A PROJECT REPORT

ON

“ANALYSIS OF FINANCIAL STATEMENT OF

PUNJAB NATIONAL BANK AND ICICI BANK”

(Submitted in partial fulfillment of the requirement

of

Master of Business Administration

Sikkim Manipal University

SUBMITTED BY:

Deepak Arora

Enroll. No.

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ACKNOWLEDGMENT

I extend our profound gratitude to our project guide Mr. Parkash Chabra for his

interest, guidance and suggestions throughout the topic of the ANALYSIS OF

FINANCIAL STATEMENTOF PUNJAB NATIONAL BANK AND ICICI BANK. I

feel honored and privileged to work under his. He shared his vast pool of knowledge

with me that helped me steer through all the difficulties with ease. This project report

would not have been possible without his guidance and I would like to thank him for

everything he has done for us.

DEEPAK ARORA

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INTRODUCTION

Financial institutions whose activities may be either specialized or may overlap are classified as

banking and non-banking entities. The banking system is, by far, the most dominant segment of the

financial sector, accounting as it does, for over 80 per cent of the funds flowing through this sector.

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

reduction in statutory reserve requirements, prudential norms for interest rates, asset classification,

income recognition and provisioning. But it could not match the pace with which it was expected to

do. The accomplishment of these norms at the execution stages without restructuring the banking

sector as such is creating havoc.

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

hands. Large industries who had their control in the management of the banks were utilizing major

portion of financial resources of the banking system and as a result low priority was accorded to

priority sectors. Government of India nationalized the banks to make them as an instrument of

economic and social change and the mandate given to the banks was to expand their networks in rural

areas and to give loans to priority sectors such as small scale industries, self-employed groups,

agriculture and schemes involving women.

To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the

banking system to expand its network in a planned way and make available banking series to the large

number of population and touch every strata of society by extending credit to their productive

endeavors. This is evident from the fact that population per office of commercial bank has come down

from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of advances of public sector banks to

priority sector increased form 14.6% in 1969 to 44% of the net bank credit. The number of deposit

accounts of the banking system increased from over 3 crores in 1969 to over 30 crores. Borrowed

accounts increased from 2.50 lakhs to over 2.68 crores but at the same time problem of NPA arouse to

disturb the profitability situation of banks.

The non-performing assets of Indian banks may not be as much a cause for concern to the Reserve

Bank of India today as they were a few years ago. The focused efforts of individual banks to bring

down their NPAs under the RBI's regulatory guidance and surveillance have been assisted by

favourable trends in the operational environment reflecting global economic developments. There has

been a sharp decline in the proportion of commercial banks' gross NPAs to gross advances from 12.7 3

per cent as on March 31, 2000, to 8.8 per cent as on 31 March 2003. In absolute terms, however, gross

NPAs rose by 13.7 per cent from Rs 60,408 crore (Rs 604.08 billion) to Rs 68,714 crore (Rs 687.14

billion) between March 31, 2000, and March 31, 2003, while net NPAs expanded by 8.9 per cent from

Rs 30,073 crore (Rs 300.73 billion) to Rs 32,764 crore (Rs 327.64 billion).

Public sector banks accounted for 78.7 per cent of the gross NPAs and 76.2 per cent of net NPAs at

end-FY03, down from 87.8 per cent and 87.1 per cent, respectively, three years earlier. Gross NPAs

are important since they depress the overall yields on the banks' credit portfolio and constrain their

ability to operate with lower margins and, in turn, their capacity to lower lending rates. Loan-loss

provisioning and write-offs go to reduce the capital available for further asset creation. Gross NPAs do

not, however, disclose the entire picture of the overdues from borrowers. These exclude unpaid

interest, including any penal interest, accrued on NPAs and, as a prudential measure, not recognised as

income in the banks' financial statements. The banks, however, have a contractual right to receive such

interest, and a record of the interest is kept in a notional (suspense) account. It is included in the

creditor-bank's claim against the borrower when legal proceedings are initiated for recovery of dues.

When a settlement is reached with a borrower in respect of an NPA, the whole or a substantial part of

the accrued and unrecognised interest may be forgiven.

A write-off of the NPA involves foregoing of the accrued interest. Hence, the magnitude of such

interest dues assumes importance in assessing the likely losses a bank may suffer because of NPAs.

Currently, this information is not required to be disclosed in banks' financial statements. The tightened

RBI norms for reckoning assets as non-performing and for non-recognition of income from such assets

(by reducing the minimum period of debt-servicing default from 180 days to 90 days), effective from

the quarter ended March 2004, would presumably have resulted in significant additions to NPAs

during FY04.

Moreover, the further integration of the Indian economy with the global economy may subject the

competitiveness and performance of Indian enterprises to increased pressures. Probable interest rate

hikes in the near future would add to firms' operational costs and squeeze their profit margins. All

these point to the need for constant vigilance aimed at containing fresh accretions to NPAs.

