CONTENTS

CHAPTER 1: INTRODUCTION
OBJECTIVES NATURE AND SCOPE RESEARCH METHODOLOGY LIMITATIONS

CHAPTER 2: ORGANISATION PROFILE HISTORY OF THE ORGANISITION FUNCTIONS OF THE BANK GROWTH AND DEVELOPMENT CHAPTER 3: DATA COLLECTION, ANALYSIS & INTERPRETATION. TABLES, GRAPHS AND CHARTS ANALYSIS & INTERPRETATION CHAPTER 4: MANAGEMENT OF FUND IN INVESTEMENT IMPACT OF FINANCIAL SECTOR REFORM ON PRINCIPAL OF LENDING. CRITERIA OF BORROWERS AND CREDIT NEED. CREDIT INVESTMENT

CHAPTER 5: FINDINGS, SUGGESIONS & CONCLUSION RESEARCH FINDINGS SUGGESIONS CONCLUSION APPENDIX

CHAPTER 1

INTRODUCTION
Credit management is a systematic and objective collection and analysis of data about the defaulted loans under different credit policies and collection procedures. The credit management is to regulate the credit in a proper way for the growth and expansion of the organization. The RBI being the central bank of the country takes regular steps to control the expansion of the credit so as to keep money supply and inflation within control. Furthermore, it is to see that the advance of loans are made to the deserving sectors at a reasonable cost; so that the economy goes in a proper direction. The cooperative association formulates some credit policies, rules, and terms, which are to be followed by the Co-operative Bank, which is in accordance with the instructions of Central Bank of India. In order to put banks and financial institutions on guard against borrowers who have defaulted in their installment dues to other to other lending institutions, the then Finance Minister declared in his budget speech on 28.02.1994 that RBI would formulate a scheme to collect and circulate the names of the defaulting borrowers. To recover the NPA there are Debt Recovery Tribunals, established by the central bank. The Recovery of Debts Due to Bank and Financial Institutions Act was enacted on 27th Aug., 1993 and came in to force form 24th day of June 1993. It provides the establishment of Tribunals for expediting adjudications and recovery of debts of banks and financial institutions. A good and planned credit policy is helpful in reducing the NPA amount and which leads the financial institutes to archive the objective.

OBJECTIVES The basic objectives of the study are as follows:

To know about the credit policy of the Kendrapara Urban Cooperative bank. To know about which documents are needed to the bank while a customer applied for a loan at Kendrapara Urban Cooperative Bank. To know about the recovery process. To know about the NPA of the bank and causes of the NPA. To study the work process of loans, job of recovery section and implementation of regulations.

Scope
The geographical study is conducted in the Kendrapara area. The study is conducted on advancing of loans and actions of recovery section of the bank.

METHODOLOGY
The data collected for the purpose of the study are from the following sources Collection of data from primary sources,
By personal interviews with borrowers and Discussions with employees of the organization.

Collection of data from secondary sources.

Information relating to historical background, type, size and growth of Kendrapara Urban Cooperative Bank. Annual Administrative Reports and Official records

NEED FOR THE STUDY.

The primary need of the study is to know the different types of loans and advances issued to different sectors, collection procedures, credit policies & different types of deposits made by the customers with the bank.

Supplement to above primary needs, there are other secondary needs, which are furnished below.
To know about the Kendrapara Urban Cooperative Bank and its functions. To strengthen employee-employee and employee-employer relationship. To know about its new future planning. To examine the pattern of organization structure and relationship among the branches, customers and vigilance formalities. To know about cooperative bank and its societies.

LIMITATIONS
Due to work pressure my mentor in the Kendrapara Urban Cooperative Bank had short of time; yet he helped from all corners.
Some entries were restricted in some area of the organization which restricted me to collect some important related data for my study. Unwillingness of the respondents to give information.

The bank was unable to provide the annual report of 2010-2011 as the banks audit has started by that time that too, late.

CHAPTER-2

HISTROY OF KENDRAPARA URBAN CO-OPERATIVE BANK.

The Kendrapara Urban Co-operative Bank is one of the Urban banks of our State, Odisha. Now the bank is known as a front line co-operative bank in our State. The Kendrapara Urban Co-operative Bank was registered on 26.09.1986 under the president ship of Honorable Minister, Sj.Bhagabat Prasad Mohanty. This Bank started its functions form 26.20.1988. The bank is started with a firm aim of providing service to the customers in particular and to the society at large. Initially the bank started functioning with 423 individual members as share holders. Authorized share capital of the bank is Rs 20, 00,000/- of one lake share of Rs 20/- each. Each share holders contribution the share capital of Rs 166540/-. As on 30.06.1987 the collected share capital of Rs 166540/- form the individual members. Govt. Has not purchased any share in the year 1986-87. The bank was started at near old bus stand, Kendrapara, but now the bank is to near Kendrapara college by constructing own building to a very good location. At the time of starting the area of operation of the bank was confined within the Kendrapara municipality area of the 35 village. The first board meeting was helped by the SJ.Bhagabat Prasad mohanty as president of the bank. The bank accounts are first audited by the Sir B.C mohapatra. The bank started with the objective to encourage thrift, self help groups and co-operatives among and with members of the Bank. To accept deposits and to give loans and advances to public were the primary functions of the Bank. The bank is graded as A Grade in the year, 2008-09. The reserve bank has also inspected the bank and graded it as grade-II, so that the bank can be secured by grade-I and the bank can provide ATM facilities to its customers. The bank also provided the services during the time of the floods, cyclones, etc. The Bank got the prize as one of the best co-operative banks of Odisha in 56th Nikhila Bharat CoOperative Union Week by the Honble Minister of Agriculture and Revenue, Dr. Damodar Rout. The bank had also got permission to expand their branches to the nearby districts, viz., Jagatsinghpur and Jajpur.

THE BRANCHES OF K.U.C.BANK

1. The Main Branch-: Kendrapara town, Near Kendrapara Autonomous college.

2. 3. 4. 5. 6.

Old Bus Stand Branch-: Kendrapara town, Near Old Bus Stand. Marsaghai Branch-: Marsaghai, Kendrapara. Patamundai Branch-: Patamundai, Kendrapara Aul Branch-: Aul, Kendrapara Chondol Branch-: Chandol, Kendrapara.

DETAILS OF THE K.U.C.BANK

Name of the Bank and Address: The Kendrapara Urban Co- Operative Bank Ltd. At/po-Kendrapara, Dist- Kendrapara Pin-754211, ORISSA

Regd. No and Date: Area of operation: No. of Directors: No. of nominated directors: Total No. of Employees: No. of Branches: -

123/KE, DT-26.09.1986 Whole Kendrapara District. 12 02 95 06

FUNCTIONS OF K.U.C.BANK
The functions of bank is mainly of two types, such as
(1) (2) Primary functions. Secondary functions

The primary functions are

(a) Accepting deposits. Granting loans and advances.

(b)

The secondary functions are,

(a) (b) Issuing the letters of credit, cheques, notes Etc. Keeping under self custody of valuables, important documents and securities by providing Safe Deposit Lockers

(c) (d) (e)

Transfer of money from one place to another and form one branch to another branch. Collecting and supplying business information. Providing reports on the creditworthiness of the customers.

Beneficial schemes
FIXED DEPOSITS-:
Deposits are accepted in the name of fixed deposits for a minimum period of 15 days and above at a higher rate of interest than to the other commercial banks.

RECURRING DEPOSITS-:
Small savings accumulate in a big way. For monthly installments of Rs 10/- and its multiples for a period of one year and above are also accepted by the Bank. It is an attractive scheme for service holders and businessmen.

