Final Report

NPA Management in Karnataka Vikas Grameena Bank
EXECUTIVE SUMMARY
Prologue A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the overall profits and affects the financial health of the bank. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. This report deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing with special reference to Karnataka Vikas Grameena Bank.
Title of the Project A Study on Non Performing Assets of Karnataka Vikas Grameena Bank
Scope of the Study The study is confined on Non Performing Assets in case of Karnataka Vikas Grameena Bank (Main Branch), Club Road, Hubli and the entire organization.
Non Performing Asset management is a key subject which plays an important role in deciding the overall performance of the bank. Therefore, the subject of Non Performing Asset is chosen for the project work. Accordingly the project is being undertaken at Karnataka Vikas Grameena Bank, Main Branch, Hubli.
KLEs Institute of Management Studies and Research, Hubli
Need of the Study The present research is concentrated to find out the efficiency of measures undertaken by Karnataka Vikas Grameena Bank to reduce NPA which in turn contributes in improving its profit margin and strengthening the financial position of the bank. The purpose of this project is to investigate and provide a comprehensive overview of managing the Non Performing Assets (NPA) in Karnataka Vikas Grameena Bank(KVGB) and the techniques practiced in the bank for managing the risk associated with the Non performing Assets and converting ill performing assets through securitization. The study tries to explore an empirical approach to the analysis of Non-Performing Assets (NPAs) with special reference of Karnataka Vikas Grameena Bank. The NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. This study aims to find the fundamental factors which have impacted NPAs of Karnataka Vikas Grameena Bank. The empirical analysis assesses how macroeconomic factors and bankspecific parameters affect NPA of bank. OBJECTIVES OF THE SYUDY Research Objectives The main aim of the research is to study Non Performing Assets and assess the effectiveness of the techniques for minimizing the NPAs, adopted by Karnataka Vikas Grameena Bank. This research aims at analyzing and finding out possible strategies to reduce the NPAs. Sub-objectives of the study 1. To understand the concept and classification of the Non Performing Assets. 2. To know why an account becomes Non Performing Assets and the steps taken by the bank to reduce Non Performing Assets. 3. To highlight Loans and Advances trend and amount of NPA in KVG Bank 4. To study the level of Non Performing Assets and its effects on financial health of the bank. 5. To devise the tools to control Non Performing Assets. 6. Framing strategies to locate ill performing assets well in advance and securitizing the same.
REASONS FOR SELECTING NPA study in KVG Bank: According to NABARD reports Gross NPA ratio (Gross NPA to Gross Advances) of Regional Rural Banks (RRBs) in India was 8.53% in 2005-06, 6.4% in 2006-07 and 4.6% in 2007-08. In KVG Bank Gross NPA ratio was 4.71% in 2005-06, 4.14% in 2006-07 and 3.58% in 2007-08. This statistics shows that KVGB is better in terms of NPA management as compared to all RRBs in India since its Gross NPA ratio was less than Gross NPA ratio of all RRBs. Amongst 6 regional rural banks in Karnataka, KVGB is in good position, in terms of total outstanding loans and deposits and as compared to other RRBs in Karnataka, KVGB has less NPA, KVGB earns a good level of income but NPAs are reducing its profit, the above said reasons induces to select the NPA for the Study.
RESEARCH DESIGN A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. The effort of the investigation is to provide descriptive profile of Non Performing Assets (NPA), classification of NPAs, reasons for NPA, methods available to reduce NPAs, techniques followed by Karnataka Vikas Grameena Bank to curb NPAs, Government policies pertaining to maintaining NPA levels with specified limits, level of Non Performing Assets and its effects on financial health of the bank and framing strategies to manage Non Performing Assets. RESEARCH METHODOLOGY Type of research: The research base was Descriptive Research. Sources of information (1) Primary data: Direct personal interview of bank officials (2) Secondary data: Secondary data sources will include websites, magazines, newspapers, textbooks and audited reports and accounts of the bank
DATA ANALYSIS After the relevant data were collected, descriptive analysis was carried out which was preferred for assessment purposes. Hence for all data interpretations were made and diagrams and graphs have been used to support discussions related to findings. Finally, conclusion and recommendations were made accordingly
Limitations of study
The study is conducted on the basis of data which was provided by the bank. Only consolidated figures are available. Access to the information is limited and complete dependency on the annual report and information provided by bank officials. The data are extracted from the records covering a period of 3 years only. The data and information taken at the time of study might have changed subsequently because all the procedures, rules and regulations might have changed at any time, based on industrial policy, RBI guidelines, etc. The data was available for the period of 200506, 2006-07 and 2007-08. Data for previous year 2008-09 was not available because bank had not yet issued Audited annual reports.
FINDINGS (1) Loans and advances disbursed in the year 2007-08 were reduced in Allied sectors, Trade and services, non-priority sector. NPA was more in Allied sectors, Trade and services, non-priority sector. So bank reduced the credit disbursement and increased advances in other sectors by introducing new schemes in the 2007-08. (2) In the year 2005-06, the gross NPA is Rs 82.43crores and in the very next year it increased to Rs 89.67 after that every year up to now the NPA increased proportionately. In the year 2007-08 Gross NPA was Rs 91.19crores. (3) Gross NPA was written off by 100% and Net NPA was brought down to Rs. Zero in the year 2007-08.
(4) In the year 2005-06 NPA is absorbing 9.19% of the Net Profit. In the year 2006-07
NPA is reducing 4.48% of net profit and in the year 2007-08 NPA is reducing 4.37% of the Net profit. In the year 2005-06 NPA had reduced 9.19% of Net profit because the NPA management different in all 4 rural banks which merged later on
to form KVGB. It was possible to reduce NPA to a greater extent of 4.48% and 4.37% in the years 2006-07 and 2007-08 respectively. (5) During the year 2007-08 under report, the Bank had implemented a scheme for writing-off of the bad/doubtful debts. Accordingly non farm sector NPA loans with book balance upto Rs 25000 which were classified as loss assets are written off. Total written off amount during the year is Rs 168.69 lakhs. The amount of cumulative recovery out of written off amount is Rs 40.40 lakhs upto end of March 2008. (6) There are several reasons for the rise in NPA; few causes can be controlled by bank. So bank worked more on controllable causes and this helped it to reduce NPAs to some extent. (7) The managers and officers interviewed admitted that they have noticed wilful defaulters as instrumental in increase in NPA. (8) Political environment and political interferences such as political patronage of defaulters and Govt loan waiver scheme are contributing to rise in NPA level. Economic conditions may include decrease in level of income of borrowers etc. (9) According to managers and officers of KVGB the major reasons for advances becoming Non performing is wrong selection of borrowers and lack of inter-bank co-ordination in exchange of information over list of defaulters. (10) KVGB has adopted all possible preventive and corrective measures to reduce
the existing NPAs and prevent generation of new NPAs.
RECOMMENDATIONS General suggestions: The Bank should adopt the following General strategies for control of NPAs. The suggestions are as follows: (1)Projects with old technology should not be considered for finance.
(2)
Exposure on big corporate or single project should be avoided.
(3)Conducting NPA workshops not only for recovery officers but also for entire staff (4)There is need to shift banks approach from collateral security to viability of the project and intrinsic strength of promoters.
(5)
Reducing the lending in Allied sectors, Trade and services, non-priority sector Extending inter-bank co-ordination in exchange of information over list of
(6) Excessive reliance on collaterals should be avoided

(7)
defaulters. Pre-sanction suggestions: (1)Uneven scale of repayment schedule with higher repayment in the initial years normally is preferred. (2)As for as possible, repayment of term loans should be fixed on monthly basis rather than on quarterly or semiannual basis. (3)Personal guarantees of the directors should normally be insisted upon. (4)Bank should assess and continue to keep a track of guarantor also. Post sanctions suggestions:
(1)
The Credit section should carefully watch the warning signals viz. non-payment of
quarterly interest, dishonor of cheque etc.

(2) Inspection system can be improved by surprise visits by recovery officers.
(3) Monitoring of NPA symptoms which are borrower-related: Following are the indicators which have to be interpreted in order to ensure that there are no willful defaults: a) b) c) d) e) f) g) Unnecessary and frequent visits of borrower to the branch or Head Office. His standard to living shows upward swing soon after loan is disbursed. He purchases immovable property. This indicates that borrower has diversified He does not bother for his health. His next generation is not interested in his business He has developed relationship with political leaders. He tries to avoid bankers visit to the factory and/or his house.
the loan amount and purchased immovable property.
(4) List of defaulters is displayed in the notice board of all branches of KVGB without
disclosing the account number, amount of loan, overdue, etc. (5) Approaching influential borrowers who are defaulters, while important functions such as thread ceremony, marriage, etc. are going on in their houses and branch staff can directly
ask for repayment during such functions and loans have been repaid because the borrowers (defaulters) tried to protect their self prestige in the presence of invited guest and relatives. (6) List of defaulters prepared and pasted at public places and the recovery van, a hired jeep, flagged with banner Vasuli Dal (recovery squad of Karnataka Vikas Grameena Bank). (7) The bank has to go for selling of Non Performing Assets to Asset Reconstruction Company of India Limited (ARCIL) to bring down the NPAs. (8) Presently Bank is spending 3 days a week on Public Working day recovering the NPA from the customer which to be increased to 4 days a week, because the bank has to spend 2 days for selling the property. CONCLUSION: NPA is a double-edged weapon, which affects bank profitability due to interest income not being recognized on NPA accounts and loan loss previously to be created from profit earned. The bank must adopt structured NPAs management policy for elimination or reducing the NPAs in the bank. In general the trend of NPAs in KVGB are decreasing trend, on the same time the KVGB has been adopted a very good techniques to control over the NPAs but presence of NPA in the bank accounts reduces the profitability.
It is not possible to eliminate totally the NPA in the banking business but can only be minimized. It is always wise it follow the proper policy appraisal, supervision and follow-up of advances to avoid NPAs. For reduction of NPAs, though there is a greater need of political threat and effective enactment of laws to recover NPAS, the banks should also like advantage of Debt Recovery Tribunals, Lok adalat, and the legislations enacted by the state govt. and one-time settlement schemes. In the case of KVGB it is one of the good sign that the NPA ratio has been decreasing every year.
INDUSTRY PROFILE History of Banking in India:

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The Government's regular policy for Indian banks since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:1. Early phase from 1786 to 1969 of Indian Banks 2. Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. 3. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.
Phase I: The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public had lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
Phase II: Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization of Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.
The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949 : Enactment of Banking Regulation Act. 1955 : Nationalization of State Bank of India. 1959 : Nationalization of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalization of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of Regional Rural Banks. 1980 : Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector banks of India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. Phase III :This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of Mr.M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
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capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Calcutta" in Calcutta in June 1806. Couple of decades later, foreign banks like HSBC and Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank set up in 1865. By the 1900s, the market expanded with the establishment of banks like Punjab National Bank, in 1895 in Lahore; Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. Indian banking sector was formally regulated by Reserve Bank of India from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers.
SBI Group:
The Bank of Bengal, which later became the State Bank of India. State Bank of India; with its seven associate banks command the largest banking resources in India. Nationalization:
The next significant milestone in Indian Banking happened in the late 1960s when the then Indira Gandhi government nationalized, on 19th July, 1969, 14 major commercial Indian banks, followed by nationalization of 6 more commercial Indian banks in 1980. The stated reason for the nationalization was more control of credit delivery. After this, until the 1990s, the nationalized banks grew at a leisurely pace of around 4% - also called as the Hindu growth of the Indian economy.
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After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19 nationalized banks in India. Liberalization: In the early 1990s the then Narasimha Rao Government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks like ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. However there had been a few hiccups for these new banks with many either being taken over like Global Trust Bank while others like Centurion Bank have found the going tough. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. Current scenario: Currently banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
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Bank is a financial institution that borrows money from the public and lends money to the public for productive purposes. The Indian Banking Regulation Act of 1949 defines the term Banking Company as "Any company which transacts banking business in India" and the term Banking as "Accepting for the purpose of lending all investment of deposits, of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft or otherwise".
Banks play important role in economic development of a country, like Banks mobilise the small savings of the people and make them available for productive purposes. Promotes the habit of savings among the people thereby offering attractive rates of interests on their deposits. Provides safety and security to the surplus money of the depositors and as well provides a convenient and economical method of payment. Banks provide convenient means of transfer of fund from one place to another. Helps the movement of capital from regions where it is not very useful to regions where it can be more useful. Banks advances exposure in trade and commerce, industry and agriculture by knowing their financial requirements and prospects. Bank acts as an intermediary between the depositors and the investors. Bank also acts as mediator between exporter and importer who does foreign trades.
Indian nationalized banks (banks owned by the Government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. The Indian banking can be broadly categorized interest nationalized, private banks and specialized banking institutions. When operation through a large network of branches and people it is necessary to have commonality of thinking and approach and a credit policy document provides the basis for this. Some well known banking institutions disappeared under a mountain of ill-advised credit exposure and some very well known names considered stalwarts in global banking came close to disappearing.
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The Structure of Indian Banking.
The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are again split interest old banks and new banks.
Reserve Bank of India [Central Bank]
Scheduled Banks
Scheduled Commercial Banks
Scheduled Co-operative Banks
Public Sector Banks
Foreign Banks
Private Sector Regional Banks
Rural
Scheduled Urban Co-Operative Banks
Scheduled State Co-Operative Banks
Nationalized Banks
SBI & its Associates
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Old Private Sector Banks
New Private Sector Banks
Regional Rural Banks