The RBI has taken commendable initiatives, starting from the early 1990s, to tackle the NPA problem

by prescribing prudential requirements in line with international standards in relation to the

recognition of income accrued on impaired loans and loan-loss provisioning. Some more measures by

the RBI can improve the position further.

In the recent past, sluggish credit offtake coupled with growing liquidity in the banking system has led

to intense competition among banks for new business, which in turn results in the dilution of their

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credit appraisal standards. Credit decisions based on a thorough appraisal of proposals without being

influenced by extraneous considerations is a good first step to prevent potential non-performance of

the facilities extended.

The RBI may need to impress upon banks the need to set up or strengthen their corporate research

capabilities to furnish to credit evaluation officials updated information on macro-economic trends and

the current state; global competitiveness; near-term prospects of various industries; and the likely

shifts in relevant government policies.

The RBI may also require banks to employ suitable software for analysing the balance-sheets of

borrowers, which will help the analyses conform to a uniform format, leaving little scope for

withholding unfavourable data. Credit decisions, especially in the case of small- and medium-sized

borrowers, are often influenced by the collateral offered -- generally immovable property. The best

safeguard against credit risk is a critical evaluation of the borrower's prospective financial health and

debt-servicing capacity, without undue reliance on the collateral. A weak area in banks, especially

PSBs, is the monitoring of borrowers subsequent to disbursal of credit facilities. Every PSB should be

encouraged to introduce a system of effective monitoring of borrowers above specified floor levels for

credit facilities.

The PSBs should be willing to spend a little more on credit monitoring if they wish to avoid fresh

accretions of NPAs. In the case of consortium lending, it should be made clear that it is the primary

responsibility of the consortium leader to keep a careful and continual watch on the borrower and keep

co-lenders periodically with the outcome of the monitoring. Relying on this obligation of the lead

bank, co-lenders themselves may not keep a close tab on the borrower. In the case of banks, especially

PSBs, there may be under-reporting of NPAs because of inadequate understanding and

implementation by a large number of branches, of instructions relating to identification of NPAs and

recognition of interest accrued on them.

The statutory central auditors may review advances at only a small percentage of branches and may

accept data on NPAs reported by the remaining branches without an independent scrutiny of other

advances at those branches. A report of a National Task Force of the Confederation of Indian Industry

on NPAs in the Indian financial system (December 1999) estimated that NPAs that were so left out of

the final tally could be as high as 3 to 4 per cent of gross advances. The RBI could, therefore, usefully

examine the systems prevalent in the bank to ensure scrupulous compliance with the prudential

requirements and the concrete results thereof achieved. In this examination, the commitment of the top

management to present the true financial picture of the bank could also be looked into.

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The RBI's advice to banks, in its recent credit policy statement, to introduce graded higher

provisioning according to the age of NPAs included under "doubtful for more than three years'

category" is welcome. Banks should take this measure as a hint not only to expedite recovery but also

to write off these assets (unrecoverable portion) as early as possible. The RBI should not hesitate to

hold auditors responsible for any gross negligence or collusion with the bank's management in under-

reporting NPAs and in the excess recognition of accrued income. It should strictly enforce its

prudential guidelines on income recognition, loss provisioning and disclosure of the true financial

health of banks.

It is also desirable that the RBI refrain from issuing guidelines on compromise settlements with

borrowers in default. It has issued a plethora of circulars during the past decade, setting out the

circumstances under which compromise proposals in certain cases could be entertained by banks and

the extent of relief to be provided to the defaulting borrowers. Such guidelines might have served a

purpose before the RBI required each bank to formulate a credit recovery policy. Banks should be

allowed operational freedom on compromise proposals based on merits within the framework of their

recovery policy.

One would expect the RBI to periodically assess the effectiveness and impact of the recovery of debts

under the Securitisation (SARFAESI) Act, corporate debt restructuring and to promote statutory

amendments and take necessary measures to assist these laws and mechanisms.

Up to June 2003, recoveries by resort to the SARFAESI Act totalled a meagre 4 per cent of the over-

Rs 12,000 crore (Rs 120 billion) claimed by institutional lenders. Banks seem to have deferred wider

recourse to the statutory powers pending the Supreme Court's decision on a landmark reference under

the Act.

Opinions differed on whether the court's judgement, pronounced recently, would benefit the banks or

the borrowers more. Some bankers were, however, apprehensive of the delays in recovery proceedings

consequent to the judgement. The finance minister has taken care of this by promising in his Budget

speech to promote suitable amendment to the relevant provisions of the Act.

The RBI should stick to the deadlines of September/December 2004 for banks to obtain their

borrowers' consent for sharing information on them with other banks and the Credit Information

Bureau. Exchange of information and access to a centralised database on borrowers would serve the

interests of the banks themselves.It would be useful for the RBI to review many recommendations of

the CII National Task Force for tackling NPAs. It's another matter that the CII has developed cold feet

and does not seem to have pursued the recommendations following adverse references by critics to the

alleged contribution of some of the large CII members, to the NPA problem.