PRAGATI REINVESTMENT SCHEME-:

A long term plans in multiples of Rs. Tens are accepted from the customers .These deposits and interest accumulated there upon are increased by reinvestment for accruing maximum permissible interest as governed by the RBI. This is an ideal investment for children and students for their future benefits.

BHAGYALAXMI DEPOSIT SCHEME-: The bank at your door step.

The bank exclusively designed for the benefit of businessman, professionals and small savers. The authorized agents of bank collect deposits from the prospective depositors daily and the collections are to be deposited in the bank on behalf of the customers. Presently multiple products are made available with the commercial banks of public sector and also in the private banking sector. The K.U.C.B. Ltd. should introduce all these new products for the better service of the customers.

CHAPTER-3

CUSTOMERS ACCOUNTS WITH THE BANKER

The relationship between the banker and the customer begins with the opening of an account by the former in the name of the latter. Initially all the accounts are opened with a deposit of money by the customer and hence these accounts are called deposit accounts. The buck of resources of a bank are mobilized by accepting deposits from the public, which is one of the essential functions of the banker, account to the definition of Banking Regulation Act, 1949. The banker solicit deposits from the members and the public belonging to different walks engaged in numerous economic activities and having different financial status . Therefore the bank has introduced different types of accounts with various facilities and privileges. Mainly it includes the fixed deposit accounts, the current accounts, the savings bank deposit accounts and some other deposits. In recent years a few new types of accounts have also introduced by the bank such as recurring deposits, student deposits, multi-purpose deposit scheme, super saving, janata deposit scheme re-investment plan, flexi deposits etc. These types of deposits are included under the other the types of deposits.

Discussion in regard toTypes of Deposit accounts: FIXED DEPOSIT ACCOUNTS.

In this category, these accounts include the deposits with the banks for a fixed period which is being specified at the time of making the deposits. Such deposits are therefore called fixed deposits or term deposits. A fixed deposit is repayable on the expiry of a specified time, chosen by the depositor at the time of deposit. The rate of interest and conditions on which the banks accept fixed deposits, are regulated by the Reserve Bank in exercise of the powers conferred upon it by sections 21 and 35a of the banking regulation Act, 1949. In 1992 fixed deposit were classified in to different categories with varying periods of starting form 46 days. Since 1992 Reserve Bank of India commenced the policy of gradual regulation over deposition of interest rates. Reserve Bank of India permitted the banks to prescribe their own rates of interest on fixed deposits of different maturities, but the max. rates of interest were fixed by it. This ceiling rate was revised several times. In Oct.1997, the ceiling rate itself was also withdrawn and thus, the deposit interest rate was totally freed form RBI regulations. Bank is now free to fix their own rates of interest on

fixed deposits of different maturities in the future. On April, 1998, the min. period of maturity of term deposits was reduced from 30 days to 15 days. It is History. A restriction was imposed on the bank that they must offer same rate on the deposits of the same maturity irrespective of the size of such deposits. This restriction has also been removed since April 29, 1998. Banks are now are made free to fix rates of interests on the deposits studying the market conditions. The maximum rate of interest paid by the Kendrapara Urban co-operative Bank is 8.75% whose maturity period is more than 5 years less than 10years and rate of interest is 4.00% whose maturity period is 15days to 45days. The fixed deposits of Kendrapara Urban Co-Operative Bank for the last 7 years, for 200405 to 2010-11 are as follows. Sl. No. 01 02 03 04 05 06 07 YEAR 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 FIXED DEPOSITS (RS IN LACS) 855.31 843.32 839.05 919.71 4067.87 4959.45 6392.48

FIXED DEPOSITS (RS IN LACS)

7000 6000 5000 4000 3000 2000 1000 0 FIXED DEPOSITS(RS IN LACS)

The fixed deposit in 2004-05 is 855.35 which is decreased in 2005-06 and also in 200607 and 2007-08, 2008-09, 2009-10, 2010-11. After that, the deposits are increased with an increasing rate, which is a positive sign for the banks growth in future.

CURRENT ACCOUNTS
A current account is a running and active account which may be operated upon any number of times during the working days. There are no restrictions on the number and the amount of withdrawals from a current account. As the banker under an obligation to repay these deposits on demand, they are called demand liabilities of a banker. To meet such liabilities, the banker keeps sufficient cash received against such deposits vis--vis the saving and fixed deposits. Current accounts suit to the requirement of big businessmen, joint stock companies, institutions, public authorities on all working days. The following are the special characteristics of these current accounts. A current account is meant for the convenience of the customer. The bank is not to pay any interest on the credit balance in the current account. In case of unremunarative accounts involving lot of work but without the maintenance of sufficient balance, the banker charges incidental expenses from the customer. A current account carries certain privileges which are not given to a savings account holder. The current deposit amounts of the Kendrapara Urban Co-operative Bank for the last 5 years are shown in figures and by graph below. Sl. No. 01 02 03 04 05 YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 AMOUNT (RS IN LACS) 125.48 175.89 180.75 232.53 382.31

AMOUNT (RS IN LACS)

450 400 350 300 250 200 150 100 50 0 2006-07 2007-08 2008-09 2009-10 2010-11 AMOUNT(RS IN LACS)

The current deposits increase at an increasing rate during the period, 2006-07 to 2009-10, after that there is more increasing in the fixed deposits in the following year to that year, i.e. 2010-11. The current deposit is much more to that of the years in the past.

SAVINGS BANK ACCOUNTS.

A savings bank account is meant for the people of the lower middle classes who wish to save their current income to meet their future needs and also intend to earn income from the savings. The banks therefore impose certain restrictions on the saving bank accounts and also offer a reasonable rate of interest unlike the interest rates on the fixed deposits. The need of keeping cash reserves against such deposits is comparatively larger and vice-versa the fixed deposits but smaller as against the extension of banking facilities during the last decade. The growth of banking habit amongst the people, the saving deposits of all scheduled commercial banks have gone up substantially. There are certain restrictions on the savings accounts, such as. Restriction on number of withdrawals regarding the number and amount of withdraw als within a specified period of time. The number of withdraws over a period of six month is limited to 50 time. A depositor cannot withdraw an amount of Rs smaller than Rs 10 or any sum which is not a multiple of Rs 10. The amount chargeable for a cheque is Rs 5. Bank restricts on minimum balance should to be maintained in the account. The rate of interest payable by the banks on deposits maintained in savings accounts is prescribed by the Reserve Bank of India.

The Savings Bank amounts of the Kendrapara Urban Co-operative Bank for the last 7 years i.e. from 2004-05-2010-11 are as follows. Sl. No. 01 02 03 04 05 06 07 YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 AMOUNTS ( in LACS of Rs.) 1095.85 1230.37 1400.21 1646.31 1674.33 2026.43 2506.68

AMOUNTS (IN LACS)

3000 2500 2000 1500 1000 500 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

AMOUNTS (IN LACS)

The saving account of the bank increases with a increasing reat year 2004-05 to 2010-11. Which implies the sound growth of the bank? It shows the growth of the with a smoothen way.