The RRBs, called by different names in different states, such as Grameena Banks, Gramin Banks, Grama Banks, Gramya Banks, Elaquai Dehati Banks, Gaonlia Banks, etc were started in 1975, i.e. during the Emergency days, with the aim of providing credit to small and marginal farmers, agricultural labourers, rural artisans, street vendors and all those living below the poverty line as the preamble of the Regional Rural Banks Act, 1976 proclaimed in unequivocal terms. Regional Rural Banks have been in existence for around three decades in the Indian financial scene. Inception of regional rural banks (RRBs) can be seen as a unique experiment as well as experience in improving the efficacy of rural credit delivery mechanism in India. With joint share holding by Central Government, the concerned State Government and the sponsoring bank, an effort was made to integrate commercial banking within the broad policy thrust towards social banking keeping in view the local peculiarities. The genesis of the RRBs can be traced to the need for a stronger institutional arrangement for providing rural credit. The Narsimham committee conceptualized the creation of RRBs in 1975 as a new set of regionally oriented rural banks, which would combine the local feel and familiarity of rural problems characteristic of cooperatives with the professionalism and large resource base of commercial banks. Subsequently, the RRBs were set up through the promulgation of RRB Act1 of 1976. Their equity is held by the Central Government, concerned State Government and the Sponsor Bank in the proportion of 50:15:35. RRBs were supposed to evolve as specialised rural financial institutions for developing the rural economy by providing credit to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs. Over the years, the RRBs, which are often viewed as the small mans bank, have taken deep roots and have become a sort of inseparable part of the rural credit structure2. They have played a key role in rural institutional financing in terms of geographical coverage, clientele outreach and business volume as also contribution to development of the rural economy3. A remarkable feature of their performance over the past three decades has been the massive expansion of their retail network in rural areas. From a modest beginning of 6 RRBs with 17 branches covering 12 districts in December 1975, the numbers have grown into 196 RRBs with
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14,446 branches working in 518 districts across the country in March 2004. RRBs have a large branch network in the rural area forming around 43 per cent of the total rural branches of commercial banks. The rural orientation of RRBs is formidable with rural and semi urban branches constituting over 97 per cent of their branch network. The growth in the branch network has enabled the RRBs to expand banking activities in the unbanked areas and mobilise rural savings. Indias own Gramin Banks, the regional rural banks (RRBs), are a success story, too, for a different reason. These banks have shown tremendous improvement in their financial performance as a result of several revamping measures the government has implemented, in doses, from 1993.
Social cost for social benefit: As these banks were designed to exclusively cater to the credit needs of the poor in the rural and far-flung areas, it was presumed that they would incur some losses. The framers of the RRB policy spelt this out in the very beginning, not as if they were discovered subsequently. These losses were supposed to be treated as the necessary social cost for the social benefit of covering the rural poor. In fact, the RRBs lived up to this expectation; as many as 196 RRBs were established by 1990 with more than 14,500 branches across the length and breadth of the country, taking banking services to the unbanked rural, tribal and other interior areas. About 123 million persons, belonging to the weaker sections, benefited from these banks. But the performance evaluation was made in terms of the viability of the RRBs. The accumulated losses of Rs 621 crore by 1991-92 and 152 out of 196 RRBs being in losses was a big cause of concern that provoked the corrective measures. If the performance were viewed keeping the establishment goals in view, this loss, which worked out to Rs 18 lakh per RRB per year, would be peanuts compared with the service they rendered to the poor.
Profitability: The policymakers who became monomaniac wanted the profitability to be increased at any cost even at the cost of distancing the RRBs from the rural poor and set out with
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revamp measures. As a first measure, the barrier of financing exclusively to the weaker section was removed. In other words, the non-target group, or the rich, became their new target group. The second main objective, cheap credit, was given a go-by in tandem; the rates of interest charged on the loans at RRBs have become higher than any other commercial bank. The third objective of mobilising rural savings and channelling them for the development of the same area and to access funds from urban markets for the benefit of rural people also suffered a setback as a result of excessive profitability concern, as indicated by a low credit-deposit (CD) ratio. The CD ratio of RRBs has fallen from around 100% in the beginning to around 50% today. Instead of attracting funds from the urban centres, the RRBs are taking the rural resources to urban centres as evidenced by their high investment-deposit (ID) ratio, ranging between 55% and 60% during the last three years. The RRBs invested in securities of Rs 45,666.14 crore against their deposit base of Rs 83,143.55 crore in 2007. The fourth major objective was to take banking services to the door steps of the rural poor. The RRBs spread has been heartening and rapid 196 RRBs opening 14,500-odd branches all over rural India, accounting for 20% of the total bank branches. But, the reform measures did not allow the RRBs to continue with their rural and regional character. As of March 2008, of the 14,458 branches, only 11,353 were in the rural areas, 2,561 in semi-urban areas and 584 in urban areas. Stranger still, as many as 60 branches of RRBs are in metropolitan areas even as many as 1,014 rural branches were closed or shifted between 1998 and 2007 on the plea of non-viability. The regional character also suffered a setback following the consolidation exercise that started in September 2005. The number of RRBs has reduced from 196 back then to 88 by May 2008 and the principle of each RRB functioning in a homogeneous agro-climatic area is given a go-by. There is a distance of 1,000 km or more between some of the amalgamated RRBs and the districts covered are not contiguous as the rule for amalgamation was one RRB for one sponsor bank in one State. So, all the original characters of the RRBs have undergone a transformation; rather, they have become more commercial than the pure commercial banks. The RRBs have no doubt turned from eternal loss makers into profit-making entities following the revamping measures. The net profit generated in the RRBs in 2007-08 was Rs 625.11 crore. Though higher than the previous years Rs 617.13 crore, it was lower than the profit earned in
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the year before of Rs 748.11 crore.
This raises doubts on the sustainability of even the commercial character of these banks, which have sacrificed their social responsibility. At times, the external factors such as loan waivers and rescheduling of installments on account of drought and the resultant reduction in non-performing assets favorably influence their financial results. In fact, the accumulated loss in the system during 2007-08 of Rs 2,759.49 crore was higher than the previous years Rs 2,636.85 crore. Also to be viewed from the commercial angle is the fact that their business volume is disproportionately low compared with their share in branch network. While RRB branches account for 19.58% of the total bank branches, their deposit of Rs 83,143.55 crore accounts for only 2.6% of the total bank deposits in India and advances of Rs 48,492.59 crore constitute a still lower share of 2.01%. Similarly, the rural branches of the RRBs account for 36.94% of the total rural branches of all the banks put together. But, their share in institutional agricultural advances is not more than 10%.
While it is clear that the turnaround strategy of RRBs has clearly turned them away from their original goals, their profits, induced through sacrificing the rural weaker sections credit and other measure, do not seem to be sustainable. Also, the business levels of the banks are nowhere comparable to their size in terms of number of offices.
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BANK PROFILE
One of the successful experiments of the Banking Sector in India has been the formation of the Regional Rural Banks (RRBs). Experts in the field have acknowledged this fact taking into account the recent enormous progress achieved by the RRBs, which have travelled a long way in the last 30 years, on a journey that can best be described as arduous. Close on the heels of Nationalization, when the focus shifted from Class Banking to Mass Banking, the RRBs emerged as a low cost Bank designed to cater to the needs of Small and Marginal Farmers, Rural Artisans, Petty Traders etc., who operate in Rural Areas. The initial period was marked with innumerable challenges as the RRBs had to deal with illiterate, superstitious people, not exposed to the changing world scene. It was indeed an uphill task, as they were expected to play the role of not just a Banker, but also that of a friend, philosopher and guide, leading them on the path of development. Malaprabha Grameena Bank, Bijapur Grameena Bank, Varada Grameena Bank and Netravathi Grameena Banks were the four RRBs, sponsored by Syndicate Bank, in the State of Karnataka. When the above RRBs were established without much ado way back in the 1970/80s, people may not have had the slightest idea about the ripple that these RRBs would create in the banking industry and the impact that they would have on the rural scene. In the formative years, the main concern was to reach out to the rural poor through its strong network of branches. The Banks were playing a pivotal role in bringing about a metamorphosis in their respective areas of operation through implementation of the various schemes and programmes tailored to suit the requirements of their customers. As part of the measures which will lead to strong, efficient and vibrant Banking System, the mergers and restructuring phase of the recommendations of the Narsimham Committee is now being implemented and thus the four RRBs sponsored by Syndicate Bank in the State of Karnataka were amalgamated to form the KARNATAKA VIKAS GRAMEENA BANK by a Government of India Notification dated 12/09/2005. The combined business level of this Bank was Rs.3263.73 Crores with Deposits of Rs.1620.46 Crores and Advances of Rs.1643.27 Crores as on 12/09/2005
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The Banks have come a long way from those initial years and after amalgamation the Bank has a network of 409 branches cutting across the length and breadth of the nine districts forming its area of operation. Surmounting the initial problems of bringing about uniformity in the working of these Branches after amalgamation, the Bank was able to record a growth of 20.41% as on 31/03/2008 in comparison to the combined figures of the four RRBs put together as on 31/03/2007. The Bank plans to achieve a business level of Rs 6450 Crores by the end of March 2009. As at the close of December 2008 the total business is Rs. 5507 Crores Comprising Deposits of Rs.2569 Crores and Advances of Rs. 2938 Crores respectively. Apart from conducting the Banking business, the Bank is intricately involved in the social fabric of the people it serves. The activities undertaken are Recognising that health is a neglected sector among the rural people, the Bank has been organizing various health camps free of cost. Also in association with the District Blindness Eradication Centre, it has conducted free Eye Check-up Camps followed by cataract surgery and implantation of IOL. Bank also runs a free clinic at one of the villages in its area of operation. When the river Krishna was in spate, thousands of families were rendered homeless. Bank was quick to respond by distributing rugs at a relief camp and donating a days salary of the Staff to the Chief Ministers Relief Fund. Responding positively to a news item in the local daily, a village situated close to the Dharwad town was gifted solar light. This village had no electricity till the Bank took it upon itself to provide it. Bank has adopted several balawadies run by the Akshara Foundation in the slum areas, adopted a rural school for overall development, donated steel plates to the children of Government Schools at many places, recognises meritorious rural students by awarding cash prizes etc., etc. Thus, the Bank has fulfilled the aspirations of the rural people with its total involvement. To continue as the leading and visible Grameena Bank, acting as a catalyst for the growth of Agriculture/Allied and Non-Farm Activities, encouraging customers to pursue gainful vocation to maximize returns for a decent living, to liberate vulnerable sections from the clutches of
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money lenders and finally build a vibrant and pro-active Financial Institution is the mission of Karnataka Vikas Grameena Bank. MISSION: To continue as the leading and visible Grameena Bank in the country by acting as a catalyst for the growth of Agriculture/ Allied and Non-Farm activities.
To accelerate lending and reach out to all needy customers to pursue gainful vocation and thus enable them to maximize returns for a decent living and more so committing to liberate vulnerable sections from the clutches of money lenders.
To build vibrant and proactive financial institution with staff committed to serve by adopting improved technological inputs and products to drive improved business growth.
To motivate and encourage SAVINGS and channelise the same for disbursement of credit to achieve alround development of people of nine districts in Karnataka true to its name KARNATAKA VIKAS.
Organisation structure:
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KEY PERSONS: Board of Directors: Mr. K P Muralidharan Mr. K. Raghuram Bhandari Chairman Special officer, Institutional Finance Govt. of Karnataka Mr. R. Sekar Mr. P. S. Mohanan AGM, RBI, Bangalore DGM, NABARD, Bangalore Mr. Murali Mohan Regional Manager, Syndicate Bank, Belgaum Smt Shikha CEO, Zilla Panchayat, Dharwad Mr. N. R. Sadananda Regional Manager, Syndicate Bank, Hubli
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Mr Naveen Chandra Shetty
Central Govt. Nominee-Non Official Director
Mr Monte Feranandes Other Key Persons: I T Sethuraman G Subba Rao B G Hangaragi Branch officials details: Mr H Kariyappa R G Nargund M A Shaik Number of branches:
Central Govt. Nominee-Non Official Director.
General Manager General Manager Senior Manager
Manager of KVGB, Main branch, Hubli Senior Officer Recovery Officer
KVGB has 309 rural branches, 63 semi-urban branches and 35 urban branches spread across Bagalkot, Belgaum, Bijapur, Dharwad, Gadag, Haveri, Dakshina Kannada, Udupi, Uttar Kannada districts. Totally there are 407 branches of KVGB.
Products and Services of KVG Bank: (1) Personal Banking: (a) Savings Bank Account These accounts are designed to help the individuals (personal customers) to inculcate the habit of saving money and to meet their future requirement of money. Amounts can be deposited/withdrawn from these accounts by way of cheques/ withdrawal slips. It helps the customers to keep minimum cash at home besides earning interest of 3.5% p.a. (b) Current Accounts
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Current Accounts can be opened by individuals, partnership firms, private and public limited companies, HUFs/specified associates, societies, trusts, etc. (c) FINANCING 2, 3 & 4 WHEELERS for undertaking Agricultural /other activity Purpose: To undertake Agricultural / other own business / Profession. Special Features: Unique loan scheme for purchase of vehicles for Agricultural use /Business purpose at reduced margin for SF / MF. For Agriculturists, rate of interest and other norms are applicable as per Agri Loans, and for others, SRTO norms are applicable. Quantum: For SF/ MF 95 % of the vehicle value. Other farmers 85% of the vehicle value. For businessmen 75 % of vehicle value
VIKAS SUVARNA Under Vikas Suvarna Scheme, Jewel loans can be arranged with fixed credit limits or as an Overdraft facility. A Jewel Loans with fixed credit limits: Purpose: Loans under the scheme may be granted for all the purposes i.e. production and also for Consumption purposes. Eligibility: Agriculturist /Non agriculturists. They should be customers of the Bank properly introduced. Rate of Interest: Interest shall be debited on monthly rests & compounded quarterly, however, in case of agriculturist; it is to be collected on quarterly/ half yearly/ yearly basis depending on the cropping pattern or other income generation activity taken up. If overdue, 2% over and above the normal rate of interest is to be collected. Jewel Appraiser fee: 1% subject to minimum of Rs10/- and maximum of Rs.25/for Advances upto Rs.10000/- and Rs.50/- for loan above Rs.10000/Conditions:
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No Jewel loans are arranged in the name of Jewel appraiser.
(d) VIKAS PRATIBHA SCHEME Eligibility Criteria Courses Eligibility: a) Studies in India: Graduation Courses, Post Graduation Courses like Masters and Ph.D- Professional Courses like Engineering, Medical, Agriculture, Veterinary, Law, Dental etc. Computer Certificate Courses of reputed institutes accredited to Dept of Electronics or Institutes affiliated to University. Etc. b) Studies in abroad: Graduation courses offered by reputed universities, Post graduation like MCA, MBA, MS etc. c) Courses conducted by CIMA-London, CPA in USA etc. Student Eligibility Any major student representing himself or a minor student represented by parent or guardian of Indian nationality Secured admission on the basis of merit to professional / technical / other courses through entrance test / selection process. Secured admission to foreign university / institutions Branches shall ensure that the beneficiaries financed are the permanent residents of their command area / service area. Quantum of Finance Need based finance in the form of short term/term loan subject to repaying capacity of the parents / students and the maximum of Rs.10.00 lakhs and Rs.20.00 lakhs for studies in India and Studies in Abroad respectively "DEMAND LOANS - for Salaried & Non-Salaried Customers Salaried Class :
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o o o o
10 to 15 times of gross salary Maximum cut back up to 60 % Personal clean loans & loan for vehicles/ consumer durables etc. Loans for New as well as used cars
Non- Salaried Class :