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BANKING SYSTEM

An area of concern which impacts on investment is the relatively high interest rate structure

that prevails in the country. Interest rates are no dsoubt related to inflation in a trend sense but this

relationship is primarily with respect to the rates received by the savers. A beginning has been made

by reducing the interest rates on small savings schemes run by the Government as well as on bank

deposits. However interest rates paid by borrowers are also dependent on the level of efficiency of the

financial system. The spread between the deposit and lending rates in India is high by international

standards and reflects both the constraints faced by and the relatively low level of efficiency in the

financial intermediation system. Although in recent years there has been considerable liberalisation in

the banking sector with tightening of prudential norms and accounting practices which have led to an

improvement in the health of the banking sector, there are some areas of concern which need to be

examined.

The banking industry has a high level of non-performing assets (NPAs) to contend with. High NPAs

raise the cost of bank operations and thereby the spread and efforts need to be made to bring these

down. However, a balance has to be drawn between the reduction in NPAs on one hand and ensuring

adequate supply of credit to the economy on the other. Excessive pressure on banks to reduce NPAs is

likely to lend to a high degree of selectivity in the credit disbursal process and consequently, a

reduction of the total level of credit as dictated by the growth of deposits. The rate of reduction of

NPAs will therefore have to be fairly gradual keeping in mind the notional lending risks associated

with the Indian economy and the speed at which debt recovery and settlement processes operate. In

addition, the factors other than NPAs which affect the level of spread required for the viability of

banks would need to be considered in the context of national priorities and policy objectives. To

achieve this, action has to be taken on strengthening and professionalising the internal control and

review procedures of banks and financial institutions with a view to ensuring autonomy with

accountability. Also the process of judicial review and implementation of debt recovery processes and

decisions need to be given further impetus and the role of the States is critical in this regard. In this

context, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act 2002 will go a long way in allowing the banks to take control of the assets of willful

defaulters without going through cumbersome and time-consuming litigation.

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The ability of the banks to increase their loan portfolio is not only determined by a growth in their

deposits, but also by the need to conform with prudential norms relating to capital adequacy. Once a

bank has reached a level of advances commensurate with the capital adequacy norms, any increase in

loan assets has to be preceded by a proportionate increase in capital. This can be achieved either by

tapping the market or by the Government providing the capital in case of public sector banks. It was

earlier difficult for public sector banks to raise fresh equity from the market unless the Government

subscribed to the issue in order to maintain its majority share. This was limiting the options for some

banks to enter the market. With the Government’s decision to bring down its stake in banks to 33 per

cent, this immediate bottleneck will be removed. The Government is also seized with the need to find

remedial measures to improve the health of weak banks, which have poor bottom lines and high costs,

principally staff costs. The Government has recapitalised some of the weak banks and restructuring

exercises have been undertaken to bring about a turnaround in their health.

Priority sector lending by banks in another area, which needs examination. The role that priority

sector lending has played in making credit available to sectors which are of national importance in

terms of their effects on employment and poverty alleviation, such as agriculture and small scale

industries which have strong externalities, cannot be over emphasised. However there is a case for

reviewing the system of directed lending in so far as development of specialised institutions not only

on a sectoral basis but also on a regional basis is concerned. In this context, institutions such as

NABARD, SIDBI, Local Area Banks (LABs) Regional Rural Banks (RRBs) and cooperative financial

institutions need to be strengthened and professionalised and linkages between themselves and with

the commercial banking sector established on a firmer and more formal footing. The institutional

structure of branch networks which are critical for effective implementation of priority sector lending

should, however, not be diluted even with greater autonomy and private participation in pubic sector

banks. Micro-credit, which has been a focus in India and has proved successful in social sector

lending needs to be pursued much more vigorously.This social need of Priority sector lending leads

the banks towards more NPAs because defaulters are more in case of priority lending.

The advent of liberalisation and greater integration of the financial architecture globally, major

challenges face the financial sector and it is critical that the necessary skills are acquired and upgraded

to meet the new demands. Globalisation has brought about fierce competitive pressures on Indian

banks from international banks. In order to compete with the new entrants effectively, Indian

commercial banks need to possess matching financial muscle, and size has therefore assumed

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criticality. However in the days of ‘virtual’ banking, the size of a bank measured by its branch

network may not be as important as the size of its balance sheet and quality of its assets whether NPA

or not. Indian banks would therefore have to acquire a competitive edge . Mergers and acquisitions

route provides a quick step forward in this direction offering opportunities to share synergies and

reduce the cost of product development ,delivery and improve the situation of quality of assets or

reduce the NPA level . There are however legal and social constraints to these moves at present but it

is possible that market compulsions will soon force their removal. A beginning has already been made

in the area of private sector banking.

There has been a paradigm shift in Indian banking with the absorption of the latest technology and the

need to meet the client’s expectations in a customised manner. However, the race for customers could

lead to adverse selection. To succeed in the changed environment, banks would need highly efficient

assets and liabilities management systems to take care of the need to identify, anticipate, manage and

mitigate risks which are known today as well as those which may appear in relation to the products of

the future. Growing disintermediation and competition will also put pressure on bank spreads and

even fee based and service generated incomes will come under pressure. The way out seems to be

compensation through higher turnover without compromising on asset quality.