OTHER DEPOSITS.
A variant of saving bank accounts and the recurring deposits or cumulative deposit accounts are introduced by the bank in recent years. This accounts interest is to inculcate the habit of savings on a regular basis as an inducement and is offered in the form of comparatively higher rate of interest due to compounding in nature. The other deposits mainly include recurring deposits, student deposit accounts, multipurpose deposit schemes, reinvestment plans, pigmy deposit schemes etc. The rate of interest on this

type of accounts is comparatively same as with the saving account. It is in accordance with the Reserve Bank of India. In case a depositor is compelled to close the account before its maturity, the bank shall pay no interest if the deposit is made for a period before or less than 3 months, The interest at 1.5% is payable for deposits made above 3 months but below 6 months, 4% on deposits made up to 12 months and alike paripassu to the periods for which the deposits are being made. The recurring deposit account can be opened by any person, more than one person, jointly or severally or by a minor in his name along with the name of the guardian. While opening an account, the depositor is given a pass book which is to be present to the bank at the time of monthly deposits and repayment of the amount to the depositor. The other deposits of the Kendrapara Urban Co-operative Bank for last seven years form 2004-05 to 2010-11 are shown below in a table form with the graphical representation. Sl.No. 01 02 03 04 05 06 07 YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 AMOUNTS (IN LACS of Rs.) 1310.08 1697.70 1896.86 2287.03 25.69 28.48 33.54

AMOUNTS (IN LACS)

2500 2000 1500 1000 500 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 AMOUNTS (IN LACS)

The other deposits of the bank increases with an increasing with increasing rate from 200405 to 2010-11. But, due to an increase in the fixed deposits, the other deposits were affected heavily from the year, 2008-2009.

TOTAL DEPOSITS.
The total deposits of the Kendrapara Urban Co-Operative bank is the sum total of the fixed deposits, current deposit account, saving account of the bank and the other deposits. The total deposits for the last seven year of the Kendrapara Urban Co-Operative Bank are shown below in both tabular and graphical form. YEARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 FIXED DEPOSITS 855.31 843.32 839.05 919.71 4067.87 4959.45 6392.48 CURRENT DEPOSITS 57.09 75.45 125.48 175.89 180.75 232.53 382.31 SAVINGS DEPOSITS 1095.85 1230.37 1400.21 1646.31 1674.33 2026.43 2506.68 OTHER DEPOSITS 1310.08 1697.70 1896.86 2287.03 25.69 28.48 33.54

TOTAL

In the year 2004-05, the other deposits of the bank were most significant among the total deposits. The savings bank deposits also contribute good amount to the bank, but the current deposits were also very less in comparison to the other deposits. Fixed deposits contributed a moderate amount to the bank.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

OTHER SAVINGS DEPOSITS CURRENT FIXED DEPOSITS

In the year 2005-06 there are the other deposits of the bank increases and also take significant part of the total deposits. The bank in this year goes downward but the saving deposit and current deposit of the bank with a increasing rate. The current deposit of the bank in 2006-07 is increase with a faster rate, where the other deposit is more than the other. The saving deposit of the bank is increases but the fixed deposit of the bank is moves downward, which is somehow affects the growth of the bank. In 2010-11 the all type of deposits of the bank are increases. The year, 2010-11 is the current year. of the fixed deposit in the year the fixed deposit of the bank is increases with a very faster rate than the current deposits of the bank fall with small amount but the other deposit of bank affected heavily. After the entire total deposits of the bank moves forward smoothly with an increasing rate form this we conclude that it is positive sing for bright future of the bank.

CREDIT MANAGEMENT MEANING AND DEFINITION OF CREDIT MANAGEMENT.

Credit management is term used to identify accounting function usually conduced under the umbrella of account receives. Essentially this collection of process involves the qualifying the of credit to a customer, monitors the reception and logging of payment on outstanding invoices regarding charges on a customer invoice, when it functioning effectively, credit management serves as an excellent way for business to remain financially stable. The process of credit management is being done accurately by assessing of the credit worthiness of the customer, NPA base is expected to be low. This is particularly important if the organization chooses extent of credit line or revolving to certain customers. Proper credit management is the need of the call time for setting specific criteria as the customer must have to receive the credit. As a part of the evaluation process, credit management is also depending on determining the total credit line which will be extended to proposed customers.

DEFINITION
Credit management involves the polices and practices followed by financial organization for granting credit and receiving the collections form the customers.

ANALYSIS OF CREDIT MANAGEMENT Credit management is a tool of management to expand its financial and statistical information on investment activity of the organization . For this purpose, it

makes use of C.R.R and S.L.R. Management , Asset classification and Provisioning (Non-performing Assets) management, Demand, Collection and balance management, Asset and Liability management , Budgeting and such useful techniques , which help the Management in making sound rational decisions. The advantage of credit management can be summarized as follows:1) Helping in credit planning and formulating future credit policies 2) Assistance in the credit controlling performances 3) Useful in the solution of strategic credit problems 4) Helping in communicating credit information 5) Assisting in co-ordination in different phases of management

A. ASSETS 1. CASH: a) Does the Branch generally cash balance which very from the Head office has not fixed any norms carry significantly more

for retention of cash balance at

branch level for the year 2009-10 norms fixed by the H.O ? The H.o. of the banks holds insurance Coverage for all its branches for cash-insafe, cash-in-transit &cash-in-counter.

b) Does the branch hold adequate insurance coverage of cash?

c) is cash maintained in effective custody of two or more per instructions of

yes, the branch bank followed to maintain joint

double lock cash system with the B.M. and officials as

cashier as joint custodian of cash balance. The Head office.? Checking of cash balances undertook checked by been authorized administrative of- by ficials & bank officials.

d) Have the cash balances have at periodical intervals authorized officials?

2) BALANCE WITH S.B.I. AND OTHER BANKS:

a) Were balance confirmation certificate oneobtained in respect of outstanding balances the end of the year and whether aforebalances have been reconciled?

The branch bank has account with SBI nimapada Branch. Balance said as on 31.o3.10 in the said accountant stood at Rs. 104632.81 which at

has been reconciled with GL balance. b) Your observation on the reconciliation reported in following manner: (1) Cash transaction remaining un-responded Revenue items requiring adjustment/ Write off 3) Old outstanding balances remaining Unexplained /un-adjusted for over One year (give year wise details) NO NO NO (2) statement be

c) In case any item deserve special attention management the same may be reported:-

of the NO Such case to be reported

3. INVESTEMENT

Has the branch bank kept money at call neither the branch bank invested money at call nor short-notic invested money at calls of purchased /sold investment during and short notice during the year? the year under Audit nor purchase/sold any investments.

4.ADVANCES: i. The branch bank allowed advances to PACS under STASO,STOPP,MT & other Purposed. LADS are also keeping mortgage of Deposits script. Deposits of loans Advanced during the year under Audit are shown here under:Allowed

Sl no

type of loan

Amount

ST SAO (SF) STOPP MTSF(Bettlevine) STRO to C.S

27,59,29,957 29,79,650 45,00,000 6,57,572

 MTFS SHG Loan SRCC Loan to SC LAD Gold loan Total

2,05,627 8,25,000 27,59,000 18,91,000 11,68,200 29,09,16,006

Some of the irregularities noticed in course of audit are discussed below. 1. STSAO and STOPP loans instead of maintaining in two separate ledger , maintained in one subsidiary creates problems in reconciliation of above two subsidiary accounts. 2. KCC cheques issued by loanee members for availing ST loans in most cases written by the secretary of PACS concerned. Cuttings and Overwriting were not also attested by loanee members. 3. No sincere and effective steps taken for recovery of old outstanding loans such as MT NonAgril . loan, CC loan to LCCS, SBL etc.

5. CREDIT APPRAISAL: (i) Has the branch obtained loan is prescribed forms in in Respect of advances sanctioned During year? Yes, KCC Loans Financed to Application members of PACS basing on their land particular and scale of finance. LADs and other loans

are sanctioned obtaining application in prescribed form of the bank.