o o o
Personal loans up to 50 % of gross annual income Loan for vehicles/ consumer durables etc. Loans for New as well as used cars are provided.
(e) A regular interest earning scheme. A flexible and convenient deposit scheme which ensures that your money never remains idle. Even very small amounts earn interest for very short periods. Yes. You can deposit an amount of just Rs.1000/- for a period as short as 15 days and make it grow.
(2)
DEPOSITS
Savings Bank Account Minimum Amount: With Cheque Book Facility: * For all category of Branches minimum balance is Rs.500/Without Cheque Book Facility: * For Urban Branches minimum Rs.250/* For Semi-urban and Rural Branches Rs.100/Period: Operative Account. Rate of Interest: 3.50% simple interest. Vikas Premium Savings Bank Account Minimum Amount: Minimum Balance of Rs.10000/- Shall be maintained in SB. Period: Operative Account.
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Rate of Interest: 3.50% simple interest. Vikas Special Premium Savings Bank Account Minimum Amount: Minimum Balance of Rs.20000/- Shall be maintained in SB. Period: Operative Account. Rate of Interest: 3.50% simple interest.
Jeevana Prabha Savings Bank Account (An Insurance Linked Deposit Account) Minimum Amount: Rs.1,110/- initial Deposit. A minimum of Rs.1000/- shall always be maintained in the account to derive benefit of the Scheme. Period: For a minimum period of 3 years from the date of opening of the account. Rate of Interest: Simple interest as applicable to SB Account. Current Account Businessmen, Traders, Industries, Companies, Associations and others who have occasions to receive, to be received / pay out cash / cheques quite often have to open current accounts. Minimum Amount: Urban Area Rs.2000/- initial deposit for individuals and Rs.3000/- for others. Rural / Semi urban Areas Rs.500/- for individuals and Rs.1000/for others. Period: Operative Account. If minimum balance is not maintained, Rs.20/- per occasion is to be levied. Sanchayani Deposit (RD/CD): Minimum Amount: Monthly installments of Rs.10/- and in multiples of Rs.10/-.
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Period: Minimum 12 months or more and in completed quarters and maximum 120 months. Rate of Interest: On quarterly basis as applicable to Term Deposits. Fixed Deposits: (Normal / Monthly / Quarterly / Half Yearly) Minimum Amount: Minimum of Rs.500/- in multiples of Rs.100/Period: Minimum 15 days and Maximum 120 months. Rate of Interest: Applicable simple rate of interest at Half yearly rests. Payable on Monthly / Quarterly / Half Yearly / On Maturity Nirantara Deposit: Minimum Amount: Minimum of Rs.5/- in multiples of Rs.5/Period: Maturity period of 60 Months from the date of opening the account. Rate of Interest: 5% on Maturity.
(3) ADVANCES Short Term Loans (a) VIKAS KISAN SAMRUDHI CREDIT CARD SCHEME Objective: The scheme aims at providing adequate and timely credit for the comprehensive credit requirement of farmers under single window, with flexible and simplified procedure, adopting whole farm approach including short term credit needs and a reasonable component for consumption needs through KCC. Nature of Financial Accommodation: It is both in the form of Term loan(repayable in 5 years) for meeting the investment credit requirement and Revolving Cash Credit for agriculture and allied activities. The working capital /recurring expenditure shall be in the form of revolving cash credit.
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Quantum of Limit: a) The limit is fixed taking in to account a) Short term credit requirement for crop cultivation for the entire year (requirements for all the three seasons in a year) depending on the type of crop grown, type of cultivation-irrigated or rain fed etc.
b) Term loans requirement which are repayable within 5 years under agriculture and allied activities based on the unit cost of the assets to be acquired by the farmer. c) Working Capital limits for agriculture and allied activities. The initial investment in fixed and /or working capital requirement/recurring expenditure of the borrower is the basis for fixing the limit. As regards consumption requirement, the bank may take in to consideration the family labour and fix the overall limit under KCC and KSCC. The total limit will be in relation to the projected net earning and repayment capacity of the borrower. (b) VIKAS SUGGI Under this scheme all short term crop production loan which are not covered either under Vikas Kissan Credit Card or Vikas Kisan Samrudhi Credit Card are to be covered. (C) VIKAS KALYANA SCHEME Vikas Kalyana is one such loan product being implemented for the benefit of agriculturists to avoid selling the agricultural produce at distress market price during harvesting season. Objective of the scheme To protect interest of agriculturists from selling their produce at distress market price during harvesting seasons. Eligibility of the borrowers All Agriculturists.
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Crops eligible for storage Food grains (Paddy, Jowar, Wheat, Ragi etc) Oil seeds (Ground Nut, Sunflower, safflower,) and pulse crops (Tur, Bengal gram, Green gram, Soya beans etc) Commercial crops like Areca nut, coconut etc. Loan amount A maximum amount of Rs. 5.00 lakh can be sanction per applicant. However, the farmers availing pledge loans should credit 50% of proceeds to their outstanding crop/KCC loan, if the outstanding crop/KCC loan is availed for growing the crop proposed for pledging.
Other Schemes: SCHEMES OF THE KVG BANK a) Credit Policy : The Bank continued to accord prime importance to the Loans and Advances portfolio with its multi dimensional utilitarian aspects. Considering the vast area of operation of the Bank covering nine potential Districts in the State Bank has adopted a Credit Policy as per the guidelines issued by RBI\NABARD and sponsor Bank. The Credit Policy is aimed at increasing high quality and high yielding advances with special thrust on advances to investment credit in agriculture sector, credit linkage to SHGs\JLGs and also to augment credit flow to SME Sector. b) Policy for extending Relief measures: Occurrence of drought, flood pest attack and other natural calamities caused wide spread damage to economic pursuits of our borrowers. It is felt necessary to have a set of guidelines to provide relief by the Branches to calamity affected persons without delay. Hence, Bank adopted a Policy for extending relief measures to the borrowers affected by natural calamities, in tune with NABARD directives. c) Crop loans at reduced rate of interest:
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As envisaged in the Union budget 2006-07, during the year 2006-07, Crop loans up to Rs. 3 lakhs were sanctioned with interest @ 2% provided by NABARD. With this, total crop loans disbursed during the year 2006-07 was at Rs. 540.10 Crores. d) Tie up arrangements: During the previous years, the Bank had entered into Tie-up arrangements with 6 Tractor\vehicle manufacturing Companies for supplying Tractors\Two\Three\Four wheelers to our customers, providing free Registration\Insurance of Vehicle at dealers cost, additional free servicing of the vehicles etc. This year the Bank had executed fresh MOU with Eicher Tractors & Sonalika Tractors, hence, now our customers will have choice of 8 Tractor\vehicle manufacturing Companies, providing additional benefits. e) Coverage of collateral free loans under Credit Guarantee scheme of CGTSI:
To have a better coverage of risk on the collateral free loans sanctioned to SMEs, Bank has proposed to cover such collateral free loans up to Rs. 25 lakhs sanctioned to SMEs, under the Credit Guarantee scheme of CGTSI. Bank has been already enrolled as MLI with CGTSI for the purpose. f) Provision for ;inclusion of Education expenses in KCC: As suggested by Sponsor Bank to encourage education among the family members of the farmers, Branches are permitted to include expenses for Education up to Rs.1,000\- in the KCC limits sanctioned to the farmers. g) Enhancement in project cost under KVIB MMS loans: Till last year KVIB was considering projects with cost up to Rs.10 lakhs for grant of Margin Money Subsidy (MMS). However, the KVIB has enhanced the maximum permissible cost of the project up to Rs. 25 lakhs for grant of MMS, hence the Branches are permitted to consider Project with total cost up to Rs. 25 lakhs, under KVIBMM scheme. h) Introduction of PAIS for Swarojgar Credit Card holders: As suggested by NABARD, Swarojgar Credit Card holders were brought under coverage of Personal Accident Insurance Scheme (PAIS) for a sum assured up to Rs. 50,000\- with United India Insurance Company Ltd. i) Credit Rating of high value NFS loan a\cs:
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In order to ensure healthy credit portfolio and also to assess the creditworthiness of the applications \ borrowers. Credit Rating System was introduced for Borrowers having \ proposed cumulative credit limits of Rs.20.00 lakhs & above. Credit Rating charts as adopted by the Sponsor Bank were prescribed for the purpose. j) Package of Relief measures in Distgress district: Govt. of India has identified Belgaum district in banks Area of operation and extended Package of Relief measures to be implemented in the Distress districts. Under the scheme, interest on the eligible lover due loans of Farmers as on 01-07-2006 was waived, the loan a\cs were to be restructured and fresh finance made available to such borrowers. Bank waived eligible overdue interest, for which, claim was submitted to NABARD. Restructuring of the loan a\cs is being done and fresh finance is being made available to the needy farmers. k) Interest subvention of Poultry loan a\cs: Considering the loss of income to the poultry units due to outbreak of Avian Flu during February 2006. Govt. of India had announced onetime interest subvention of 4% to the poultry units affected by avian Flu. Accordingly Bank had passed on the eligible interest subvention to 75 eligible loan a\cs and reimbursement of the same was received. l) Loan Schemes Launched during the year: In terms of the directives issued by RBI\NABARD \ Sponsor Bank, land also considering the genuine needs of our customers, the following new loan schemes were launched during the year: During the year 2008 KVG Bank launched the following Schemes: Sl.No 1 Name Of the scheme Vikas Jalavardhini Features A scheme for financing individual farmers and joint liability groups for rain water harvesting A scheme aimed for making available valuefor-money accommodation with extra income to the tourists A scheme is provided to cope up with the
Bed and breakfast scheme of the Ministry of Tourism Scheme for Development or
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strengthening of agricultural marketing large expected marketable surpluses of infrastructure, Grading and agricultural and allied commodities standardisation 4 Amrutha scheme of Govt of Karnataka A scheme for the benefit of widows and distressed women to provide assistance for purchase of dairy animal costing Rs 20000 This scheme aims at empowering women members of SHGs and rural women by providing employment opportunities
Asare scheme to establish e-halli (eMahile) information and service centres
Income Tax Act As per Finance Bill, 2006 the provisions for exemption granted under section 80(P) of the Income Tax Act available to RRBs (treating them as deemed Cooperative society) have been withdrawn. The Task Force is of the opinion that in view of the high cost of operations in rural areas having significant business and default risks, low profit margins, need to finance at lower rates of interest to financially weaker sections of the rural society and that the RRBs as a separate rural credit system are yet to consolidate and are poised at a critical stage of take off, the provisions under section 80(P) of Income Tax Act may be continued for a further period of 5 years or till the restructuring process is completed Therefore, KVGB will not pay Income tax till 2009-10.
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INTRODUCTION TO STUDY Introduction to Non Performing Assets (NPA)