Situation arising out of the huge non performing assets in the banks due to default in payment of loans

mainly by big borrowers and steps taken in this regard thereto. The incidence of non-performing

assets of banks and share of big borrowers in this could be very harmful for any bank’s profitability.

This has been a constant cause of concern for the Government too, as high incidence of NPAs would

curtail the availability of funds to the banks for effective deployment. There are various factors,

internal to a bank and external, to it which lead to an asset turning non-performing. The internal

factors basically pertain to deficiency in credit appraisal and supervision, diversion of funds by the

borrower and wilful default in repayment and inefficient management of the unit financed. The

external factors on the other hand are non-viability or sickness of the unit due to change in technology,

demand pattern and other policies, non-completion of project due to cost, time, overruns and other

factors, such as non-availability of raw materials, labour problems, natural calamities, environmental

factors such as pollution control, ecological damage and delay in disposal by courts/DRTs of suits

filed by banks for recovery.

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OBJECTIVES AND METHODOLOGY

OBJECTIVES:-

To study the NPA Position in IDBI Bank Ltd.

To try and understand the Legal & Regulatory frameworks applicable in the country for NPA

prevention and and its impact on the Indian Financial System.

To try & develop a vision for the NPA in India for the future

To try & dig out the few Non-contemporary issues regarding the reason for the existence of the

NPAs

METHODOLOGY:-

In order to fulfill the above mentioned objectives for my project , I directed my focus mainly

towards the working papers , journals or books on NPAs and the Indian and the world financial

& Banking sectors like the world bank policy research paper, the RBI bulletin, a few master

circulars of RBI.

I also had conversations with the Branch Manager IDBI Bank in order to learn their

experiences with NPAs & noted down any suggestions for the system that was given to me by

the IDBI Bank.

I read through the charter of the bank in order to understand the exactly policies that form the

guidelines for the functioning at the syndicate bank.

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DEFINITIONS OF NON-PERFORMING ASSETS

AS PER RBI GUIDELINES

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

bank. A ‘non-performing asset’ (NPA) is defined as a credit facility in respect of which the interest

and/ or installment of principal has remained ‘past due’ for a specified period of time. The specified

period was reduced in a phased manner as under:

Year ending March 31 Specified period

1993 Four quarters

1994 Three quarters

1995 onwards Two quarters

An amount due under any credit facility is treated as "past due" when it has not been paid within 30

days from the due date. Due to the improvements in the payment and settlement systems, recovery

climate, upgradation of technology in the banking system, etc., it was decided to dispense with ‘past

due’ concept, with effect from March 31, 2001. Accordingly, as from that date, a Non-performing

Asset (NPA) shall be an advance where

Interest and/or installment of principal remain overdue for a period of more than 180 days in

respect of a Term Loan.

The account remains ‘out of order’ for a period of more than 180 days, in respect of an

Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 180 days in the case of bills purchased and

discounted,

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

period not exceeding two half years in the case of an advance granted for agricultural purposes,

and

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Any amount to be received remains overdue for a period of more than 180 days in respect of

other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it has

been decided to adopt the ‘90 days’ overdue’ norm for identification of NPAs, from the year ending

March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall

be a loan or an advance where;

Interest and/ or installment of principal remain overdue for a period of more than 90 days in

respect of a term loan,

The account remains ‘out of order’ for a period of more than 90 days, in respect of an

Overdraft/Cash Credit (OD/CC),

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

discounted,

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

period not exceeding two half years in the case of an advance granted for agricultural purposes,

and

Any amount to be received remains overdue for a period of more than 90 days in respect of

other accounts.

'Out of Order' status

An account should be treated as 'out of order' if the outstanding balance remains continuously in

excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal

operating account is less than the sanctioned limit/drawing power, but there are no credits

continuously for six months as on the date of Balance Sheet or credits are not enough to cover the

interest debited during the same period, these accounts should be treated as 'out of order'.

‘Overdue’

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

by the bank.

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Income Recognition

Income recognition - Policy

The policy of income recognition has to be objective and based on the record of recovery.

Internationally income from non-performing assets (NPA) is not recognised 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, NSCs, IVPs, KVPs and Life policies may

be taken to income account on the due date, provided adequate margin is available in the

accounts.

Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of

outstanding debts should be recognised on an accrual basis over the period of time covered by

the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances should not be

taken to income account unless the interest has been realised.

Reversal of income

If any advance, including bills purchased and discounted, becomes NPA as at the close of any year,

interest accrued and credited to income account in the corresponding previous year, should be reversed

or provided for if the same is not realised.

Guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in

the current period and should be reversed or provided for with respect to past periods, if uncollected.

Leased Assets

The net lease rentals (finance charge) on the leased asset accrued and credited to income account

before the asset became non-performing, and remaining unrealised, should be reversed or provided for

in the current accounting period.