(ii) Has the branch complied with the Procedures/ instruction of HO fromRegarding preparation of proposals Grant/renewal of advance/EnhanceCC limit etc. Including adequate documentation in respect there of? (b) Sanction and disbursement :

Yes, the branch bank followed instructions of HO issued time to time while allowing for Advances .But in case of SRCC ment of loans no field visit done prior to Recommendation. The B.Ms are authorized by the

bank for sanction of ST loans under KCC as apprised by PACS disbursement of other type loans SRCDD, SHG & other MT after sanction keeping (c) Documentation by loans. H.O.LADS such Carried as out

allowed

mortgage of scripts (instrument). for legal

Documentation is badly required security of advance & initiation of

action in case of default. The branch bank has obtained (d) Review/ Monitoring / Supervision : (i) Is periodical review of advances Including periodical balance Confirmation, acknowledgement of followed by the branch. (ii)Stock books & debt statements other periodical operation debts financial statements etc. reviewed Regularly from the borrowers & duly Scrutinized . (iii) Indicate case of advances to nonCorporate entrepreneurs with limit Beyond Rs. 10.00 lakhs where the RBI Guidelines with regard to compulsory Audit have not been complied with. (iv) Has the inspection or physical Verification of security to the bank Carried out by the branch as per rules Laid down by H.O. (v) Major deficiencies in credit: (a) SRCC loans earlier disbursed to No inspection and field visit taken up up in case SRCC Loans The branch bank has not allowed any finance to non-corporate entrepreneurs beyond Rs. 10.00 lakhs. No periodical review of advance has been followed. No effective steps Debts document as per sanction order.

taken for recovery of individual

Loans financed since long. CC accommodation allowed to LCCS And since more than 6 years also exceed & limit sanctioned. No step taken for recovery of said accommodation.

individual

Were transferred to societies

without following Required formalities. (b) A good nos. of LAD account are remained NAP as on 31.03.10 due to lack of credit Management. 6. OTHER ASSETS (a) Stationary & Stamps The cashier I/c of the branch bank is the custodian of saleable forms and registers and postage balance closing stocks as on 31.03.10 were verified by B. Behera SARCS on 26.06.10. A copy of the stock statement is enclosed with office copy of the audit report. (b) Suspense recoverable During the year under audit, the branches has allowed advance of Rs. 155791/- & recovered Rs. 81,315 leaving balance of Rs. 26,9,343.06 as on 31.03.10 out of above outstanding a sum of Rs. 87,139.06 of remain outstanding for more than 3 years.

The Branch manager has allowed advances to staff without liquidation of previous outstanding. Details list of advance

recoverable is enclosed with the report vide statement NO. 17(A) and (B). The branch bank should take effective steps for realization of sundry assets as said assets not generating any income. 1. Audit recoveries from MDD agent 2. Locker rent receivable 3. Misc. dues recoverable 4. Fuel cost recoverable 5. Litigation cost recoverable 6. Bonus paid to J.S recoverable 18,44,627.00 6,500.00 380.89 2059.00 62,237.47 92,336.00

(B). LIABILITIES 1. BILLS PAYABLE / SUNDRY DEPOSITS: No bills / cheques pending for realization as on 31.03.10. suspense payable as per statement No. 18 was Rs. 315,65,429.42 which was less of Rs. 500/than General Ledger balance.

Difference of Rs. 500/- raised during the year under audit. The B.M is instructed to reconcile said a/c by next audit. 2. BORROWINGS : The branch bank has not borrowed any

Amount from Any agencies except remittance With H.O. The H.O. account showing 81,96,20,881 as on 31.03.10 int. payable @ 6.5% P.A calculated to Rs. 52,56,551 on monthly average of HO a/c credit balance are charged in P/L account for assessment of branch viability. FACTORS AFFECTING CREDIT MANAGEMENT.
There are several factors credit management in the two evolution and qualify a customer for the receipt of some of commercial credit. This includes gathering data on the customer current financial condition. The current credit position of the customer. The current ratio between the income and outstanding financial obligations will also be taken in to invest or not. The demand of the sector in while the credit want to invest. Competent management seeks not only to project the vendors possible losses, but also protect the customer from creating more debt obligation which cannot be settled in a time. After establishing a credit limit for a customer, credit management focuses on providing the Client with accurate statement or invoice.

credit

balance

of

Rs.

GOALS AND OBJECTIVES OF CREDIT MANAGEMENT

Assess and assure credit risk and manage it such a way that risks (expected losses) are minimized and return is optimized. To activate target loans, recovery followed by risk based return be done by managing a credit portfolio. Install a system and control measures for periodic reviews.

Credit management is a process of managing credit using following steps,

Formulation of credit police. Credit nitration. Credit evaluation and risk assessment. Credit mentioning and control.

CREDIT POLICY
Credit policy provided a brooder framework of reference and uniform standards. It should be flexible to meet various situations. It should aim to provide guidances for what to do. It should contain segmentation of credit portfolio. Should clearly certain parameters like maximum amount of loan, deposit and capital. Should clearly state the delegates authorized for processing and approval of loan. Guideline for interest rate. Quality of credit. Should put a good administrative set up credit administration.

CREDIT INTENTION
Target market planning is the most important of the credit intention. Target market refers to business disciplines and selectivity. The target market (TM) process follows the formulation of overall business strategy of the bank. Identifying business potential, defining desirable oppernuties and adhering to resultant marketing objective. TM identifies the acceptable and desirable profit of customer and product to be be offered, Define risk acceptance criteria (RACs)

CREDIT EVALUATION OF RISK ASSESSMENT

The 3cs of the credit. Character. Capacity. Collection.

RISK ASSESSMENT
Business risk. Management risk. Terms of loan. Critical success factor. Risk based charging of interest.

CREDIT MONITORING AND CONTROL

Periodic review. Interim review. Quarterly accounts. Identification of early warning signs Classifition of NPA. Rehabitation of NPA. (remedial management)

NON-PERFORMNG ASSETS (NPA) Definition

A lone or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any loners which are more than 90day overdue and any consumer lone which are more than 189 day overdue. More generally, an assts which is not production income. Conceptually an assts become nonperformances, when it ceases to generate income for the bank. The RBI has given the following guide lines for classification of advances account to NPAs.

1. Loan accounts
A loan account (term loan) is to be classified as NPA when interest and installment of principal remain overdue for a period of more than 90 day. An account will be classified as NPA if the charge during any quarter is not service fully with inform the end of the quarterly. Similarly it also be classified as NPA if the installment due is not service with in 90day form its due date.

2. Cash credit and overdraft accounts

A cash credit or overdraft account is to be classified as NPA when it remains out of order for a period of more than 90 days. A cash credit over draft account is treated as out of order if the outstanding in the account remains continuously in asses of the sanctioned limit/drawing power.

3. Bills purchased and Bills discounted account

A bill purchased/bill discount cropped will be classified NPA if the bill remains over due for a period of more than 90 days.

4. Agricultural advances
A crop lone account for short duration cropped will be classified as NPA if the principal or interest there on remains for two crop sedations A crop loan account for long duration crop will be classified as NPA if the principal or interest there on remains overdue for one crop season.

5. NPA DUE TO IRREGULARITY IN OPERATIVE ACCOUNTS.

In case of cash credit account where the stock statement has not been obtained for a continuous period of more than 3 months as on the date balance sheet, the account will be classified as NPA. An account were the limits have not been reviewed or renewed for a period of more than 180 days from its due date or form the date of adhoc will be traded as NPA.