Non Performing Assets surfaced suddenly in the Indian banking scenario, around the eighties. In the midst of turbulent structured changes overtaking the international banking institutions and where the global financial markets were undergoing sweeping changes. Management of Non Performing Assets nowadays is a critical performing area for banks. It is better for Indian banks to try for the international standard in terms of efficiency, productivity, profitability, assets recognition norms, and provisioning and capital adequacy to compete in the competitive new economy. Definition of N.P.A With a view to moving towards International best practices and to ensure greater transparency the 90 days overdue norm for identification of Non Performing Assets has been adopted by the R.B.I. (w.e.f. 31.03.2004) So NPA refers to, Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. The Account remains out of order for a period of more than 90 days. In respect of an overdraft/ C.C. The bills remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
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Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. A loan granted for short duration crops is treated as NPA, if the installment of principal or interest thereon remains overdue for two crops season and a loan granted for long duration crops is treated as NPA, if installment of principal or interest thereon remains overdue for one crop season. An account would be classified as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter. So in short, NPA refers to those assets where in which the bank does not earn income from that account, asset (or) loan granted. If an irregular Account continuously remain as irregular category for a period of 90 days (earlier 180 days) it seems NPA. According to the guidelines of the RBI once an Account is listed as NPA, the interest has to be deducted out of the profit of the same accounting year.
Indian Economy and NPAs: Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIIs, etc. Further, international rating agencies like, Standard & Poor have lowered India's credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate. Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive.
Reasons for existence of huge levels of NPAs in the Indian banking system:
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The origin of the problem of growing NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective postdisbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing.
NPAs have become an issue for banks and financial institutions in India: To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets.
Out of Order Status: An account should be treated as out of order if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit / drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as out of order. Over Due: Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank.
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RBI guidelines on income recognition (interest income on NPAs) Banks recognize income including interest income on advances on accrual basis. That is, income is accounted for as and when it is earned. The prima-facie condition for accrual of income is that it should not be unreasonable to expect its ultimate collection. However, NPAs involves significant uncertainty with respect to its ultimate collection. Considering this fact, in accordance with the guidelines for income recognition issued by the Reserve Bank of India (RBI), banks should not recognize interest income on such NPAs until it is actually realized. Reversal of Interest Income: If any advance becomes NPA as at the close of any year, interest accrued and credited to income Account in the corresponding should be reversed or provided for if the same is not realized.
Reporting of NPAs: Banks are required to furnish a report on NPA as on 31st March of each year after completion of audit. The NPA would relate to the banks global portfolio including the advances at the foreign branches.
Classification of Assets: The NPAs are classified into 3 categories namely: Sub-standard Assets Doubtful Assets Loss Assets
These are being classified by the Banks based on the period for which the asset has remained non-performing and the reliability of the dues. Sub-Standard Assets:
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An asset becomes NPA is first classified as a sub-standard asset and which remains as NPA for a period less than or equal to12 months (earlier18 months).
In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to such an assets will have well defined or weaknesses that endanger the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
Doubtful Assets: A substandard asset becomes a doubtful if it has remained as a substandard for a period exceeding 12 months (before 18 months). A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable.
Loss Assets: An asset, which is considered as irrecoverable by the banks of internal or external auditor or the R.B.I. Inspection is treated as loss Account but the amount has not been written off wholly. In classification of assets interest above categories should be done taking interest Account the degree of well defined or weakness and the extent of deepened on collateral security for realization of dues.
Banks should establish appropriate internal system to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks
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may even fix minimum cut off point to decide what would constitute a high value Account Depending their respective business levels.
In terms of RBI guidelines, as and when an asset becomes a NPA, such advances would be first classified as a sub-standard one for a period that should not exceed 18 months and subsequently as doubtful assets.
It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the banks balance sheet. UP GRADATION OF LOAN ACCOUNT CLASSIFIED AS NPA In case of any borrower pays the arrears of interest and principal classified as NPAs the account should no longer be treated as non-performing and may be classified as standard Account.
CLASSIFICATION TO BE BASED ON BORROWERS-WISE AND NOT FACILITY WISE The classification as NPA of the accounts should be based on the borrower wise and not based on the facility wise. That is if a borrower is having more than one facility (like two or more accounts) in the same bank. The borrowers all the facilities should be treated as NPAs and not particular facility or part thereof which has become irregular.
Note:
If the borrower is availing limits from more than one branch all the limits of the borrowers in all the branches to be treated as NPA.
NORMS OF NPA: Asset Classification
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Treatment of accounts under IRAC norms should be borrower-wise and not facility wise, i.e.,different facilities granted to a borrower cannot have different asset classification. In other word, if a borrower enjoys several facilities and one of them becomes non-performing, all the other facilities too should be classified as NPAs. All borrowed accounts, irrespective of their outstanding, are required to be classified as Standard Assets or Non-Performing Assets (NPAs). NPAs are required to be classified further into the following three categories, based on the period for which the asset has remained nonperforming and the realisability of the dues: 1. Sub-standard Assets 2. Doubtful Assets 3. Loss Assets Standard Asset: Performing assets are standard asset is one which does not disclose any problem and which does not carry more than normal risks attached to the business. The performing asset is one that generates income to the bank. Sub-standard Assets: With effect from 31st March 2005, a sub standard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weakness that jeopardizes the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected. Doubtful Assets: An asset would be classified as doubtful, if it has remained under sub-standard assets category for a period exceeding 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full,-on the basis of currently known facts, conditions and values- highly questionable and improbable. Further doubtful assets are classified into three sub-categories for the purpose of provisining. They are:
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Loss Assets:
Bad and doubtful upto 1 year Bad and doubtful 1-3 years Bad and doubtful above 3 years
Loss asset is one where loss has been identified by the bank or internal or external auditor or the RBI inspection but the amount has not been written-off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. Asset classification is a very good information tool. It gives the clear picture of bank assets and also their quality. It also provides a base for making provision. The classification of assets brings transparency in banking system. Income Recognition Income recognition policy: The policy of income has to be objective and based on the record of recovery. Internationally income from Non-performing asset is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. However, interest on advances against Term Deposits, NSC, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the account. Fees and commission earned by the banks as a result of Re-negotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re-negotiation or rescheduled extension on credit. If the government guaranteed advances become NPAs, the interest on such advances should not be taken to income account unless the interest has been realized.
Reversal of Income:
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If the advance, including bills purchased and discounted becomes NPA as the close of the year, interest accrued and audited to income account in the corresponding previous year should be reversed or provided for all if the same is not realized. This will apply to govt. guaranteed accounts also.
In respect of NPAs fees commission and similar income that accrued should cease to
accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. Leased Assets-the finance charge component of finance income as defined in AS-19 Leases issued by the council of the Institute Of charted Accounts of India(ICAI) on the leased assets which has accrued and was credited to income account reversed or provided for in the current accounting period.
Reporting of NPAs: Banks are required to furnish a report on NPAs as on March 31 each year after completion of audit. The NPAs would relate to the Banks Global portfolio including the advances at the foreign branches. The report should be furnished as per the prescribed format. While reporting the NPA figures to RBI the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the Net NPAs. When NPAs are reported to RBI, the amount of technical write-off if any should be reduced from the outstanding Gross Advances and Gross NPAs to eliminate any distortion in the quantum of NPAs being reported.
Provisioning Norms In order to narrow down the divergences and ensures adequate provisioning by banks. It was suggested that a banks statutory auditors, if they also desire, could have a dialogue with RBIs regional office/inspectors who carried out the Banks inspection during the previous year with regard to the accounts contribution to the differences. In conformity with the prudential norms provisions should be made on the Nonperforming assets on the basis of classification of assets into prescribed categories. Taking into
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account the time lag between an accounts becoming doubtful of recovery, its recognition as such, the realization of the security an the erosion overtime in the value of security charged to the bank, the bank should make provision against Sub-standard assets, doubtful assets and loss assets. Loss Assets The entire asset should be written off, if the assets are permitted to remain in the banks for any reasons, 100% of the outstanding should be provided for. Doubtful Assets 100% of the extent to which to which the advance is not converted by the realizable value of the security to which the banks has a valid recourse and the realizable value is estimated on a realistic basis. In regard to the secure portion, provision may be made on the following basis at the rates ranging fro 20% to 100% of the secured portion depending upon the period for which the asset has remained doubtful. Period for which the advance has Provision Requirement (%)
remained in doubtful category Upto one year One to three year 20% 30%
One to three years outstanding stock of NPA - 60% with effect from 31-3-2005 as on 31st March 2004 -70% with effect from 31-3-2005 -100% with effect from 31-3-2005 Advances classified as doubtful more than 3 100% with effect from 31st March 2004 years on or after April 2004 Sub-Standard Assets A general provision of 10% on total outstanding should be made without making any allowance for DICGC/ ECGC guarantee cover securities available. The unsecured exposures which are identified as sub-standard would attract additional provisions of 10% i.e. a total of
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20% on the outstanding balance. The provisioning requirement for unsecured doubtful asset would remain unchanged at100%. Unsecured exposure is defined as an exposure where the realizable value of security as assed by the bank/ RBI inspecting officers is not more than 10% of the outstanding exposure. Standard Assets From the year ending 31st March 2000, the banks should made a general provision of a minimum of 25% on standard asset on global loan portfolio basis. The provisions on standard assets should not be reckoned for arriving at Net NPAs. The provision towards standard assets need not be betted from Gross advances but shown separately as contingent provisions against standard assets under other liabilities and provisions. Other Provisioning Norms: A) Books of selling bank 1. When a bank sells its non-performing financial assets to other banks, the same will be removed from its books on transfer. 2. If the sale is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall should be debited to the profit and loss account of that year. 3. If the sale is for a value higher than the NBV, the excess provision shall not be reversed but will be utilized to meet the shortfall/ loss on account of sale of other non performing financial assets. B) Books of purchasing bank The asset shall attract provisioning requirement appropriate to its asset classification status in the books of the purchasing bank. C) Accounting of recoveries: Any recovery in respect of non-performing asset purchased from other banks should first be adjusted its acquisition cost. Recoveries in the excess of the acquisition cost can be recognized as profit. D) Capital Adequacy:
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For the purpose of capital adequacy, banks should assign 100% risk weights to the nonperforming financial assets purchased from other banks. In case the non- performing asset purchased is an investment, then it would attract capital charge for market risks also. For NBFCs the relevant instructions on capital adequacy would be applicable. E) Exposure Norms: The purchasing bank will reckon exposure on the obligor of the specific financial asset. Hence these banks should ensure compliance with the prudential credit exposure ceilings (both single and group) after reckoning the exposures to the obligors arising on account of the purchase. For NBFCs the relevant instructions on exposure norms would be applicable. Main reasons for accounts becoming NPAs: Units closed Borrower Absconding Sale of Assets Diversion of Funds
Wilful Default
Non Renewal of the Limits

Interest/Instalments not paid.
Non repayment of loans due to natural calamities such as drought, floods, earthquakes etc. Lack of verification of his/her securities.
Often stated reasons for NPAs in India: Corruption Judicial system flaws
Nonexistent fear of penalties
Inefficient credit appraisal systems Lack of technology, methodology and data support for scientific credit appraisal
Commonly used methods to reduce NPAs :
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Personal contacts with borrowers.
Frequent follow-ups by bank officials. Issue of periodical notices.

Adjustments of his/her outstanding deposits.
Apply of Scientific for appraisal before the loan is disbursed and monitor it closely in real time.
Conduct recovery Campaign
Break up recovery to branch level network Take every NPA case as a separate issue and analyze the need for further funding from an economic point of view. Implement a system for selecting a good borrower. Effects of NPAs: As the number of accounts become NPAs this will lead to additional provisions which has to be made and these provisions are made out of profits earned by the Bank. Ultimately it leads to reduction in profits. Prerequisites to Controlling NPAs: 1. Governance : Independent oversight board with clear mandate. Defined and transparent procedures Improved reporting standards 2. Greater focus on restructuring : The quality and speed of asset resolution is key Taking ownership of NPAs and proactive management Working with debtors to improve cash-flow of assets underlying NPAs. 3. Greater powers and institutional capabilities: For example, power to separate bad management from the debtor and to liquidate debtors, which cannot be expeditiously restructured. Training, knowledge Transfer Leadership 4. Incentives and disciplines for banks: Enhanced accountability of Banks and Bank managers
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Ensure banks put in place risk analysis and credit management systems Ultimate burden not transferable to AMCs. 5. Greater protection of creditor rights: Credible liquidation procedures and efficient secured transaction processes Triggers and inventives for insolvency Strong and Credible regulators, free from political pressure. 6. The Road to Recovery: The key Facilitators Early detection Speed Voluntary references Facilitation and quick arbitration. Acts governing Securitisation and NPA: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act extends to the whole of India Under section 69 of Transfer of Property Act, mortgagee can take possession of mortgaged property and sale the same without intervention of Court only in case of English mortgage. (English Mortgage is where mortgagor binds himself to repay the mortgaged money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer the property to the mortgagor upon payment of the mortgage money as agreed). In addition mortgagee can take possession of mortgaged property where there is a specific provision in mortgage deed and the mortgaged property is situated in towns of Kolkata, Chennai or Mumbai. In other cases possession can be taken only with the intervention of court. Therefore till now Banks/Financial Institutions had to enforce their security through court. This was a very slow and time-consuming process. There was also no provision in any of the present law in respect of hypothecation, though hypothecation is one of the major security interest taken by the Bank/Financial Institution.
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Keeping in mind the above factors among many other the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act was enacted with effect from 21.6. 2002. The Act deals with three aspects. 1. Enforcement of Security Interest by secured creditor (Banks/Financial Institutions)
2. Transfer of non- performing assets to asset Reconstruction Company, which will then
dispose of those assets and realise the proceeds. 3. To provide a legal framework for securitisation of assets.
Securitization is the process of pooling and packaging Financial Assets, usually relatively illiquid, into liquid marketable securities. Securitization allows an entity to assign (i.e. sell) its interest in a pool of financial assets (and the underlying security) to other entities.
OBJECTIVES OF THE STUDY