The term 'net lease rentals' would mean the amount of finance charge taken to the credit of Profit &

Loss Account and would be worked out as gross lease rentals adjusted by amount of statutory

depreciation and lease equalisation account.

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As per the 'Guidance Note on Accounting for Leases' issued by the Council of the Institute of

Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be opened by

the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be.

Further, Lease Equalisation Account should be transferred every year to the Profit & Loss Account

and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the

head 'Gross Income'.

Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account provided the credits in the accounts

towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.

In the absence of a clear agreement between the bank and the borrower for the purpose of

appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an

accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent

manner.

Interest Application

There is no objection to the banks using their own discretion in debiting interest to an NPA account

taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma

accounts.

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Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31st March 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 given in the Annexure.

While reporting 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. Banks which

do not maintain Interest Suspense account for parking interest due on non-performing advance

accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report.

Whenever 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.

ASSET CLASSIFICATION

Categories of NPAs

Banks are required to classify non-performing assets further into the following three categories based

on the period for which the asset has remained non-performing and the realisability of the dues:

Sub-standard Assets

Doubtful Assets

Loss Assets

a. Sub-standard Assets

A sub-standard asset was one, which was classified as NPA for a period not exceeding two years.

With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period

less than or equal to 18 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 ensure recovery of the dues to the banks

in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the

liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some

loss, if deficiencies are not corrected.

b. Doubtful Assets

A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31

March 2001, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18

months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as

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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.

c. Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors 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.

Guidelines for classification of assets

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

degree of well-defined credit weaknesses and the extent of dependence on collateral security for

realisation of dues.Banks should establish appropriate internal systems to eliminate the tendency to

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

may fix a minimum cut off point to decide what would constitute a high value account depending upon

their respective business levels. The cut off point should be valid for the entire accounting year.

Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks.

The system should ensure that doubts in asset classification due to any reason are settled through

specified internal channels within one month from the date on which the account would have been

classified as NPA as per extant guidelines.

Accounts with temporary deficiencies

The classification of an asset as NPA should be based on the record of recovery. Bank should not

classify an advance account as NPA merely due to the existence of some deficiencies which are

temporary in nature such as non-availability of adequate drawing power based on the latest available

stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock

statements and non-renewal of the limits on the due date, etc. In the matter of classification of

accounts with such deficiencies banks may follow the following guidelines:

Banks should ensure that drawings in the working capital accounts are covered by the adequacy of

current assets, since current assets are first appropriated in times of distress. Drawing power is

required to be arrived at based on the stock statement which is current. However, considering the

difficulties of large borrowers, stock statements relied upon by the banks for determining drawing

power should not be older than three months. The outstanding in the account based on drawing power

calculated from stock statements older than three months, would be deemed as irregular. A working

capital borrowed account will become NPA if such irregular drawings are permitted in the account for

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a continuous period of 180 days even though the unit may be working or the borrower's financial

position is satisfactory.

Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the

due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements

and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of

credit limits is already on and would be completed soon. In any case, delay beyond six months is not

considered desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits

have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be

treated as NPA.

Accounts regularized near about the balance sheet date

The asset classification of borrower accounts where a solitary or a few credits are recorded before the

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

indicates inherent weakness on the basis of the data available, the account should be deemed as a

NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory

Auditors/Inspecting Officers about the manner of regularization of the account to eliminate doubts on

their performing status.

Asset Classification to be borrower-wise and not facility-wise

It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit

and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as

NPA and not the particular facility or part thereof which has become irregular.

If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a

separate account, the balance outstanding in that account also should be treated as a part of the

borrower’s principal operating account for the purpose of application of prudential norms on income

recognition, asset classification and provisioning.

Advances under consortium arrangements

Asset classification of accounts under consortium should be based on the record of recovery of the

individual member banks and other aspects having a bearing on the recoverability of the advances.

Where the remittances by the borrower under consortium lending arrangements are pooled with one

bank and/or where the bank receiving remittances is not parting with the share of other member banks,

the account will be treated as not serviced in the books of the other member banks and therefore, be

treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share

of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer

of their share of recovery, to ensure proper asset classification in their respective books.

17

Accounts where there is erosion in the value of security

A NPA need not go through the various stages of classification in cases of serious credit impairment

and such assets should be straightaway classified as doubtful or loss asset as appropriate. Erosion in

the value of security can be reckoned as significant when the realizable value of the security is less

than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as

the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning

should be made as applicable to doubtful assets.

If the realizable value of the security, as assessed by the bank/ approved values/ RBI is less than 10 per

cent of the outstanding in the borrowed accounts, the existence of security should be ignored and the

asset should be straightaway classified as loss asset. It may be either written off or fully provided for

by the bank.