6. OTHER POINTS ON NPA CLASSIFICATION

Consortiums advances in case of consortium advance the account will be classified as NPA by a member bank depending on the record of recovery in its own book irrespective of the recovery status with the lead bank or any other member bank. NPA classification is to be on borrower wise and not facility wise. Emptied categories should be rehabilitated Advances should be guaranteed by the Govt.

CALLSIFICATION OF NON PERFORMING ASSETS (NPA)

Assets, which are performing are classified as standard assets. Based on the period for which the accounts have remained non-performing and also non-realizable are classified as non-standard assets. There are three categories of non-standard assets. They are (a) sub- standard assets, (b) doubtful assets and (c) loss assets. A sub-standard asst is an account which has remained in NPA category for a period of not more than 12 months. The non-performing assets over a period

of 12 months, due to any reason of legal disputes, death(s) of the proprietor(s), insolvency or liquidation etc. are classified as doubtful assets. The non-performing assets for a period exceeding 12 months and loss bearing are classified as loss assets. A doubtful asset is one which has remained in NPA category for more than 12 months. In other words, ounces an account become NPA it is classified as substandard asset and it remain in this classification 12 months and unless upgraded to standard asset, it is then classification as doubtful asset. A loss asset is one where loss has been identified by the bank or internal auditor or external auditor or by RBI inspector and the amount has not been written off wholly. It is an asset which is considered uncollectable and is of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING, 2010-11

Previous year Sl. No. Balance (Rs in lacs) 28371360.73 1 10111867.00 2 1256069.00 3 51322.00 4 191001.00 5 172800.00 6 1022204.00 7 423873.00 8 615528.00 9 1150271.50 10 1438000.00 11 91000.00 12 143434.00 13 2240130.00 14 50000.00 15 1463413.79 16 17 18 19 48792274.02 Particulars Interest on deposit and borrowings Salary and allowances Rent, taxes, insurance & lighting. Legal expenditure Postage, telegram, telephone Audit fee paid Depreciation and repairs Printing and stationery O.T.S loss Other expenses Prov.for bad and doubtful assets Prov.for standrad assets Prov.for building dep. Prov.for recoverries Prov.for election exp. Profit before tax Prov. for arrear D.A to staff Income tax paid Net profit after tax Total Current year Amount (Rs in lacs) 40283614.98 11522046.81 1124297.50 68832.00 231298.50 198000.00 1098457.00 304392.50 161314.79 1100676.50 2502000.00 192000.00 143434.00 2487288.00 50000.00 2456446.60 500000.00 751673.00 1704773.60 64424099.18

INCOMES
Previous balance 45721989.87 2456372.05 583712.10 48792274.02 Sl.no 1 2 3 4 Particulars Int.and discount Comm.exchange&brokrage Other incomes Total Amount (RS) 61876721.43 1846546.46 70083.41 64424099.18

BALANCE SHEET FOR THE YEAR, 2010-11 CAPITAL AND LIABILITIES

OPENING BALANCES AS ON 01.04.10 14221750.00 12430.00 2 2982769.00 197975.75 345109.25 5774.00 166070.46 110710.00 89430.00 700000.00 1000000 3 SL. NO. HEAD OF ACCOUNT INNER COLUMN (Rs) OUTER COLUMN (RS)

PAID UP SHARE CAPITAL (a)Individual Share Capital (b) Nominal Share RESERVE FUND & OTHER RESERVES (a)Statutory Reserve Fund (b)Building Fund (C)Dividend Equalization Fund (d)Bad Debt Fund (e)Flood And Famine Fund (f)Common Good Fund (g)Jubilee Fund (h)Coop Education Fund (i)investment dep. Fund (j) Investment Fluctuation Reserve. PRINCIPAL/SUBSINDIARY FUND A/C FOR SHARE CAPITAL (a)Central coop. Bank (b)Other Coop.Bank DEPOSITS (i)Saving Bank Deposits (ii)Fixed Deposits (iii)Cureent Deposit

1711580.00 1320.00 17130860.00

3348622.38 3459199.92 230065.95 345109.25 5774.00 68284.46 58537.00 89430.00 700000.00 1000000.00 Total

9305022.96

4 164631169.21 18589624.91

16743188.27 409354708.78 18075686.78 Total

594863583

BORROWING (a)Form SBI/State/Club (b)Short Term Loan/Of Which Secured (C)Midterm Loan(Secured) (d)Govt. and other approved securities 6 Bills for collection bills payble after being collection Interest payble on deposits Interst payable on borrowings Provi.for O.D Provi.accounts Provi.for NPA Provi.for standard asset Sundry liabilities Suspense BLD Audit fees payble Pay order Demand draft U.D profit

4600000.00 Total 142282.00 Total 11007666.00 Total 13797085.00 13963854.55 16566865.00 1128200.00 4135757.46 163095.00 198000.00 3846950.00 1785234.00 1039023

4600000.00

142282.00 11007666.00 13797085.00 13963854.55 16566865.00 1128200.00 4135757.46 163095.00 198000.00 3846950.00 1785234.00

7 8 9 10 11 12 13 14 15 16 17 18

10783132.55 14064865.00 936200.00 3652210.82 172800.00 787045.00 3148937.00

CHAPTER -4

4.1.INTRODUCTION

Banking has been defined in section 5(1) of Banking Regulation Act, 1949 as accepting for the purpose of lending of investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise. It is required that the banker takes care to place his funds in customer who will repay the advance granted to them as undertaken, on time. In order to ensure that the funds granted are repaid, it is necessary that the banker vets the requests of borrower for funds applying certain basic principles of lending and satisfies himself as to whether it qualifies the test. The bank lending must being with the lending principle. Once the principle of lending is known, the direction of lending will be automatically known. The principles of lending are as follows:

4.1.1. CARDINAL PRINCIPLES

The cardinal principles are SAFETY, SECURITY, LIQUIDITY AND PROFITABILITY. These have been guiding the function of a banker since the time the banking was evolved. Over the years the dimension and magnitude of each of these principles have undergone modification and expansion in response to the changing state of the economy but the underlying truth remains.

4.1.1.(a)CONCEPT OF SAFETY AND SECURITY

As the bank receives deposit for lending, a banker shall lend only a part of his Deposit as a good portion of deposits is repayable on demand on short notice and he is required to maintain cash or easily convertible assets to meet the withdrawals customers. In order to ensure that banks do not over lend affecting their liquidity, the R.B.I have stipulated that all banks shall have to keep a certain percentage (which is revised from time to time) of their deposits and other

demand liabilities by way of Statutory Liquidity Reserves(SLR) and Cash Reserve Ratio(CRR). At present, The Cooperative Banks have to keep 3% as CRR and 25% as SLR of their total Demand & Time Liabilities. The dictum therefore is that a bank advance must be safe. That is a loan should be granted to a reliable borrower who could it within a short period from reasonably dependable sources. In actual practice, obtaining marketable security as collateral besides the primary security so that in the event of default of repayment of advance by the borrower, the banker can fall back upon the securities for realization of dues to him ensures this principle.

4.1.1. (b) CONCEPT OF LIQUIDITY

The term liquidity for a banker refers to the availability of funds to him. A Banker should have at any point of time , sufficient ready money available with to him to meet the withdrawals of the customers as deposits with banks are mostly of short terms in nature and are repayable on demand. It is for this reason that a banker, while lending , shall have to insure that he does not find himself in a locked-on position . The banker should therefore verify at the time of lending that the borrower will be in a position to generate sufficient surplus in his business so as to be able to repay the money so advanced. Thus , ensuring liquidity with the borrower amounts to ensuring liquidity with the banker. So, the advance must be liquid in nature i.e. the convertibility of the assets (loans) into cash easily and readily. Thus a banker would ensure the concept of liquidity by looking into easy sale ability and absence of risk of loss on sale of the assets, which is taken as surety for the loan granted by him.