OBJECTIVES OF THE SYUDY Research Objectives The main aim of the research is to study Non Performing Assets and assess the effectiveness of the techniques for minimizing the NPAs, adopted by Karnataka Vikas Grameena Bank. This research aims at analyzing and finding out possible strategies to reduce the NPAs. Sub-objectives of the study 1. To understand the concept and classification of the Non Performing Assets.
2. To know why an account becomes Non Performing Assets and the steps taken by the bank to reduce Non Performing Assets. 3. To highlight Loans and Advances trend and amount of NPA in KVG Bank
4. To study the level of Non Performing Assets and its effects on financial health of the
bank. 5. To devise the tools to control Non Performing Assets. 6. Framing strategies to locate ill performing assets well in advance and securitizing the
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same. REASONS FOR SELECTING NPA study in KVG Bank: According to NABARD reports Gross NPA ratio (Gross NPA to Gross Advances) of Regional Rural Banks (RRBs) in India was 8.53% in 2005-06, 6.4% in 2006-07 and 4.6% in 2007-08. In KVG Bank Gross NPA ratio was 4.71% in 2005-06, 4.14% in 2006-07 and 3.58% in 2007-08. This statistics shows that KVGB is better in terms of NPA management as compared to all RRBs in India since its Gross NPA ratio was less than Gross NPA ratio of all RRBs. Amongst 6 regional rural banks in Karnataka, KVGB is in good position, in terms of total outstanding loans and deposits and as compared to other RRBs in Karnataka, KVGB has less NPA, KVGB earns a good level of income but NPAs are reducing its profit, the above said reasons induces to select the NPA for the Study.
RESEARCH DESIGN, RESEARCH METHODOLOGY and DATA COLLECTION RESEARCH DESIGN A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. The effort of the investigation is to provide descriptive profile of Non Performing Assets (NPA), classification of NPAs, reasons for NPA, methods available to reduce NPAs, techniques followed by Karnataka Vikas Grameena Bank to curb NPAs, Government policies pertaining to maintaining NPA levels with specified limits, level of Non Performing Assets and its effects on financial health of the bank and framing strategies to manage Non Performing Assets. RESEARCH METHODOLOGY Type of research: The research base was Descriptive Research. Sources of information (1) Primary data: Direct personal interview of bank officials
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Bank officials who provided information: Mr M G Nargund (Senior Officer, Hubli), Mr H Kariyappa (Branch Manager, Hubli), Mr B G Hangaragi (Senior Manager, HO, Dharwad), M A Shaik (Recovery Officer, Hubli) and staff members (2) Secondary data: Secondary data sources will include websites, magazines, newspapers, textbooks and audited reports and accounts of the bank Due to the vastness of the subject an attempt is made to understand the main spheres of the problem of Non-performing assets and its effect on the financial stability of the bank. This study is descriptive in nature and is based on the secondary information from the journals published by the bank, financial magazines, websites etc. Tools for analysis: Simple statistical, arithmetic methods and ratios are used to analyse the data that were collected and tabulated.
FINANCIAL ANALYSIS
(1) Operating Profit Operating profit is the profit before interest and tax. It is also known as PBIT. Operating profit of KVG Bank for 3 years is as follows: (Amount in Crores) Year 2005-06 2006-07 2007-08 Operating Profits 69.01 120.96 124.01
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Interpretations: Karnataka Vikas Grameena Bank is the result of merger of four Regional Rural Banks of Karnataka. The Banks Operating Profit is gradually increasing. . Operating Profit in 2005-06 stood at Rs. 61.01(in Crs) at the end of financial year 2007-08 it was Rs.124.01 (in Crs). There is huge increase in operating profit in the year 2006-07 and 2.52% increase in the year 2007-08. KVGB was formed on 12th-September-2006. Therefore the above table shows the Operating profit of 200 days of the year 2005-06 and operating profits of the years 2006-07 and 2006-07. (2) Net Profits Net profit is obtained by deducting Provisions from Operating profit. Following table shows the Net Profit of KVGB for 3 years: Year 2005-06 2006-07 2007-08 Net Profits 30.29 71.82 72.13
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Interpretations: Above graph shows the Net Profit of 200 days of the year 2005-06 and 2 financial years 2006-07 and 2007-08. The Banks Net Profit is gradually increasing. In the year 2005-06 Net profit was Rs 30.29 crores and Rs 71.82 crores in the year 2006-07 and Rs 72.13 crores in the year 2007-08. There is growth of 0.43% in the Net profit in the year 2007-08. The performance of bank is recognised by its net profit. With a narrow interest spread bank was able to earn very good profit in the year 2007-08. This was possible on account of meticulous planning and foresight resulting in increased net profit.
(3) Investments, Advances, Deposits and Borrowings The following table shows the inflows and outflows of funds of the bank: (Amount in thousands) Year 2005-06 2006-07 2007-08 Investments Advances Deposits Borrowings 19171358 1668788 5331555 17096177 6221313 21193822 22303803 3694880 7822021 24800407 27567386 3708275
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3.1. Interpretations for Investments: Management of funds of the Bank was of prime importance amongst its other key areas of performance obligations ever since the RRBs were permitted to invest their Surplus funds in Securities, Bonds and Debentures within the parameters of directive guidelines issued by RBI\NABARD, from time to time, with a system of monitoring the inflow and out flow of funds on day-to-day basis, the Bank has been able to gauge the availability of surplus funds for the purpose of short term as well as long term investments or even for pre-payment of refinances.
The following table shows various Investments of KVGB: Sl No 1 2 3 4 Particulars Equity Shares Bonds and Debentures Govt. Securities Mutual Funds As on 31/03/2006 As on 31/03/2007 0.58 58.65 472.03 1.90 0.58 74.67 544.79 2.09 As on 31/03/2008 0.64 66.64 713.31 1.62
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Total
533.16
622.13
782.21
KVGBs investment in Bonds and Debentures, Govt securities and Mutual Funds has increased in the year 2006-07. In the year 2007-08 there is decrease in investments in Bonds and Debentures and Mutual Funds because of recession in India. Due to meltdown of share market KVG bank has reduced its investment in Bonds and Debentures and Mutual Funds. There is 30.93% increase in investment in Govt securities because it is the safest investment option at the time of recession. By this investment decision KVGB is able to maintain its profit growth. 3.2. Advances: The bank is able to maintain dominance in the field of Advances by increased deployment of funds in the form of Loans and Advances. The following table shows the sector-wise Disbursement of Credit: (Rs in Crores) Sl No. A Sector Priority Sector i) Agriculture ii) Allied Activities iii) SSI\RA iv) Trade & Service Total of Priority Sector B Non Priority Sector Total Disbursement 428.40 7.31 24.73 187.38 647.82 197.40 845.22 632.19 13.51 26.31 187.09 859.19 241.09 1100.19 786.38 9.55 73.67 139.44 1009.04 266.11 1275.15 2005-06 2006-07 2007-08
Interpretations: NPA was more in Allied sectors, Trade and services, non-priority sector. So bank reduced the credit disbursement and increased advances in other sectors by introducing new schemes in the 2007-08.
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3.3. Deposits: There is consistent increase in the level of Deposits and the bank recorded the deposits growth rate of 23.60% in the year 2007-08.
3.4. Borrowings: KVBG used refinance facility made available by NABARD/Sponsor bank (Syndicate Bank) under the various Refinance schemes. The repayments were made as per time schedule according to NABARD/Sponsor bank (Syndicate Bank) guidelines. Bank has undertaken several measures to reduce NPA because it will reduce earning capacity of the bank and repayment of borrowings would be impossible if there is no or less profit.
(4) NON-PERFORMING ASSETS (NPA) 4.1. As per the Annual report of the KVGB, year wise details of the NPAs in KVGB are given in the following tables: (Amount in Crores) Year 2005-06 2006-07 2007-08 NPA Outstanding 82.43 89.67 91.19 % growth ----8.78% 1.70%
4.2. Details of Non Performing Assets (NPA) Purchased/Sold during 2005-06, 2006-07, 2007-08: Nil 4.3. Percent (%) of NPA to Total Advances Particulars Total Advances Non Performing Assets % of NPA to Total Advances 2005-06 1749.96 76.35 5.15 2006-07 2168.40 89.67 4.14 (Amount in Crores) 2007-08 2547.86 91.91 3.58
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Provisions held for NPA Additional Provisions held for NPA Provisions held for Standard Assets Risk Fund Provisions Held Unrealised Interest on NPA
40.35 23.37 4.09 1.68 75.06
49.02 23.37 6.76 1.68 78.39
67.82 23.37 7.71 0.00 91.35
4.4. Movement of Gross NPA, Net NPA and Provisions for NPA: (Amount in Crores)
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Particulars Movement of NPAs (Gross) a) Opening Balance b) Additions during the year c) Reductions during d) Closing balance Movement of net NPAs a) Opening Balance b) Additions during the year c)Reductions during d) Closing balance Movement of provisions for NPA (excluding provisions on standard assets) a) Opening Balance b) Provisions made during the year c) Write-off of excess provisions d) Closing balance
Year Year Year 31/03/2006 31/03/2007 31/03/2008 76.35 19.03 12.95 82.43 17.81 12.37 12.95 17.03 82.43 21.81 14.57 89.67 17.03 7.24 8.67 15.6 89.67 17.39 15.87 91.19 15.6 1.52 17.12 0
58.54 6.66 0 65.4
65.4 8.74 0.7 74.07
74.07 19.62 2.5 91.19
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The above graph explains very clearly about the trend of NPAs in KVGB for the last 3years. In the year 2005-06, the gross NPA is Rs 82.43crores and in the very next year it increased to Rs 89.67 after that every year up to now the NPA increased proportionately. In the year 2007-08 Gross NPA was Rs 91.19crores. The announcement of Debt Waiver Scheme coupled with unseasonal summer rains affected the recovery climate severely, resulting in addition to the NPAs of the Bank. There was a total addition of Rs 17.02 crores to the outstanding level of NPAs as at 31-3-2008. Therefore, Gross NPA was written off by 100% and Net NPA was brought down to Rs. Zero in the year 2007-08.
PROBLEMS OF KVG BANK REGARDING NPAs:
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NPA reduce the yield on evidences but also reduces the profitability of KVGB. The effect of NPAs can be classifies in to two categories i.e. Impact on internal factors and Impact on external factors. 1. Impact on external factors: Regulatory and credit rating agencies are also not happy with the level of NPA Indifferent attitude developed in the mind of the Bank customers. Image of the bank in the minds of the general public will go down. 2. Impact on internal factors: NPAs affect the internal position of the bank. The following are the impact of internal factors: 2.1 NPAs increase Total Expenditures 2.2. NPAs reduce the earning Capacity and Profitability 2.3. NPAs reduce the ROA (Return On Assets) 2.4. NPAs reduce the ROCE (Return On Capital Employed) Other internal impact of NPA: NPAs erode current profits through provisioning requirements They result in reduced interest income They require high provisioning requirements affecting profits They limit recycling of funds, set in asset- liability mismatches, etc. Impact of NPA on financial performance of the bank can be measured by calculating ratios which are as follows: (I) Profitability ratios (II) Leverage Ratios (III) Investment ratios
(IV) Recovery and NPA ratios
2. Impact on internal factors:
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NPAs affect the internal position of the bank. The following are the impact of internal factors: 2.1 NPAs increase Total Expenditures: The overall expenses of the bank continued to rise for a number of reasons. The Provision for doubtful accounts, that caused the dramatic increase in total expenses. The size of provision for doubtful accounts varies from year to year because of the differences in the levels of the risk anticipated. The following table gives the details about the total expenses of the Bank. The same information is given in the chart below: Trend of Total Expenses (Amount in 000) Year 2005-06 2006-07 2007-08 Total expenses including Total expenses excluding Provision for doubtful accounts Provision for doubtful accounts 1073257 1018216 2266963 2179558 2798311 2602107
The above graph gives a very clear picture about the differences between the total expenses, including provision and excluding provision of the KVGB. The Provision for doubtful debts occupies a dominant role in the total expenses. Provisions for BDD increase the total expenses of the bank. 2.2. NPAs reduce the earning Capacity:
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The NPA affects earning capacity of the bank. In general various causes reduce the profitability performance of the bank. The provision for doubtful debts is one among the most important cause for reducing the profitability of the bank. The following table gives a detail about Profit before tax of the bank. Profitability of the Bank:
Interpretations: From the above graph it is clear that in the year 2005-06 NPA is absorbing 9.19% of the Net Profit. In the year 2006-07 NPA is reducing 4.48% of net profit and in the year 2007-08 NPA is reducing 4.37% of the Net profit. In the year 2005-06 NPA had reduced 9.19% of Net profit because the NPA management was different in all 4 rural banks which merged later on to form KVGB. Due to experience and good NPA management measures by the bank, it was possible to reduce NPA to a greater extent of 4.48% and 4.37% in the years 2006-07 and 2007-08 respectively. Inspite of the measures undertaken by KVGB, there is reduction in Net profit due to NPA in the accounts of KVGB.
2.3. NPAs reduce the ROA (Return On Assets)
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ROA is a measure of how effectively the banks assets are being used to generate profit. Return On Assets = Operating Profit X 100 Total Assets (Amount in 000) Year 2005-06 2006-07 2007-08 Operating Profit 8,96,391 19,67,966 20,82,288 Total Assets 2,61,09,223 3,22,41,897 3,86,88,473 Ratio(ROA) 3.43 6.10 5.38
Interpretation: The profitability of the bank in terms of return on assets was somewhat lower than the preceding year, but within above table range, the return on assets was 5.38%. During the previous year 2005-06 and 2006-07, however, they were respectively, 3.43% and 6.10%. The major reason for the slight decrease in the level of ROA in the year 2007-08 was, of course, the provision for doubtful debts accounts (provisions for NPA) which was higher than its level during the previous year.
2.4. NPAs reduce the ROCE (Return On Capital Employed)
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This ratio basically highlights the fact that overall profitability is the effect of Profit margin (earnings as a % of sales) and assets turnover and accordingly it is also expressed. Return on Capital Employed = Net profit before tax, interest and dividends ("EBIT") Total assets (or total assets less current liabilities (Amount in 000) Year 2005-06 2006-07 2007-08 EBIT 8,96,391 19,67,966 20,82,288 Capital employed 37,44,018 45,25,469 52,71,185 Ratio(ROCE) 23.94 43.48 39.5
Interpretation: The probability of the bank in terms of return on assets was somewhat lower than the preceding year, but within above table range, the return on assets was 39.5%. During the previous year 2005-06 and 2006-07, however, they were respectively, 23.94% and 43.48%. The major reason for the slight decrease in the level of ROA in the year 2007-08 was, of course, the provision for doubt full debts accounts (provisions for NPA) which was higher than its level during the previous year. NPA reduces ROA and ROCE i.e, NPA reduces the earning capacity of assets, return on assets and return on capital also gets affected.
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Impact of NPA on financial performance of the bank can be measured by calculating ratios which are as follows: (I) Profitability ratios The primary objective of business enterprises is to earn profit and the study of profitability in relation to sales, capital employed and net worth occupies and important place in ratio analysis (1) Net profit margin The profit margin tells how much profit a bank makes for every Rs 100 it generates in revenue. Net Profit margin = Net Profit for the year X 100 Total Income (Amount in 000) Provisions Net profit Total Income Net profit margin towards NPA 2005-06 320943 1394200 23.02% 403500 2006-07 718186 2985149 24.06% 490200 2007-08 721339 3519650 20.49% 678200 Year
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Interpretation: Net profit margin has increased in the year 2006-07 by 1.04% (i.e, 24.06% - 23.02%) because increase in Net profit is proportionately larger than increase in Provisions towards NPA. In the year 2007-08 Net profit margin has drastically decreased to 20.49% due to huge increase in Provisions towards NPA. Net Profit Margin is inversely proportionate to Provisions towards NPA. Provisions towards NPA (along with other expenditure items) is deducted from Total Income to get Net profit.
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(2)
Gross profit margin Gross profit margin indicates the relation between Net Interest income and the total income generated by interest income and operation income. Gross profit margin = Net Interest Income X 100 Total Income (Amount in 000)
Year 2005-06 2006-07 2007-08 Net Interest Total Gross profit Interest on Recovery %growth in Income Income margin (%) Advances of NPA Recovery of NPA 782816 1394200 56.15 1062948 129545 -----1719696 2985149 57.61 2276459 145700 12.47 1779820 3519650 50.57 2710453 158700 8.92
Interpretation: Interest on Advances received includes amount of Recovered NPA. In the year 2006-07, NPA recovered was 12.47% and Gross Profit margin was 57.61%. There was decline in Gross Profit Margin from 57.61% to 50.57% in the year 2007-08 because of decrease in recovery of NPA from 12.47% to 8.92%. Decrease in Recovery of NPA led to decrease in Interest earned, thereby ending up with decrease in Net Interest Earned.
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Note: Net Interest Income = Interest Earned - Interest Expended Year Interest Earned Interest Expended Net Interest Income 2005-06 1280625 497809 782816 2006-07 2736879 1017183 1719696 2007-08 3217182 1437362 1779820
(3)
Cost to Income Ratio
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Cost to Income ratio represents relationship between cost and income of the bank. If cost to income is low, it indicates that bank is good in terms of profit maximisation. Cost to Income ratio = Operating Expenditure X 100 Net Income or Net Profit (Amount in 000)
Year 2005-06 2006-07 2007-08 Operating expenditure 508847 758333 842241 Net Profit 320943 718186 721339 Cost to Income ratio (%) 158.55 105.59 116.76
Interpretations: Operating expenses related to management and recovery of NPA include Legal expenses, Travelling charges of Recovery officers, Postage and Telephone charges. If there is no proportionate rise in Income (recovered income) with a increase in Operating expenses then such expenses will be lead to decrease in profit. Compared to all three years, 2006-07 was better in terms of profit maximisation. In the year 2006-07 the amount spent on management and recovery of NPA yielded some returns. In the year 2007-08, cost to income ratio was decreased which indicates that the amount spent on NPA management and recovery was not in proportion to amount recovered. (II) Leverage Ratios
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Capital structure / Leverage Ratios: These ratios study the relationship that exists between owners funds and loan funds and highlight the relative weights of the two sources of finance. These ratios also consider the application of long-term funds on fixed assets and current assets. These ratios are regarded as indicators of long-term solvency.
(1) Shareholders Fund to Total Assets or Proprietary ratio
Total Assets to Shareholders Fund shows the relationship between total assets and shareholders fund. Shareholders Fund to Total Assets = Total Shareholders fund Total Assets (Amount in 000) Total shareholders Provisions for fund to total assets NPA 403500 0.143 0.140 0.136 490200 678200
Year 200506 200607 200708
Shareholders Fund 37,44,018 45,25,469 52,71,185
Total assets 26109223 32241897 38688473
Interpretations:
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Shareholders fund to total equity is declining year by year due to increase in liabilities. Every year there is an increase in Provisions for NPA which has lead to increase in Total liabilities. This has reduced the ratio of Shareholders Fund to Total Assets. Thus net worth is decreasing because of NPA.
(2) Debt Equity ratio
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Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the banks assets. Debt Equity ratio indicates the percentage of funds being financed through borrowings. Debt Equity ratio = Total outside debt (Borrowings) Equity (Amount in 000) Year Debt (Borrowings) Shareholders Fund Debt-Equity ratio 2005-06 1668788 37,44,018 0.45 2006-07 3694880 45,25,469 0.82 2007-08 3708274 52,71,185 0.70
Interpretations: In the year 2006-07, Debt-Equity ratio was increased to 0.82 because the promoters (Govt of India, Govt of Karnataka and Syndicate Bank) wanted to do the business with maximum of outsider's funds in order to take lesser risk of their investment and to increase their earnings (Reserves) by paying a lower fixed rate of interest to outsiders.
(III)
Investment Ratios
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These ratios basically are concerned with the return on the funds invested or employed in banking business. Return on investment is the ultimate test of success of any business activity. (1) Dividend Per Share Dividend Per Share is the ratio that represents the profits for promoters (shareholders) on each share. Dividend Per Share = Dividend Payment Number of shares (2) Dividend Yield Dividend Yield ratio shows how much a bank pays out in dividends each year relative to its share price. Dividend Yield = Dividend Per Share X 100 Market share price (3) Earning yield Earning yield shows the percentage of each invested in the stock that was earned in the stock by the bank. Earning yield = Earnings Per Share X 100 Market share price (4) Dividend Cover Dividend Cover represents how many times over the profits could have been paid the dividend. Dividend Cover = Profit for the year Gross Dividend
(5) Price Earning Ratio
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Price Earning Ratio is the ratio between market price per share and EPS. At any time, the P/E ratio is an indication of how highly the market "rates" or "values" a business. Price Earning Ratio = Market price per share Earnings Per Share (6) Earning Per Share (EPS): It measures the profit available to equity shareholders on a per share basis, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to shareholders by the number of outstanding shares. The profits available to the ordinary shareholders are represented by net profits after taxes and preference dividend.
EARNING PER SHARE= (PROFIT AFTER TAX/NO OF SHARES OUTSTANDING)*100
The above mentioned Investment ratios cannot be ascertained in case of KVG Bank becuase of the following reasons: Shareholders of KVG Bank are Govt of India, Govt of Karnataka and Syndicate
Bank. Thier equity holdings are in the ratio of 50:15:35. Every year the profits of the bank are transferred to Reserves and Surplus. Thus, dividend is not declared.
KVB Bank is not listed in any of the stock exchanges in India. Therefore market
price of shares cannot be ascertained. So the investment ratios cannot be calculated for KVG Bank.
(IV) NPA and RECOVERY RATIOS:

a. Gross NPA ratio b. Net NPA ratio
c.Problem asset ratio d. Risk ratio
e.Provision ratio (1) Gross NPA ratio
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Gross NPA ratio represents ill performing financial asset in the total loans and advances given by the bank to its customers. Gross NPA ratio = Gross NPA X 100 Gross Advances Year 2005-06 2006-07 2007-08 (Amount in Crores) NPA Outstanding Total Advance Gross NPA Ratio 82.43 1749.96 4.71% 89.67 2168.4 4.14% 91.19 2547.86 3.58%
Interpretations: Gross NPA ratio is declining year by year because KVG Bank evolved a broad loan recovery policy an implemented through recovery officers with adequate accountability and empowerment. 2 recovery officers were recruited in the year 2006-07 and 2 were recruited in the year 2007-08. They were trained in Recovery management through workshops. The defaulters were constantly reminded about their overdues and notices were sent to them and recovery officers met defaulters regularly. Several other measures were taken but due to some unavoidable causes NPA is not fully moved out.
(2) Net NPA Ratio
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Net NPA Ratio shows the actual non-performing loans to net advances. Net NPA is derived after deducting Provisions for NPA from Gross NPA. Net advances are derived by deducting provisions for bad and doubtful debts from Gross Advances. Net NPA Ratio = Net NPA X 100 Net Advances (Amount in Crores) Net Advances Net NPA Ratio 1709.61 0.996 2119.38 0.711 2480.04 0.000
Year 2005-06 2006-07 2007-08
Net NPA 17.03 15.06 0
Interpretations: There was decline in Net NPA Ratio in the year 2006-07 because of proporationate decrease in Gross NPA. The announcement of Debt Waiver Scheme coupled with unseasonal summer rains affected the recovery climate severely, resulting in addition to the NPAs of the Bank. There was a total addition of Rs 17.02 crores to the outstanding level of NPAs as at 313-2008. During the year 2007-08 under report, the Bank had implemented a scheme for writingoff of the bad/doubtful debts. Accordingly non farm sector NPA loans with book
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balance upto Rs 25000 which were classified as loss assets are written off. Total written off amount during the year is Rs 168.69 lakhs. The amount of cumulative recovery out of written off amount is Rs 40.40 lakhs upto end of March 2008.
(3) Problem Assets Ratio Problem Assets Ratio represents the relationship between Gross NPA and Total assets. In other words, it is a ratio showing the presence of non-performing assets in total assets. Problem Assets Ratio = Gross NPA X 100 Total Assets (Amount in crores) Problem Assets Ratio 3.16% 2.78% 2.36%
Year 2005-06 2006-07 2007-08
Gross NPA 82.43 89.67 91.19
Total Assets 2610.92 3224.19 3868.85
Interpretations:
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Problem assets ratio is decreasing every year. This indicates that NPA is declining in the Total Assets . Problem assets ratio was 3.16%% in the year 2005-06 and was reduced to 2.78% and 2.36% in the years 2006-07 and 2007-08 respectively.
(4) Risk Assets Ratio
Risk Assets Ratio measures the impact of NPA on total capital and reserves of the bank. This ratio specifies bank's capital to its risk. Regulators in the banking system track a bank's risk to ensure that it can absorb a reasonable amount of loss arising through NPA. Risk Assets Ratio = Net NPA X 100 Total Capital and Reserves (Amount in Crores) Year 2005-06 2006-07 2007-08 Net NPA 17.03 15.06 0 Total Capital and Reserves 374.40 452.54 527.11 Risk ratio 4.55 3.33 0.00
Interpretations:
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The above graph clearly shows that there is decrease in Risk ratio of the bank every year. The capital is adequate to absorb the losses arising due to NPA. In the year 200708 NPA is fully written off. Therefore it is assumed that there is less risk.
(5) NPA Provisions Ratio
Provisions Ratio represents the portion of provisions in advances. Higher provisions reduce gross advances. NPA Provisions Ratio = Total NPA provisions X 100 Total Advances
(Amount in Thousands)
Year 2005-06 2006-07 2007-08
Provisions towards NPA 403500 490200 678200
Advances 17096177 21193822 24800407
NPA Provisions ratio 2.36 2.31 2.73
Interpretations:
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In the year 2006-07 NPA provisions ratio was reduced to 2.31% but there was increase in the year 2007-08 by 2.73%. Bank has to take necessary measures to reduce NPA Provisions ratio. Higher the NPA Provisions ratio lower the profitability.
NPA MANAGEMENT AT KARNATAKA VIKAS GRAMEENA BANK

Objectives of NPA Management
Maximum recovery of NPAs in the earliest possible time, and To bring down the NPA levels. NPA management is an integral part of the
overall loan asset management of the bank, consisting of strategic approaches to: 1) Guard against risks of adverse selection of new assets: Meaning, proper evaluation and appraisal of the credit proposals, so that the chances of new assets turning to bad are minimized. 2) Prevent deterioration of existing performing assets: It means keeping sustained and continued watch on the assets, and taking appropriate actions as necessary, so that asset degeneration is minimized 3) Tackling the existing NPAs through preventive and corrective measures: NPA management involves: a) Analysis of the assets for grouping and sub grouping b) Based on the analysis, finalizing the strategy for optimum management. Analysis helps to systematize recovery and control. It tells that the NPAs can be broadly segregated into two groups. Recoverable through regular follow up: By inducing recovery through reminders, both written and oral. Not recoverable through regular follow up: The accounts falling under this head need to be tackled under one of the following process: a. Fit for initiation of legal action b. Fit for negotiated settlements either directly or through initiation of legal action, which will eventually lead to negotiated settlements. c. Fit for waiver of legal action, leading to eventual write-off.
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d. Fit for other solutions: like sale of security, merger and acquisitions etc.
The above can be diagrammatically represented as under:

RECOVERY
Wilful Repayments
Imposed, conscious, effort-specific measures
Self motivated, hence no action necessary
Induced by periodical reminders
Legal Remedies
Non Legal Remedies
Compromises [OTS]
Decree Execution
Compromise, Write-off, Mergers, Acquisitions
Rehabilitation [subject to viability & RBI norms]
Of the various processes, recovery through negotiated settlements offers the best scope for maximizing NPAs reduction at the minimum expense. From the banks angle, the process of compromise settlements (OTS- One Time Settlements) enables saving of a lot of valuable time, apart from projecting a helpful/ positive image of the bank. In addition, recycling of the recovered funds add to the interest of the bank.
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Important statistics The following table shows the sector-wise defaults in payment of loans and advances Sl No. A Sector Priority Sector i) Agriculture ii) Allied Activities iii) SSI\RA iv) Trade & Service B Non Priority Sector % defaults 54% 8% 15% 12% 19% 46%
NPA was more in Allied activities sector, Trade and services, non-priority sector. So bank reduced the credit disbursement and increased advances in other sectors by introducing new schemes in the 2007-08. So bank was able to reduce NPA in the previous year. Number of wilful defaulters: Willful defaulters behind the increase in NPA Non-Willful defaulters behind the increase in NPA 71% 29%
The managers and officers interviewed admitted that they have noticed wilful defaulters as instrumental in increase in NPA.
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Methods preferred by KVGB to Reduce NPA Level: Sl No 1 2 3 4 Factors Recovery of over dues Monitoring Performing Assets Upgradation of Quality Assets Write off Loss Assets % Score of factor 34% 40% 20% 6%
Managers of KVGB prefer to monitor performing assets to prevent them from becoming non-performing assets. They give second preference to recover the over dues through various corrective measures. Upgradation of quality assets i.e, assessing a borrowers financial stability to repay the loan. Least preference is given to write-off loss assets because writing off is considered to be loss and does not yield any recovery.
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1) REASONS FOR POOR RECOVERY OF LOANS: A) External External causes are causes which cannot be controlled by bank. i. ii. iii. iv. v. vi. vii. viii.
ix.
Natural calamities Political Interference Loan waiver, write off, etc. Geographical factors Changes in Policy environment Changes in Technology Changes in Economic Conditions Target approach under Government Legal process i.e, delayed process in court
According to Managers and officers of KVGB following are main external causes contributing to rise in NPA: Sl No ii v vi vii ix Main External Causes Political interferences Changes in Policy environment Changes in Technology Changes in Economic Conditions Legal process i.e, delayed process in court Other External Causes % score of causes 18% 17% 4% 21% 16% 24%
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From the above table inferences can be drawn that political environment and political interferences such as political patronage of defaulters and Govt loan waiver scheme are contributing to rise in NPA level. Economic conditions may include decrease in level of income of borrowers etc. Legal processes take lot of time for recovery. Inadequacies in power and raw materials, product or process obsolescence due to technological changes rarely affected the borrowers.
B)
Internal causes Internal causes can be either bank related or borrower related. Bank Related: i. ii. iii. iv. v. vi. vii. viii. ix. x.
xi.
Improper identification of borrower Lack of appraisal skills Delay in loan sanctioning Under or over financing Insufficient gestation or repayment period Lack of post-disbursement follow-up Lack of borrower contact and poor understanding of rural clientele No thrust on recovery Laxity in internal control systems Poor Management Information System Failure to ensure adequate rapport with government agencies and other banks
xii. xiii. xiv.
Low motivation and involvement of staff Perception of bank as a charity institution Poor Industrial Relations climate
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According to Managers and officers of KVGB following are main internal causes which can be controlled by bank and the causes contributing to rise in NPA: Sl No viii xi Main Internal Causes Bank related: Lack of borrower contact and poor understanding of rural clientele Failure to ensure adequate rapport with government agencies and other banks Other reasons % score of causes 55% 45%
5%
According to managers and officers of KVGB the major reasons for advances becoming Non performing is wrong selection of borrowers and lack of inter-bank coordination in exchange of information over list of defaulters with other banks and Govt agencies.
Borrower Related causes: i. ii. iii. iv. v. vi. vii. Misutilisation of Loan Diversion of Funds Lack of Technical and Managerial Skills Poor maintenance of Assets Willful Default Personal accident, death, etc. Shifting of place of residence or business
According to Managers and officers of KVGB following are main internal causes which can be controlled by bank and the causes contributing to rise in NPA
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Sl No i ii iii
Main Internal Causes Borrower related: Misutilisation of Loan Diversion of Funds
% score of causes 23% 22%
Lack of Technical and Managerial Skills 25% (especially small borrowers)
v vi
Willful Default Shifting of place of residence or business Other reasons
22% 5% 3%
Managers and officers are in the opinion that mismanagement and diversion of funds to other purposes are the main reasons for borrowed account becoming irregular. Lack of Technical and Managerial Skills (especially small borrowers) and lack of experience and exposure also results in irregularity of borrowed accounts. The borrower may shift his place of residence or business and thus try to avoid repayment of loans.
Preventive and Corrective Methods used by KVGB to avoid NPA The preventive methods include:
a. More careful and responsible scrutiny and appraisal. This includes timely
sanction, realism in fixing repayment schedule and adequacy of credit with efficient delivery. Factors considered by KVBG for securitizing the assets: Whether the property available can be mortgaged or not Whether the property available can be hypothecated or not
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b. Monitoring performing assets c. Regular and effective follow up with borrowers and timely action on sensing the likely default. d. Title, value, etc. and additional security are to be investigated before the disbursement of loan. e. More detailed information about the borrowers is to be obtained in terms of his/her family background such as i) size of the family ii) number of dependents in the family iii) earning members in the family iv) standard of living v) length of residency in the area, etc. f. Reviewing the advances in time and taking appropriate immediate action. g. Sending demand notices in time. h. Contacting the borrower before the harvest or cash inflow. i. Proper supervision of the borrowal account through personal visits and calling for periodical returns to get incipient signals of default. j. Efficient MIS system on the borrowers and on the branches. k. Credit rating of clientele. l. Strict observance of time schedules. m. Timely extension of period of limitation through debt acknowledgement partial payment, renewal of documents etc. n. Timely rephasement or rescheduling of loan in the event of natural calamities.
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2) Corrective methods (i) Sharing the Threat Perception: The top management conducts seminars and meetings with the staff and conveys the crisis in which the bank is in. It indicates that unless recoveries start coming the bank would be closed. (ii) Staff Motivation Shields, trophies and appreciation certificates are awarded to the staff and branches showing good recovery performances (iii) Constitution of Special Recovery Cells and Related Measures
a)
The special recovery cell in bank maintains rapport with Nodal Officers and
branches for effecting recoveries. In all branches of KVGB there is one recovery officer for each branch. Each recovery officer spends on an average 3 days a week on recovery. Recovery officers are accompanied by Branch managers and other one or two officers if the case is important.
b)
Executives of bank visit selected number of NPA parties and establish direct
personal contact for ensuring recovery. The bank arrange for customers meet especially o NPA clients at various important centres to discuss an address their problems.
c)
The KVG bank arranges periodical lawyers' meet to review the status of suit
filed cases. d) Pragmatic approach is followed for out of court settlement of loan accounts and
bringing compromise proposals to logical end at the earliest. e) Identification of potential NPAs is done by the end of the first quarter of the
financial year so that preventive measures could be initiated at the beginning. f) Staff mobility is ensured and the recovery staff is allowed to hire transport to
suit their needs and no questions are asked.