Advances to PACS/FSS ceded to Commercial Banks

In respect of agricultural advances as well as advances for other purposes granted by banks to ceded

PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS

which is in default for a period of two harvest seasons (not exceeding two half years)/two quarters, as

the case may be, after it has become due will be classified as NPA and not all the credit facilities

sanctioned to a PACS/ FSS. The other direct loans & advances, if any, granted by the bank to the

member borrower of a PACS/ FSS outside the on-lending arrangement will become NPA even if one

of the credit facilities granted to the same borrower becomes NPA.

Advances against Term Deposits, NSC’s, KVP/IVP, etc

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be

treated as NPAs. Advances against gold ornaments, government securities and all other securities are

not covered by this exemption.

Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for agricultural plantations etc. where

moratorium is available for payment of interest, payment of interest becomes 'due' only after the

moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue

and hence NPA, with reference to the date of debit of interest. They become overdue after due date for

payment of interest, if uncollected.

In the case of housing loan or similar advances granted to staff members where interest is payable after

recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such

18

loans/advances should be classified as NPA only when there is a default in repayment of installment of

principal or payment of interest on the respective due dates

Agricultural advances

In respect of advances granted for agricultural purpose where interest and/or installment of principal

remains unpaid after it has become past due for two harvest seasons but for a period not exceeding two

half-years, such an advance should be treated as NPA. The above norms should be made applicable

only in respect of short term agricultural loans for production and marketing of seasonal agricultural

crops such as paddy, wheat, oilseeds, sugarcane etc. In respect of other activities like horticulture,

floriculture or allied activities such as animal husbandry, poultry farming etc., assessment of NPA

would be done as in the case of other advances.

Where natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on

their own as a relief measure - conversion of the short-term production loan into a term loan or re-

schedulement of the repayment period; and the sanctioning of fresh short-term loan,

In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be

treated as current dues and need not be classified as NPA. The asset classification of these loans would

thereafter be governed by the revised terms & conditions and would be treated as NPA if interest

and/or installment of principal remains unpaid, after it has become past due, for two harvest seasons

but for a period not exceeding two half years.

Government guaranteed advances

The credit facilities backed by guarantee of the Central Government though overdue may be treated as

NPA only when the Government repudiates its guarantee when invoked. This exemption from

classification of Government guaranteed advances as NPA is not for the purpose of recognition of

income. With effect from 1st April 2000, advances sanctioned against State Government guarantees

should be classified as NPA in the normal course, if the guarantee is invoked and remains in default

for more than two quarters. With effect from March 31, 2001 the period of default is revised as more

than 180 days.

Restructuring/ Rescheduling of Loans

A standard asset where the terms of the loan agreement regarding interest and principal have been

renegotiated or rescheduled after commencement of production should be classified as sub-standard

and should remain in such category for at least one year of satisfactory performance under the

renegotiated or rescheduled terms. In the case of sub-standard and doubtful assets also, rescheduling

does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory

19

performance under the rescheduled / renegotiated terms. Following representations from banks that the

foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets even

though the modification of terms might not jeopardise the assurance of repayment of dues from the

borrower, the norms relating to restructuring of standard and sub-standard assets were reviewed in

March 2001. In the context of restructuring of the accounts, the following stages at which the

restructuring / rescheduling / renegotiation of the terms of loan agreement could take place, can be

identified:

Before commencement of commercial production.

After commencement of commercial production but before the asset has been classified as sub

standard.

After commencement of commercial production and after the asset has been classified as sub

standard.

In each of the foregoing three stages, the rescheduling, etc., of principal and/or of interest could

take place, with or without sacrifice, as part of the restructuring package evolved.

ii) Treatment of Restructured Standard Accounts

A rescheduling of the installments of principal alone, at any of the aforesaid first two stages

would not cause a standard asset to be classified in the sub standard category provided the

loan/credit facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages would not cause an

asset to be downgraded to sub standard category subject to the condition that the amount of

sacrifice, if any, in the element of interest, measured in present value terms, is either written off

or provision is made to the extent of the sacrifice involved. For the purpose, the future interest

due as per the original loan agreement in respect of an account should be discounted to the

present value at a rate appropriate to the risk category of the borrower (i.e., current PLR+ the

appropriate credit risk premium for the borrower-category) and compared with the present

value of the dues expected to be received under the restructuring package, discounted on the

same basis.

20

In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)

above, the amount of sacrifice should either be written off or provision made to the extent of

the sacrifice involved.

21

iii) Treatment of restructured sub-standard accounts

A rescheduling of the instalments of principal alone, would render a sub-standard asset eligible

to be continued in the sub-standard category for the specified period, provided the loan/credit

facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to be continued

to be classified in sub standard category for the specified period subject to the condition that

the amount of sacrifice, if any, in the element of interest, measured in present value terms, is

either written off or provision is made to the extent of the sacrifice involved. For the purpose,

the future interest due as per the original loan agreement in respect of an account should be

discounted to the present value at a rate appropriate to the risk category of the borrower (i.e.,

current PLR + the appropriate credit risk premium for the borrower-category) and compared

with the present value of the dues expected to be received under the restructuring package,

discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)

above, the amount of sacrifice should either be written off or provision made to the extent of

the sacrifice involved. Even in cases where the sacrifice is by way of write off of the past

interest dues, the asset should continue to be treated as sub-standard.