4.1.1. (C) CONCEPT OF PROFITABILITY

The aspect of profitability is the ultimate objective of lending of a bank. No prudent banker will like to do a business of lending without profit so that it will

be very difficult to pay dividend to the satisfaction of his shareholders. So, the banks have also to see that their profit is kept at an ascending level so as to be able to pay dividend at an increasing rate , year after year to keep the interest of the investors in the share markets. The confidence level of the investors and customers is high with a bank which has a proven record of increasing profits and dividend rates . At present banking scenario , the R.B.I has given full freedom to the management of the bank to decide to fix the rate of interest on deposits and lending.

4.2 IMPACT OF FINANCIAL SECTOR REFORMS ON PRINCIPLES OF LENDING

As a result to Narasimham Committee Recommendations reforms in banking sector have been initiated since April 1992-93. The changes introduced , which have a bearing on principles of lending , are:Introduction of new prudential Accounting Norms on a. Capital Adequacy b. Income Recognition , Asset Classification and provisioning c. Deregulation of interest rates on deposits and advances. a. Capital Adequacy Under the new prudential norms , banks are required to calculate riskweighted assets by assigning different risk-weights to the various assets appearing on the balance sheet as on the 31st of every march as prescribed by RBI and maintain 8% of risk Weighted Assets minimum as capital . The requirement to maintain capital irrespective of classification of assets has made

the banks to seriously ponder over the advisability of expansion of credit without a proper back up of capital . Banks have started thinking and planning to reorient their approach to expansion of credit and profit planning taking into account the mandatory stipulation on capital adequacy requirement. b. Income recognition and asset classification provisioning The concept of Income recognition is that , the banks are to book the income on loan/ advances only when it is realized . As a result of which the banks can not shown interest receivable in their Balance sheet at the close if the year for calculation of their profit. As per the new prudential norms, no income can be taken to profit and loss Account if the interest /installment in a borrowed account remains unpaid for a period of more than 6 months (now it is 3 months ) from the past due date. The account has to be designed as Non Performance Assets (NPA) . Likewise ,the new norms governing classification of assets and provisioning as per NPA. Rules are as follow:-

Table: 6 Showing Classification of assets and provision

SL.NO Classification of Assets (Loans And advances ) Provisioning against classification of Assets. 0.55% 8%

1. 2.

3.

Standard assets (Performing ASSETS) Sub-standard Assets (Assets Remained 180 days from the Date of NPA) Doubtful Assets

4.

a. Up to 1 year i. Secured portion ii. Unsecured portion b. 1 year to 3 years i. Secured portion ii. Unsecured portion c. Above 3 years i. secured portion ii. unsecured portion Loss Assets (declared as loss by the statutory Auditor)

25% 98% 30% 95% 50% 100% 100%

Banks are required to classify accounts according to its performing nature first i.e. either as performing or non-performing . While interest on performing assets can be credited to profit and loss account . Interest on non-performing assets can not be taken to p and l Account. The Banks make provision from out of the profit on the non-performing Assets on an ascending scale. Longer the period of N.P.A., higher the provisioning.

c. Deregulation of interest Rates

The freedom given to banks to decides rates of interest on deposits and advances has increased competition amongst banks. The competition is seen with banks offering better rates of interest on deposits and competitive rates on advances. This results in reduced SPREAD (Interest Received-interest Paid) to a banker. Hence, the deregulation of interest rates has put pressure on profitability of banks. While expanding the business, whether it is liabilities or assets , care has to be taken by the banks to see that no unmanageable risks is entertained, which decreases the existing profit.

4.3 CRITERIA FOR ASSESSING THE BORROWER AND HIS CREDIT NEEDS
Any appraisal of a credit proposal being with the assessment of the prospective borrower . It is the prospective borrower, who uses loan amount in his business and make payment of loan in time. The banker must have confidence in the borrower, that means in the business of the borrower. Thus making the elements of sound credit , the borrowers creditworthiness has to be assessed by putting him to test against each these touch-stones i.e. FIVE GOOD Cs i.e. character, capacity, capital, collateral and conditions. The total of current assets determined will be the fund requirement of the borrower towards working capital for the projected year. From the total current assets figure, current liabilities projected by the borrower should be deducted to arrive at what is called the working capital gap. Tondon Committee suggested two methods of assessment of credit limits after the determination of working capital gap. The following illustration will help In understanding the difference between the two methods of lending better:METHOD I TOTAL CURRENT ASSETS Current Liabilities (borrowing) 165 76 METHOD II 165 76

---------------------------------------------------------Working capital Gap Net Working capital (minimum) i.e. Margin 150 30 150 55

Contribution

---------------------------------------------------------METHOD I METHOD II

Permissible Bank Finance 90 70

4.4 CREDIT INVESTIGATION

On proper assessment of the borrower , the banker has to get himself convinced about the credit worthiness of the prospective borrower. A Banker can assess credit worthiness of the borrower by collecting information from various available sources. The sources , which could be tapped by a banker for getting information are: By obtaining credit opinion from the prospective borrowers former banker. By calling for statements of the bank accounts maintained with former banker By collecting financial statements of the past three years and also the income tax, wealth tax, sales tax, Tax returns and assessment orders thereon of the past years.

 By conducting pre-sanction inspection of the borrowers unit/place and verifying the records like sales/purchase register, invoices available there. By having a dialogue with the labour of the borrowers unit during inspection to know discreetly how motivated they are and their commitment to the growth and progress of the borrower. By contacting the suppliers of raw material, to the borrowers unit and to know from them how promptly their suppliers are paid by the borrower. By interacting discreetly with the customers of borrowers product including debtors and to know from them about the quality and acceptability of product of the borrower in the market and his reputation. By getting into contact with the competitors in the business line of the borrower to know their version about the borrowers product , capacity and reputation etc. By making enquiries with friends /relatives and customers who know the prospective borrower. By referring to Defaulters List furnished by RBI to banks. After collecting information from the above sources , wherever possible, the banker shall have to make an assessment of his own based on the information collected. The assessment so made, coupled with the scrutiny of the financial

statements submitted by the borrower should enable a banker to make judgment about the credit worthiness of the prospective borrower.

4.5 TYPEs OF BORROWERS

Before lending, the banker should assess the type of borrower and special care should be taken for each of them.