g)
Staffs are deputed to Sub Divisional Officer (SDO) or Tehsil courts to assist the
court staff for issuing notices to borrowers in case of overdue loans.
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h)
Periodical recovery camps are held in villages in co-ordination with
Government officials.
i)
The borrowers are constantly reminded about their overdues and notices to clear
them are regularly sent. A copy of the list is also given to the counter clerk so that he/she can ask the defaulters whenever they come to the branch to transact to meet the Branch Manager. (iv) Involvement of Government Agencies There are instances where KVGB was able to recover overdue loans by involving District Administration. Some of the methods adopted to involve government machinery are listed below: a) Revenue recovery notices are issued by the District Magistrate or SubDivisional b) Officer once a year advising borrowers to deposit the overdue amount in the bank to avoid legal actions permitted under the law.
c) The list of defaulters is given to the Revenue Authorities or Tehsildars in
case of agriculture loans; in case of industrial loans the list is given to District Industries Centres for follow-up. d) Joint recovery teams are formed in which Tehsildars, Revenue Inspector, Patwari and bank Staff jointly participate to expedite the execution of decrees. e) Help of Block Development Officer (BDO) is solicited in case of Government sponsored schemes. Joint inspections are carried out with BDO and incase of accounts where misutilisation of loans and subsidy amount is noticed, joint First information reports (FIRs) are lodged.
(v) Extraordinary Methods
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Apart from what has been stated above KVGB has adopted certain extra-ordinary method to ensure recovery and a few of such method adopted by the bank are narrated here. In some places the visit of a police constable to a particular person's house is considered inauspicious and banks' taking advantage of this aspect have served recovery notices through police constables and have put pressure to get the loans recovered. In some cases, the branch staffs have paid money for the performance of last rites in the event of the death in the family of the borrower (defaulter) and repayments have followed.
(vi) Write off Loss assets
Under corrective management, each NPA is examined in totality and on the basis of various factors like past efforts, period of overdue, client profile, natural calamities etc. and suitable strategy is decided. Since the reasons or factors responsible for sliding a good loan into bad one vary for each loan account, it is necessary to adopt different strategies for different NPA accounts.
Some corrective management strategies for reducing NPAs are: (i) Recovery Strategies effect recovery compromises to improve recovery status of account
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partial write off adjustment of collateral securities pressure on guarantors special recovery drive help from revenue authorities
(ii) Rephasement of loans or Rescheduling of demands Repayment of the loan depends on the income generating capacity of the unit. It may be difficult to get the term loan if the unit does not generate profit. Such units may repay by borrowing from other sources or short term funds. But ultimately the loss making unit may not be able to repay the loan. Therefore, rescheduling of repayment conditions should be made according to the income generation capacity. Banks are not permitted to upgrade the classification of any advance in respect of renegotiated terms has worked satisfactorily for a period of two years after repayment. It may be mentioned that rephasement of the loan installments should be done only when it is expected to get payment after rephasement.
(iii)Rehabilitation of potentially viable units If a sick unit is potentially viable, efforts are made to finalize the rehabilitation package without loss of time. Provisions need to be made for a period of one year for the date of the disbursement in respect of additional facilities sanctioned under rehabilitation package approved by BIFR/term lending institutions such that statutory auditors are also satisfied by the progress of rehabilitation program. If the unit becomes viable, the entire is a long drawn procedure, it may be encouraged where units are potentially viable and management reliable.
(iv)Compromise with borrowers for final settlements
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A compromise may be called a negotiated settlement in which the borrower agrees to pay a certain amount to the KVGB after getting certain concessions. A large number of compromise proposals are being approved by KVGB with view to reduce the NPAs and resorting to expensive of resorting to expensive recovery proceedings spread over a long period.
(v) Calling up the advances and filing of civil suits KVGB promptly file cases against willful defaulters with the concerned authorities of the State Govt. The matters relating to recovery of advances is discussed in the state level banker meeting and necessary help from the State Govt. authorities. A list of defaulters are prepared for each village or city before organising the recovery camp with which revenue officers, block development officers, gram sevaks, etc., are closely associated.
(vi)Approaching debt recovery tribunals Debt recovery tribunal means the Tribunal established under subsection (1) of the Recovery of Debts due to Banks and Financial Institution act 1993. In order to expide recovery of NPAs, the Narasimhan Committee had suggested setting up of special Debt Recovery Tribunals (DRTs), following which the Government passed the Recovery of Debts due to Banks and Financial Institution Act 1993.these tribunals were set up to try suits of values of over Rs.10 lakhs, while High courts and District courts would take up cases of lesser values. KVGB approaches DRT when the assets become Doubtful Assets-1.
(vii) Write off the outstanding If all the efforts for recovery fail, KVGB writes of the advances. Such write off is done after exhausting all other remedies when chances of recovery are negligible.
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KVGB had 100% written off the NPA in the year 2007-08. (viii) One Time Settlement (OTS)
OTS appears to be a useful instrument available for honourable exit. While giving no scope for avoiding repayment, units with poor chance of survival and asset shortage should be considered for OTS. There should be a thorough discussion with the entrepreneurs at the very beginning of the proposal so that after OTS, they are able to pay and get their accounts closed. KVGB issues Notice and OTS are pursued when an asset becomes Loss Asset. Till the assets become loss asset the bank does not pursue OTS.
Steps taken by KVGB when asset becomes: (1) Sub- standard Notices are issued and defaulting party is contacted through telephone or post then recovery is pursued. (2) Doubtful Assets 1 Notices are issued, Group Recovery Approach is followed, legal actions are initiated. (3) Doubtful Assets 2 Recovery Approach is followed, legal actions are initiated (4) Doubtful Assets 3 Recovery Approach is followed, legal actions are initiated OTS (One Time Settlement) is pursued in deserving cases (5) Loss Assets Notice issued to borrower and OTS is pursued. Corrective Management for NPA Management Various Steps taken by KVGB for reducing NPAs
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The following steps can be followed for trying various techniques for reducing NPAs. The steps can be shown in the following chart. Study the problem and magnitude of NPAs branch wise, amount and age wise.
Prepare a loan recovery policy and strategies for reducing NPAs
Create a special recovery cells at head office /zonal office/regional office levels.
Identify critical branches of recovery
Fix targets of recovery and draw time-bound action program
Select proper techniques for solving the problem of each NPA
Monitor implementation of the time bound action plan
Take corrective steps wherever found necessary while monitoring the action plan and make changes in the original plan if necessary
Recovery of Advances: Follow-up of advocates/Civil courts: suits are filed and decrees enforcement by filing EP. Mortgaged and/or hypothecated assets are sold and the amount of loans and advances are recovered. Assets are sold through public auction. Assets of KVGB are not sold to other banks or Assets reconstruction Company of India Ltd (ACRIL) FINDINGS: 1. Loans and advances disbursed in the year 2007-08 were reduced in Allied sectors, Trade and services, non-priority sector. NPA was more in Allied sectors, Trade and
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services, non-priority sector. So bank reduced the credit disbursement and increased advances in other sectors by introducing new schemes in the 2007-08. 2. In the year 2005-06, the gross NPA is Rs 82.43crores and in the very next year it increased to Rs 89.67 after that every year up to now the NPA increased proportionately. In the year 2007-08 Gross NPA was Rs 91.19crores. 3. The announcement of Debt Waiver Scheme coupled with unseasonal summer rains affected the recovery climate severely, resulting in addition to the NPAs of the Bank. There was a total addition of Rs 17.02 crores to the outstanding level of NPAs as at 313-2008. 4. Gross NPA was written off by 100% and Net NPA was brought down to Rs. Zero in the year 2007-08. 5. In the year 2005-06 NPA is absorbing 9.19% of the Net Profit. In the year 2006-07 NPA is reducing 4.48% of net profit and in the year 2007-08 NPA is reducing 4.37% of the Net profit. In the year 2005-06 NPA had reduced 9.19% of Net profit because the NPA management different in all 4 rural banks which merged later on to form KVGB. Due to experience and good NPA management measures by the bank, it was possible to reduce NPA to a greater extent of 4.48% and 4.37% in the years 2006-07 and 2007-08 respectively.
6. Year 2006-07 was comparatively better than 2005-06 and 2007-08 in terms of
profitability.
7. Net profit margin has increased in the year 2006-07 by 1.04% (i.e, 24.06% - 23.02%)
because increase in Net profit is proportionately larger than increase in Provisions towards NPA. In the year 2007-08 Net profit margin has drastically decreased to 20.49% due to huge increase in Provisions towards NPA. Net Profit Margin is inversely proportionate to Provisions towards NPA. Provisions towards NPA (along with other expenditure items) is deducted from Total Income to get Net profit. 8. Interest on Advances received includes amount of Recovered NPA. In the year 200607, NPA recovered was 12.47% and Gross Profit margin was 57.61%. There was decline in Gross Profit Margin from 57.61% to 50.57% in the year 2007-08 because of decrease in recovery of NPA from 12.47% to 8.92%. Decrease in Recovery of NPA led to decrease in Interest earned, thereby ending up with decrease in Net Interest Earned.
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9. Compared to all three years, 2006-07 was better in terms of profit maximisation. In the year 2006-07 the amount spent on management and recovery of NPA yielded some returns. In the year 2007-08, cost to income ratio was decreased which indicates that the amount spent on NPA management and recovery was not in proportion to amount recovered.
10. Shareholders fund to total equity is declining year by year due to increase in liabilities.
Every year there is an increase in Provisions for NPA which has lead to increase in Total liabilities. This has reduced the ratio of Shareholders Fund to Total Assets. 11. In the year 2006-07, Debt-Equity ratio was increased to 0.82 because the promoters (Govt of India, Govt of Karnataka and Syndicate Bank) wanted to do the business with maximum of outsider's funds in order to take lesser risk of their investment and to increase their earnings (Reserves) by paying a lower fixed rate of interest to outsiders. 12. Gross NPA ratio is declining year by year because KVG Bank evolved a broad loan recovery policy an implemented through recovery officers with adequate accountability and empowerment. 2 recovery officers were recruited in the year 2006-07 and 2 were recruited in the year 2007-08. They were trained in Recovery management through workshops. The defaulters were constantly reminded about their overdues and notices were sent to them and recovery officers met defaulters regularly. Several other measures were taken but due to some unavoidable causes NPA is not fully moved out. 13. During the year 2007-08 under report, the Bank had implemented a scheme for writingoff of the bad/doubtful debts. Accordingly non farm sector NPA loans with book balance upto Rs 25000 which were classified as loss assets are written off. Total written off amount during the year is Rs 168.69 lakhs. The amount of cumulative recovery out of written off amount is Rs 40.40 lakhs upto end of March 2008. 14. The capital is adequate to absorb the losses arising due to NPA. In the year 2007-08 NPA is fully written off. Therefore it is assumed that there is no risk. 15. In the year 2006-07 NPA provisions ratio was reduced to 2.31% but there was increase in the year 2007-08 by 2,73%. Bank has to take necessary measures to reduce NPA Provisions ratio.
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16. There are several reasons for the rise in NPA; few causes can be controlled by bank. So bank worked more on controllable causes and this helped it to reduce NPAs to some extent. 17. The managers and officers interviewed admitted that they have noticed wilful defaulters as instrumental in increase in NPA. 18. Managers of KVGB prefer to monitor performing assets to prevent them from becoming non-performing assets. They give second preference to recover the over dues through various corrective measures. Upgradation of quality assets i.e, assessing a borrowers financial stability to repay the loan. Least preference is given to write-off loss assets because writing off is considered to be loss and does not yield any recovery. 19. Political environment and political interferences such as political patronage of defaulters and Govt loan waiver scheme are contributing to rise in NPA level. Economic conditions may include decrease in level of income of borrowers etc. 20. According to managers and officers of KVGB the major reasons for advances becoming Non performing is wrong selection of borrowers and lack of inter-bank coordination in exchange of information over list of defaulters. 21. Managers and officers are in the opinion that mismanagement and diversion of funds to other purposes are the main reasons for borrowed account becoming irregular. Lack of Technical and Managerial Skills (especially small borrowers) and lack of experience and exposure also results in irregularity of borrowed accounts. The borrower may shift his place of residence or business and thus try to avoid repayment of loans. 22. KVGB has adopted all possible preventive and corrective measures to reduce the existing NPAs and prevent generation of new NPAs.
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RECOMMENDATIONS General suggestions: The Bank should adopt the following General strategies for control of NPAs. The suggestions are as follows:
1.
Projects with old technology should not be considered for finance. Old
technologies wont yield any profits. So the borrower may fail to repay the loans and advances.
2.
Exposure on big corporate or single project should be avoided because failure of
one big project may lead to bankruptcy of the borrower and he may not be in the position to repay the advances.
3.
Conducting NPA workshops not only for recovery officers but also for entire
staff so that managers and recovery officers can get complete support from the staff and entire staff will contribute to reduce the existing NPAs and prevent generation of new NPAs. This will help the staff to notice NPA symptoms at early stage. 4.
5.
There is need to shift banks approach from collateral security to viability of the Reducing the lending in Allied sectors, Trade and services, non-priority sector.
project and intrinsic strength of promoters. More careful and responsible scrutiny and appraisal of financial stability of borrowers and appraisal of loan outstanding. This includes timely sanction, realism in fixing repayment schedule and adequacy of credit with efficient delivery. 6.
7.
Excessive reliance on collaterals should be avoided because in few cases it has Extending the contact with other banks to avoid wrong selection of borrowers
led to long drawn litigations and hence it should not be sole criteria for sanction and take on inter-bank co-ordination in exchange of information over list of defaulters. This can be done through a campaign which includes seminar and personal visits to other banks and highlighting the need for inter-bank co-ordination in exchange of information over list of defaulters.
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Pre-sanction suggestions: (1)Uneven scale of repayment schedule with higher repayment in the initial years normally is preferred.
(2) As for as possible, repayment of term loans should be fixed on monthly basis rather
than on quarterly or semiannual basis.