iv) Upgradation of restructured accounts

The sub-standard accounts which have been subjected to restructuring etc., whether in respect of

principal instalment or interest amount, by whatever modality, would be eligible to be upgraded to the

standard category only after the specified period i.e., a period of one year after the date when first

payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance

during the period. The amount of provision made earlier, net of the amount provided for the sacrifice

in the interest amount in present value terms as aforesaid, could also be reversed after the one year

period. During this one year period, the sub-standard asset will not deteriorate in its classification if

satisfactory performance of the account is demonstrated during the period. In case, however, the

satisfactory performance during the one year period is not evidenced, the asset classification of the

restructured account would be governed as per the applicable prudential norms with reference to the

pre-restructuring payment schedule.

22

Availability of security/ net worth of borrower/guarantor

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

the propose of treating an advance as NPA or otherwise, as income recognition is based on record of

recovery.

Take-out Finance

Takeout finance is the product emerging in the context of the funding of long-term infrastructure

projects. Under this arrangement, the institution/the bank financing infrastructure projects will have an

arrangement with any financial institution for transferring to the latter the outstanding in respect of

such financing in their books on a pre-determined basis. In view of the time-lag involved in taking-

over, the possibility of a default in the meantime cannot be ruled out. The norms of asset classification

will have to be followed by the concerned bank/financial institution in whose books the account stands

as balance sheet item as on the relevant date. If the lending institution observes that the asset has

turned NPA on the basis of the record of recovery, it should be classified accordingly. The lending

institution should not recognise income on accrual basis and account for the same only when it is paid

by the borrower/ taking over institution (if the arrangement so provides). The lending institution

should also make provisions against any asset turning into NPA pending its take over by taking over

institution. As and when the asset is taken over by the taking over institution, the corresponding

provisions could be reversed. However, the taking over institution, on taking over such assets, should

make provisions treating the account as NPA from the actual date of it becoming NPA even though the

account was not in its books as on that date.

Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering export of goods to countries for

which the ECGC’s cover is available, EXIM Bank has introduced a guarantee-cum-refinance

programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank

within a period of 30 days from the day the bank invokes the guarantee after the exporter has filed

claim with ECGC.

Accordingly, to the extent payment has been received from the EXIM Bank, the advance may not be

treated as a non-performing asset for asset classification and provisioning purposes.

23

Export Project Finance

In respect of export project finance, there could be instances where the actual importer has paid the

dues to the bank abroad but the bank in turn is unable to remit the amount due to political

developments such as war, strife, UN embargo, etc.

In such cases, where the lending bank is able to establish through documentary evidence that the

importer has cleared the dues in full by depositing the amount in the bank abroad before it turned into

NPA in the books of the bank, but the importer's country is not allowing the funds to be remitted due

to political or other reasons, the asset classification may be made after a period of one year from the

date the amount was deposited by the importer in the bank abroad.

Advances under rehabilitation approved by BIFR/ TLI

Banks are not permitted to upgrade the classification of any advance in respect of which the terms

have been re-negotiated unless the package of re-negotiated terms has worked satisfactorily for a

period of one year. While the existing credit facilities sanctioned to a unit under rehabilitation

packages approved by BIFR/term lending institutions will continue to be classified as sub-standard or

doubtful as the case may be, in respect of additional facilities sanctioned under the rehabilitation

packages, the Income Recognition, Asset Classification norms will become applicable after a period of

one year from the date of disbursement.

Provisioning Norms

General

The primary responsibility for making adequate provisions for any diminution in the value of loan

assets, investment or other assets is that of the bank managements and the statutory auditors. The

assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank

management and the statutory auditors in taking a decision in regard to making adequate and

necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the non-performing assets on

the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking

into account the time lag between an account becoming doubtful of recovery, its recognition as such,

the realisation of the security and the erosion over time in the value of security charged to the bank,

the banks should make provision against sub-standard assets, doubtful assets and loss assets as below:

Loss assets

24

The entire asset should be written off. If the assets are permitted to remain in the books for any reason,

100 percent of the outstanding should be provided for.

Doubtful assets

100 percent of the extent to which the advance is not covered by the realisable value of the security to

which the bank has a valid recourse and the realisable value is estimated on a realistic basis.

In regard to the secured portion, provision may be made on the following basis, at the rates ranging

from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has

remained doubtful:

Period for which the advance has

been considered as doubtful

Provision requirement (%)

Up to one year 20

One to three years 30

More than three years 50

Additional provisioning consequent upon the change in the definition of doubtful assets effective from

March 31, 2001 has to be made in phases as under:

As on 31.03.2001, 50 percent of the additional provisioning requirement on the assets which became

doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful

category.

As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the

provisions needed, as on 31.03.2002.