THE BORROWER

PERSONAL a. Individual b. Joint Individuals c. Sole proprietorship d. Partnership e. joint Hindu undivided families f. Agents and Attorneys g. Executors and Administrators h. Trustees i. Liquidators j. Receivers

IMPERSONAL a. Registered Companies b. Cooperative societies c. Local Bodies d. Clubs and Associations

FIG:3 Showing the different types of borrowers

4.5.1 Personal Borrower

a. Individual:- A n individual shoes age is 21 or above , is competent to enter into a contract as per the Indian contract act . A Contract entered into a minor is void. The banker has to be very careful while going into contracts for the following classes of persons:- Minor persons (age less than 21 years) - Lunatic persons (mental derangement) - Drunken persons (mental disorder when drinks) - Married women (bind her separate property) b. Joint Individual :- When two or more individuals join together and seeks credit facility from a banker. In such case , all the individuals should join in an y documentation starting from an application for credit. The liability of the individuals in such circumstances shall be joint. c. Sole proprietorship: - Sole proprietorship is a form of business owned by an individuals. All legal limitations on the business of individual are the limitations on sole proprietorship is nothing but a credit granted to the individual running the firm. A banker has therefore, to take into account the personal assets and liabilities of the individual of the individual while assessing the financial net worth of the sole proprietorship. d. Partnership : A partnership is an association of persons formed to run a business with a common objective of earning profit. The contract of partnership is a special contract governed by the Indian Partnership Act IX of 1932. A firm, in

the absence of a contract to the contrary, shall stand dissolved on the happening of any of the following. - Death of a partner - solvency of the firm or a partner - Mental disorder of a partner - Retirement of a partner e. Joint Hindu Undivided Family: The eldest member of the Joint Hindu undivided family is always the Karta of the family. But in trading HUF, the senior most member viz. Karta may not always be the manager. A manager may be a Kara but a Karta may not necessarily be a manager in a HUF. If credit facilities are granted to a HUF, a banker would like the documents to be executed not only by the Karta but also by all the major male coparceners and the Guardians of minors, if any. f. Agents and Attorneys: An agent is a representative of his principal and has no authority to borrow on his behalf unless by an express or implied previous authority or by recognition of agents conduct in the past by the principal. But an attorney is one who is duly authorized by his principal by execution of a written document under his hand and seal, to carry out some functions in general or a specific function on his behalf. g. Executors and Administrators : An executor is a person appointed in a Will b the maker or the testator of the Will to execute his desire in relation to his estate. A certificate issued by the Court to the person named in the Will is called Letter of Probate. Where the person dies without any will or any nominated person,

the Court appoints a person to look after the estate of the deceased. He order appointing such a person is called the Letter of Administration. An

administrator so appointed by the court shall have full power to deal with the estate of the deceased as per the terms of the Letter of Administration until the Cort revokes the same. h. Trustees: Trustees have o individual powers. They have all to act together and cannot delegates their authority to any other person, even to one amongst them unless it is provided in the Trust Deed. A banker when approached by a Trust for opening of an account or for a credit, the Bank should see that: The certificate of registration. Powers of the Trustees in the Deed. Type of credit facilities required in the Deed. 4. Specifies the name of the Bank to approached. 5. Loan documents should contain signature of all the trustees . i. Liquidators: A liquidator is one who is appointed by the Court to wind up the business of a company and pay whatever dividends to the creditors and finally distributing any surplus to the Shareholders. The liquidation of a company may be voluntary or order by the court. Under section 457 of the Companies Act 1956, a Liquidator can with the sanction of the Court, raise a loan against he security of the assets of the Company under liquidation for the purpose of winding up. j. Receivers: A receiver is appointed by or at the request of the Debenture holders or mortgagees under powers vested in them by the document

creating the security. If a receiver approaches to a Banker for a credit facility, the banker should note the following points?: 1. Copy of the order issued by the Court as Receiver. 2 . If appointed by the debenture holder- a copy should be obtained where the power to raise loan by charging the properties under his receivership must be there. 4.5.2 Impersonal borrowers. a) Registered Company There are 3 (three) types of Registered companies registered under the companies Act 1956 which are follows:1) companies limited by shares 2) companies limited by guarantees 3) companies which are unlimited 1) companies limited by shares These are companies which are shareholders liabilities is limited to the amount unpaid , if any on the shares respectively held by them .They are not liable for the debts of the company beyond that amount. There are two types of companies under this category: Private limited company Public limited company

While the number of minimum share holder strength in a private limited company should be 2 and maximum should be 50 .But the number of minimum share holder strength in a public limited company should be 7 and the maximum could be any number. 2) Company limited by guarantees A company limited by guarantee is one , which by its memorandum limits the liability of its members to such amount as the members may respectively undertake to contribute to the asset of the company , in the events of its being wound up. 3) Companies , which are unlimited A company not having any limit on the liability on its members is known as unlimited company . These are of course, very rare. b) Urban Co-operative Societies A banker may have to open accounts for a constituent like cooperative societies . This is a form of organization , which is registered under the cooperative societies Act 1912 . They are in fact limited companies but are registered under the above said Act and not under the Companies Act 1956. Before opening of an account and allowing any credit facilities to such organization , the following precautions are to be taken:a. Copy of the Bye laws of the society to be obtained

b. Copy of the registration Certificate issued by the Registrar of cooperative societies. c. Copy of the Resolution passed by the Managing committee for opening of an account and for availing credit limit. d. Copy of the list of the office bearers of the managing committee. C) Local bodies Local bodies have no implied power to barrow. Before allowing a loan to local bodies such municipalities , panchayats, Districts Boards , port trusts etc. a banker should refer to the Act under which they were constituted. In some cases , sanction of higher authority may be required before any local body can validity raise a loan. The following points have to be looked into by a banker before granting a credit to a local body:a. They have statuary pawer to borrow , and the limit fixed. b. Type of loan required c. Extend of security offered d. Sanction of higher authority , if necessary. d) Clubs and Associations A club or an association is an essentially a non-trading organization which may be registered under the societies Registration Act 1960 or the companies act 1956. A Banker should take the following steps before opening an account /granting a credit facility.

a. Copy of the Bye-laws of the club or association is to be obtained b. Copy of the Registration Certificate to be procured c. List of the office bearers of the committee of Management to be obtained d. Copy of the resolution passed by the Management committee for opening of an account and/ or for availing the credit limit granted to be obtained e. For granting credit facilities , extend of security offered to be taken care

4.6 TYPE OF ADVANCES

The credit assistance provided by a banker is mainly of two types. One is fund bashed credit support and the other is Non-fund bashed credit support. In general , the risk exposure in non-fund bashed credit facilities has been much higher than fund-bashed credit facilities.

ADVANCES

Fund based limits

Non-fund based limits

Current Assets Financed by Cash credit Over draft bills Packing credit Loans

Fixed Assets Financed by loans Banks Guarantees

Current ASSETS Financed by letters of credit Deferred payment Guarantees

Fixed Assets Financed by Bank Guarantees

Fig: 4 Showing the different types of advances

4.6.1 FUND BASED-CURRENT ASSETS

a) Cash credit This is a kind of fund based working capital credit facilities provided to traders/manufacturers and the like. This is a running account facility normally extended for a short period, say not more than one year. By sanctioning a credit under this form, the banker commits to the borrower to make available the funds up to the stated limit , any time. On account of the special nature of commitment of funds , a banker shall have to keep funds always ready irrespective of whether the borrower utilizes the limit or not . These results in a carrying cost to a banker and the cost may vary depending upon the call money market rate. b) Over draft overdraft is a form of credit as like as cash credit loan. This is also a running account facility where the account holder could remit and draw funds freely subject to the limit granted in the account. Usually , it is granted against lien/pledge of current asset like Bills receivable, Govt. securities ,Units of Mutual funds , Company s shares and debentures, LIC policies, National Savings Certificates and Banks Fixed deposits . T his is temporary in nature, whenever such financial accommodation is allowed. It is necessary that a banker take an application for such temporary from the account holder. c)Bills As per the section 5 of the Negotiable Act defined Bill of Exchange that An instrument in writing containing an unconditional order, signed by the maker ,

directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. The maker of the bill is the drawer and the bill on whom it is drawn is the drawee who has to discharge his liability under the bill. Bells are mainly of two types such as:1) DEMAND Bills Demand Bills are bills payable on demand against certain

