15. ARE YOU WILLING TO REGULARIZE YOUR ACCOUNT?

YES

NO

16. WHICH HELP DO YOU EXPECT FROM THE BANK TO REGULARIE YOUR
ACCOUNT? ________________________________________

17. ACTIONS THAT CAN BE INITIATED AGAINST YOU BY THE BANK IN CASE
OF NPA_________________________

QUESTIONNAIRE FORMAT: PROJECT 2

1. NAME:
2. COMPANYS NAME:
3. PHONE NO.
4. NATURE OF BUSINESS OR PROFESSION:
5. TYPE:
PROPRIETORSHIP

PARTNERSHIP

PRIVATE LTD.

6. NO. OF YEARS IN THE PROFESSION:

7. NO. OF UNITS IN AHMEDABAD:
8. DO YOU HAVE UNITS OUTSIDE AHMEDABAD:
YES

NO

9. ACTUAL EXPENDITURE REQUIRED FOR BUSINESS TRANSACTIONS:

10. DO YOU HAVE A BANK ACCOUNT FOR BUSINESS TRANSACTIONS:
YES

NO

11. IF YES, THEN NO. OF BANK TRANSACTIONS PER MONTH:

12. IN WHICH BANK DO YOU HAVE YOUR ACCOUNT:

SBI

OTHERS

13. IF OTHERS, THEN REASONS BEHIND NOT BEING CUSTOMER AT SBI:

DELAYED SERVICES
LACK OF COMMUNICATION
LACK OF COMPUTER SKILLS
LENGTHY PAPERWORK
UNCO-OPERATIVE STAFF
OTHERS

14.

WHICH FACILITIES ATTRACTS YOU

BANK:_________________________________

15.

WHICH FACILITIES WOULD

SBI___________________________

16.

ANY FURTHER SUGGESTIONS TO IMPROVE THE SERVICES:__________-

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