(3) Personal guarantees of the directors should normally be insisted upon. (4) Wrong selection of borrowers can be avoided in exchange of information over list of
defaulters with other banks. (5)Bank should assess and continue to keep a track of guarantor also. Post sanctions suggestions:
(1)
The Credit section should carefully watch the warning signals viz. nonInspection system can be improved by surprise visits by recovery officers.
payment of quarterly interest, dishonor of cheque etc.

(2)
During inspection of units if the recovery officer observes red flag showing union problem, shop floor atmosphere is not healthy, gossip, bare minimum number of staff and if the books of accounts are not produced for inspection during visit then it indicates that borrowers financial position is declining. The bank has to take immediate actions to avoid assets turning into non-performing loans. (3) Monitoring of NPA symptoms which are borrower-related: Following are the indicators which have to be interpreted in order to ensure that there are no willful defaults:
i. Unnecessary and frequent visits of borrower to the branch or Head Office.
Unnecessary and frequent visits indicate that he wants to disguise that is willing to repay loan. ii. His standard to living shows upward swing soon after loan is disbursed. This indicates that he has misutilised the loan amount and has used the loan amount for improving his standard to living
99
iii. He purchases immovable property. This indicates that borrower has diversified the loan amount and purchased immovable property.
iv. He does not bother for his health. It indicates that he is not interested to repay
the loan. On account of non-repayment of loan he might give an excuse that he could not repay because of his ill health. v. His next generation is not interested in his business. The borrower will not be in position to repay loan if there is death of the borrower and his next generation is not interested to continue the business then business loan will remain unpaid. vi. He has developed relationship with political leaders. vii. He tries to avoid bankers visit to the factory and/or his house.
(4)
List of defaulters is displayed in the notice board of all branches of KVGB
without disclosing the account number, amount of loan, overdue, etc. The idea is simply to draw attention of the defaulters to contact the Branch Manager. (5) Approaching influential borrowers who are defaulters, while important
functions such as thread ceremony, marriage, etc. are going on in their houses and branch staff can directly ask for repayment during such functions and loans have been repaid because the borrowers (defaulters) tried to protect their self prestige in the presence of invited guest and relatives. This method can be used only when the bank is sure that there is willful default otherwise the bank may lose its customers.
(6)
List of defaulters prepared and pasted at public places and the recovery van, a
hired jeep, flagged with banner Vasuli Dal (recovery squad of Karnataka Vikas Grameena Bank). This method can be used only when the bank is sure that there is willful default otherwise the bank may lose its customers. Bank should protect the interest of the investor but not at the cost of Banks profitability (7) The bank has to go for selling of Non Performing Assets to Asset
Reconstruction Company of India Limited (ARCIL) to bring down the NPAs. (8) Presently Bank is spending 3 days a week on Public Working day recovering
the NPA from the customer which to be increased to 4 days a week, because the bank has to spend 2 days for selling the property.
100
CONCLUSION:
NPA is a double-edged weapon, which affects bank profitability due to interest income not being recognized on NPA accounts and loan loss previously to be created from profit earned. The bank must adopt structured NPAs management policy for elimination or reducing the NPAs in the bank. In general the trend of NPAs in KVGB are decreasing trend, on the same time the KVGB has been adopted a very good techniques to control over the NPAs but presence of NPA in the bank accounts reduces the profitability. In the case of KVGB it is one of the good sign that the NPA ratio has been decreasing every year. For reduction of NPAs, though there is a greater need of political threat and effective enactment of laws to recover NPAS, the banks should also like advantage of Debt Recovery Tribunals, Lok adalat, and the legislations enacted by the state govt. and one-time settlement schemes. It is not possible to eliminate totally the NPA in the banking business but can only be minimized. It is always wise it follow the proper policy appraisal, supervision and follow-up of advances to avoid NPAs.
101
BIBLIOGRAPHY
BOOKS REFERRED:
1. M.Y.Khan and P.K.Jain, Financial Management (Fourth Edition), Tata McGraw Hill. 2. Advance Accounts by Shukla and Grewal
WEB SITES
1. www.kvgbank.com
2. www.nabard.org 3. www.icicidirect.com 4. www.rbi.org.in

5. www.indiainfoline.com 6. www.legalservicesindia.com 7. www.indiastat.com
BANKS INTERNAL RECORDS:

1. Annual Reports of Karnataka Vikas Grameena Bank (2005-06 to 2007-08) 2. KVGB Manuals
3. Circulars sent to all Branches, Regional Offices and all the Departments.
102
Annexure:
Share Capital: The bank started functioning with a Capital base of Rs 400 lakh by absorbing the paid up capital of 4 RRBs subscribed by Government of India, Government of Karnataka and Syndicate Bank in the ratio of 50:15:35 respectively.
CAPITAL (Rs in Crores) Sl No 1 2 3 4 5 Items Capital to Risk Assets Ratio (CRAR %) CRAR Tier I Capital % CRAR Tier II Capital % Percentage of shareholding of the Government of India Amount of subordinated debt raised as Tier II Capital As on As on 31/03/2007 31/03/2008 17.06 16.61 0.45 50% 19.90 19.46 0.44 50% -
103
AUDITED BALANCE SHEET , PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2006, 31.03.2007, 31.03.2008 BALANCE SHEET AS AT 31.03.2008 Capital & Liabilities Schedule As on As on 31/03/2006 31/03/2007 As on 31/03/2008 (Rs.000s) Capital Reserves & Surplus Deposits Borrowings Other Liabilities & Provisions TOTAL 1 2 3 4 5 :: 239732 3504286 19171358 1668788 1525059 26109223 239732 4285737 22303803 3694880 1717745 32241897 239732 5031453 27567386 3708275 2141627 38688473
Properties & Assets Cash and Balance with Reserve Bank of India Balance with Banks & Money at Call and Short notices Investments Advances Fixed Assets Other Assets TOTAL Contingent Liabilities Bills for collection
Schedule 6 7 8 9 10 11 :: 12
As on As on 31/03/2006 31/03/2007 1195598 1275562 5331555 17096177 84579 1125752 26109223 124376 132913 1690244 1337938 6221313 21193822 84067 1714513 32241897 131416 140388
As on 31/03/2008 2460284 2066239 7822021 24800407 103367 1436155 38688473 93525 139362
104
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31/03/2006, 31/03/2007,31/03/2008 (Rs.000s) Income & Expenditure I. INCOME Interest earned Other income TOTAL 13 14 1280625 113575 1394200 2736879 248270 2985149 3217182 302468 3519650 Schedule As on 31/03/2006 As on 31/03/2007 As on 31/03/2008
II. EXPENDITURE Interest expended Operating expenses Provisions and contingencies TOTAL 15 16 17 497809 508847 66601 1073257 1017183 758333 491447 2266963 1437362 842241 518708 2798311
III. PROFIT / LOSS : Net profit for the year TOTAL 320943 320943 718186 718186 721339 721339
IV. APPROPRIATIONS Transfer to reserves 320943 718186 721339
SCHEDULES FOR THE YEAR ENDED 31.03.2006, 31.03.2007, 31.03.2008
105
(Amount in 000s) SCHEDULES 1 CAPITAL: 1. Issued, Subscribed and Paid up capital 4,00,000 shares of Rs 100 each 2. Share Capital Deposit Total 2 RESERVES & SURPLUS Total 3 DEPOSITS: Demand deposits(from others) Saving Bank deposits Term deposits(from others) Total 4 BORROWINGS: 1. Syndicate Bank General ST SAO 2. NABARD General ST SAO - Liquidity support - Schematic - NODP Total 5 OTHER LIABILITIES: Bills Payable 51028 38163 48370 0 905000 763788 0 1668788 2168000 905000 594706 27000 3694880 935400 940383 763999 60000 3708275 0 174 1008493 1141668 8841925 9187765 19171358 1487454 10750480 10065869 22303803 1590659 11780738 14195989 27567386 40000 199732 239732 3504286 3504286 40000 199732 239732 4285737 4285737 40000 199732 239732 5031453 5031453 As on As on 31/03/2006 31/03/2007 As on 31/03/2008
106
Inter Office Adjustments Interest accrued Others (including provisions) Total 6 CASH AND BALANCE WITH RBI: 1. Cash in hand 2. Balance with RBI In current accounts Total 7 BALANCES WITH BANKS & MONEY AT CALL & SHORT NOTICE: Balance with Banks In Current Account In other Deposit Accounts Total 8 INVESTMENTS: - Government Securities - Shares and Equities - Debentures and Bonds - Tax free bonds - Mutual Funds Total 9 ADVANCES: Loans and Advances: - Bills Purchased and discounted Total Advances
182887 70692 1220452 1525059
265890 80579 1333113 1717745
593331 94844 1405082 2141627
250895
406306
442995
944703 1195598
1283938 1690244
2017289 2460284
572794 702768 1275562
737438 600500 1337938
1815739 250500 2066239
4720285 5786 583163 3354 18967 5331555
5447869 5786 746715 0 20943 773444
7133129 6365 666361 0 16166 7822021
88857 17499635
45773 21684012
358359 25478594
107
Less: Provisions for bad and doubtful debts Total 10 FIXED ASSETS 1. Premises a) Land Add: Additions Total b) Buildings Add: Additions Less: Depreciation Total 2. Other Fixed Assets Furniture and Fixture Add: Additions Less: Deductions Less: Depreciation Total Total OTHER ASSETS 11 1. Interest accrued 2. tax paid in advance 3. Stationery and stamps 4. Others
403458 17096177
490190 21193822
678187 24800407
3098 289 3387 16153 612 1026 15739
3387 0 3387 15739 4 1574 14169
3387 384 3771 14169 0 1417 12752
55395 24746 34 14654 65453 84579
65453 27392 30 26304 66511 84067
66511 51270 59 30878 86844 103367
113674 16124 9058 986896 1125752
145322 5016 11287 1552888 1714513
158144 28415 12045 1237551 1436155
12
CONTINGENT LIABILITIES Guarantees given on behalf of Constituents( In India) 124376 131416 93525
108
Total 13 INTEREST EARNED Interest/Discount on Advances/Bills Income on investment Interest on balance with RBI Total 14 OTHER INCOME Commission Exchange Inspection charges Incidental charges Service charges Profit on sale of investments Others Reversal of Income Tax provisions Total 15 INTEREST EXPENDED Interest on deposits Interest on RBI/Inter-bank borrowings NABARD Total 16 OPERATING EXPENSES Total 17 PROVISIONS AND CONTIGENCIES Provisions on Standard assets Provisions on BDD
124376
131416
93525
1062948 209318 8359 1280625
2276459 449426 10994 2736879
2710453 506729 0 3217182
9855 13731 34613 19417 28884 147
45404 21108 46563 0 66552 0
67106 24467 56053 0 68571 3505 56456 26310
6928 68643
113575
248270
302468
431907 65902
844883 19476 152824
1234326 42229 160807 1437362 842241 842241
497809 508847 508847
1017183 758333 758333
11560 55041
17684 87405
9488 196204
109
Provisions on Investment (Non SLR) Provision on Investment Provision towards fraud Provisions towards Income tax Total 66601
9069 54196 6108 316985 491447
6093 18283 0 288640 518708
NON PERFORMING ASSETS Details of Non Performing Assets Purchased/Sold: Nil
% of NPA to Total Advances Particulars Year 31-03-2006 Total Advances Non Performing Assets % of NPA to Total Advances Provisions held for NPA Additional Provisions held for NPA Provisions held for Standard Assets Risk Fund Provisions Held Unrealised Interest on NPA 1749.96 76.35 5.15 40.35 23.37 4.09 1.68 75.06 Year 31-03-2007 2168.40 89.67 4.14 49.02 23.37 6.76 1.68 78.39 Year 31-03-2008 2547.86 91.91 3.58 67.82 23.37 7.71 0.00 91.35
NPA Management: The announcement of Debt Waiver Scheme coupled with unseasonal summer rains affected the recovery climate severely, resulting in addition to the NPAs of the Bank. There was a total addition of Rs 17.02 crores to the outstanding level of NPAs as at 31-3-2008. Particulars of fresh NPAs added during the year and total NPAs recovered in comparison with that of previous years:
110
Particulars
Year 31-03-2006
Year 31-03-2007 82.43 21.81 14.57 89.67
Year 31-03-2008 89.67 17.39 15.87 91.19
NPAs at beginning Additions during the year Recovery NPA at the end of the year
76.35 19.02 12.95 82.42
Write-Off of Loans During the year 2007-08 under report, the Bank had implemented a scheme for writing-off of the bad/doubtful debts. Accordingly non farm sector NPA loans with book balance upto Rs 25000 which were classified as loss assets are written off. Total written off amount during the year is Rs 168.69 lakhs. The amount of cumulative recovery out of written off amount is Rs 40.40 lakhs upto end of March 2008. Implementation of SARFAESI Act for Recovery of Dues: Government of India, vide its Notification dated 17-05-2008 had specified that the provisions of Securitization and Reconstruction of Securities Interest (SARFAESI) Act are applicable to Regional Rural Banks also with effect from 1st April 2007. Accordingly with permission from Board of Directors, Bank has started invoking provisions of the Act. Notices were issued to 5/8 accounts. Symbolic possession of the property was taken over by the Bank in 4 cases as at end of March 2008.
111

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NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

the existing NPAs and prevent generation of new NPAs.

Exposure on big corporate or single project should be avoided.

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

(6) Excessive reliance on collaterals should be avoided

quarterly interest, dishonor of cheque etc.

the loan amount and purchased immovable property.

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

INDUSTRY PROFILE History of Banking in India:

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

The Structure of Indian Banking.

Reserve Bank of India [Central Bank]

Scheduled Commercial Banks

Scheduled Co-operative Banks

Public Sector Banks

Private Sector Regional Banks

Scheduled Urban Co-Operative Banks

Scheduled State Co-Operative Banks

SBI & its Associates

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

Old Private Sector Banks

New Private Sector Banks

Regional Rural Banks

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

the year before of Rs 748.11 crore.

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank

KLEs Institute of Management Studies and Research, Hubli

NPA Management in Karnataka Vikas Grameena Bank