payment. These are called D.P.Bills . No stamp duty is rewuired for demand bills. 2) USANCE Bills Bills are payable after a certain period of time against acceptance of first and payment on expiry of usance period. These bills are called D.A. Bills . Usance Bills must be stamped on or before the date of bills as per the Indian stamp Act. Again Bills are divided into three parts:1. Genuine Bills:- A genuine bills is one, which is drawn against genuine trade transaction 2. Accommodation Bills:- An accommodation Bills is drawn to accommodate the financial needs of another. Banker will have to very careful in financing against accommodation bills . The practice of drawing accommodation bills is known as Kite flying. 3. Advance against Bills:- A banker grants advances against bills of different types. Where a banker advances against a demand bills , it is referred to as Bills purchased . Where the advance is granted against usance Bills , it is referred to

as Bills discounted . Bills that are drawn under letter of credit and advanced against are known as Bills Negotiated. d) Packing credit packing credit facility is an export credit normally sanctioned for purchasing or procuring , processing and packing goods meant for export. This facility is extended either by way of hypothecation or pledge of an exporter who should satisfy the following: There should be the importer exporter code number allotted by trade control authorities. There should be an expert code number allotted by RBI or authorized dealer to RBI. He should not be in the caution list of export credit and guarantee corporation ltd. (ECGC) an organization of Government of India. ECGC prior permission should be obtained from them before any credit facility should be granted to an exporter. e) LOANs Term loans are granted for acquisition of fixed and current assets When there is a proposal for loan for fixed assets ;a banker should have to look into the following aspects in particular: Industry/Activity prospects Managerial competence Technical feasibility

 Commercial viability Financial viability Project cost Proposed means of financing The industry /activity prospects could be well ascertained into industrial survey reports published by business magazines ,news papers and periodicals in addition togethering information from the bankers own management information system department. The managerial competence of the promoters /borrowers will have to be assessed thoroughly through extensive credit investigation and interview with the borrower. The technical feasibility could be gauged from the report of technical feasibility study that may have been conducted by consultants appointed for the purpose and their help could be drawn to get any amplification of the factors discussed in the report. The commercial viability of the proposal has to be seen in the context of growth in the demand and supply position of the product proposed to be produced and the marketing /distribution arrangement made by the promoters. Financial viability will have to be assessed mainly with reference to parameters such as liquidity , gearing , growth of sales and production and profitability. The cost estimated and the proposed means of financing have to be thoroughly gone into to ascertain the realistic level of the same and also to find out the

extend to which uncertainties involved with the execution of the product have been taken into account. 4.6.2 NON-FUND BASED ADVANCE Various forms of non-fund bashed credit being provided by a banker are as follows:a. Bank Guarantees b. Deferred payment Guarantees c. Letters of credit a) Bank Guarantees :- A guarantee involves three parties Surely The provider of the guarantee The creditor the beneficiary of the guarantee The principal debtor- whose behalf of the guarantee is provided. These are two important aspects the bankers have to bear in mind before issuing a guarantee on behalf of a customer. a) A banker has to be thoroughly convinced about the capacity of the

customer to perform the promise/obligation undertaken in the contract before the he sets out to consider issuing a bank guarantee for him. b) Since the liability that may arise under a guarantee on default by a

customer has to be met whether or not the customer reimburses the banker , a

banker has to have sufficient cushion In the form of security to fall back upon in the event of arising of such a contingency. Bank Guarantees issued by a banker may be of the following types:1. Financial Guarantees 2. Performance Guarantees

1) Financial Guarantees Under the financial guarantees, a banker undertakes only financial liability . He undertakes to pay the beneficiary of a financial guarantee an amount not exceeding the sum stated in the guarantee, on default of promise by the customer on whose behalf the guarantee is given. These are guarantees issued in the respect of purely monetary obligation . This type of guarantee is normally issued in lieu of payment of tender deposits , earnest money deposits, customs duty/excise duty/sales tax/income tax and guaranteeing payment of goods purchased on credit. 2) Performance Guararntees
Under the performance Guarantees, a banker guarantees:a.That the customer on whose behalf guarantee is given, will perform the contract undertaken

b. On his failing to perform the same , the banker shall make good the loss caused the beneficiary by limiting him self financially to a sum not exceeding the amount undertaken in the guarantees. b) Deferred payment guarantees (DPGS) Deferred payment Guarantees are basically financial guarantees . These are given mostly when transactions of sale-purchase of capital goods are involved. Usually in such transaction, a banker issues a bank guarantee after obtaining a down payment of around 15% of the cost of the machinery and the balance of 85% including interest thereon is agreed to the made payable in installments spread-over a period of time . As this involves commitment on the part of guaranteeing banker for a long period , the banker has to do a rigid and careful appraisal of the proposal for issue of DPGs as like as sanction of term Loan. c) Letter of credit (L/C) A Letter of Credit is a mechanism, which helps a trade transaction between a seller and a buyer . A Letter of Credit is an agreement whereby a banker acting at the request of a customer undertakes to pay a third party , by a given date against the proper document , the counter value of the goods or services. Letters of credit are classified into various categories depending upon the nature and function of the credit. a. Irrevocable Letter of Credit

b. Revocable Letter of Credit c. Payment Credit d. Deferred Payment Credit e. Acceptance Credit f. Revolving Letter of Credit g. Transferable Credit h. Back to Back to Credit i. Red Clause Credit

CHAPTER-5

CONCLUSION

The credit management is a most vital activity of the bank in addition to its receiving of deposits. These are very sensitive areas in the activity fields of banking because of tough competition challenged by the commercial banks of public and private sectors. In regard to deposits, the schemes are to be designed to suite to the needs of the customers and localities creating a sense of understanding that all for you and you are for the bank. Secondly in regards to the credit management and granting of loans, the following cases on the credit policy should be processed intelligently and with all prudence; failing which, increasing of NPAs shall be increased within a short span of time. These mounting NPAs shall be a challenge to development of the bank. 1. Recovery practices, and 2. How to minimize the NPAs. Form the study of the credit policy of the Kendrapara Urban Co-operative Bank It is concluded that the recovery of loans and advances is coming down yet the granting of loans from year to year is increasing. The present credit management policy of the bank is good but there is a need of some improvement to minimize the NPA or zero NPA. Overall assessment on the bank needs to follow the proper procedures for granting the loans and advances to the customers and should keep good co-operation with other nationalized banks. Form the study I hope that once the time will come when the Kendrapara Urban Co-operative Bank will get a chance to show the expertise in management and create a new positive land mark among the co-operative banks and can cope up with modern preferences of the customers and will get a specialty position.

SUGGESTIONS
The bank must have to improve its customer service. The bank must consider the various influencing factors while granting loans. The bank must see that the fixed deposits should be for longer periods and service of granting loans thereupon should be immediate. The bank must satisfy the present customers so that the bank can attract more number of customers. The bank must provide the service much better than the like service provided by its competitors. The bank must provide all the facilities to the customers with different products whish are provided by other banks. ATM facility particularly should be provided to its customers.

APPENDIX

1.Profit and loss Account of the Kendrapara Urban Cooperative Bank Ltd., Kendrapara for the year, 2010-11. 2. Balance Sheet of the Kendrapara Urban Cooperative Bank Ltd., Kendrapara for the year, 2010-11. 3. Rules for granting the loans to the customers of KUCB.

BIBILOGRAPHY
1. Banking law and practice. P.N. Varshney, (ph.D) Educational publishers, New Delhi. 2. Financial management. R.K Sharma. S.K gupta. Kalayani Publishers. 3. Finanacial markets and service Gordon and natarajan. Himalaya publishing house 4. TIT BITS OF general advance and financial services S.K. dash Babk house, 210 gajapati nagar, BBSR-751005

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