Note: Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value of

security, in cases of NPAs with balance of Rs. 5 crores and above stock audit at annual intervals by

external agencies appointed as per the guidelines approved by the Board would be mandatory in order

to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in

25

favour of the bank should be got valued once in three years by valuers appointed as per the guidelines

approved by the Board of Directors.

Sub-standard assets

A general provision of 10 percent on total outstanding should be made without making any allowance

for DICGC/ECGC guarantee cover and securities available.

.Standard assets

From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.25

percent on standard assets on global loan portfolio basis. The provisions on standard assets should

not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but shown separately

as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions - Others' in

Schedule 5 of the balance sheet.

Floating provisions

Some of the banks make a 'floating provision' over and above the specific provisions made in respect

of accounts identified as NPAs. The floating provisions, wherever available, could be set-off against

provisions required to be made as per above stated provisioning guidelines. Considering that higher

loan loss provisioning adds to the overall financial strength of the banks and the stability of the

financial sector, banks are urged to voluntarily set apart provisions much above the minimum

prudential levels as a desirable practice.

Provisions on Leased Assets

i) Sub-standard assets

10 percent of the 'net book value'.

'Gross book value' of a fixed asset is its historical cost or other amount substituted for historical

cost in the books of account or financial statements. Statutory depreciation should be shown

separately in the Profit & Loss Account. Accumulated depreciation should be deducted from

26

the Gross Book Value of the leased asset in the balance sheet of the lessor to arrive at the 'net

book value'.

Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book

value' of the leased assets. The amount of adjustment in respect of each class of fixed assets

may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate

column in the section related to leased assets.

ii) Doubtful assets

100 percent of the extent to which the finance is not secured by the realisable value of the leased asset.

Realisable value to be estimated on a realistic basis. Over and above provision as per (a) above, the

following provision on the net book value of the secured portion should be made, depending upon the

period for which asset has been doubtful:

Period %age of provision

Up to one year 20

One to three years 30

More than three years 50

27

iii) Loss assets

The entire asset should be written-off. If for any reason, an asset is allowed to remain in books, 100

percent of the 'net book value' should be provided for.

viii Guidelines for Provisions under Special Circumstances

a. Government guaranteed advances

With effect from 31 March 2000, in respect of advances sanctioned against State Government

guarantee, if the guarantee is invoked and remains in default for more than two quarters (180 days at

present), the banks should make normal provisions as mentioned above .

As regards advances guaranteed by State Governments, in respect of which guarantee stood invoked as

on 31.03.2000, necessary provision was allowed to be made, in a phased manner, during the financial

years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year.

b. Advances granted under rehabilitation packages approved by BIFR/term lending

institutions

In respect of advances under rehabilitation package approved by BIFR/term lending institutions, the

provision should continue to be made in respect of dues to the bank on the existing credit facilities as

per their classification as sub-standard or doubtful asset.

As regards the additional facilities sanctioned as per package finalised by BIFR and/or term lending

institutions, provision on additional facilities sanctioned need not be made for a period of one year

from the date of disbursement.

In respect of additional credit facilities granted to SSI units which are identified as sick and where

rehabilitation packages/nursing programme have been drawn by the banks themselves or under

consortium arrangements, no provision need be made for a period of one year.

Note:-However, advances against gold ornaments, government securities and all other kinds of

securities are not exempted from provisioning requirements. Advances against term deposits, NSCs

eligible for surrender, IVPs, KVPs, and life policies are exempted from provisioning requirements.

28

Treatment of interest suspense account

Amounts held in Interest Suspense Account should not be reckoned as part of provisions. Amounts

lying in the Interest Suspense Account should be deducted from the relative advances and thereafter,

provisioning as per the norms, should be made on the balances after such deduction.

Advances covered by ECGC/DICGC guarantee

In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the balance

in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision

required to be made for doubtful assets, realisable value of the securities should first be deducted from

the outstanding balance in respect of the amount guaranteed by these Corporations and then provision

made as illustrated hereunder:

Example

Outstanding Balance Rs. 4 lakhs

DICGC Cover 50 percent

Period for which the advance has remained doubtful More than 3 years remained

doubtful

Value of security held

(excludes worth of Rs.)

Rs. 1.50 lakhs

Provision required to be made

Outstanding balance Rs. 4.00 lakhs

Less: Value of security held Rs. 1.50 lakhs

Unrealised balance Rs. 2.50 lakhs

Less: DICGC Cover

(50% of unrealisable balance)

Rs. 1.25 lakhs

29

Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion of advance Rs. 1.25 lakhs (@ 100 percent of

unsecured portion)

Provision for secured portion of advance Rs. 0.75 lakhs (@ 50 percent of

secured portion)

Total provision required to be made Rs. 2.00 lakhs

Advance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be

made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion

should be provided for as per the extant guidelines on provisioning for non-performing advances. Two

illustrative examples are given below:

Example I

Asset classification status: Doubtful – More than

3 years;

 

CGTSI Cover 75% of the amount

outstanding or75% of

the unsecured amount

or Rs.18.75 lakh,

whichever is the least:

 

Realisable value of

Security

Rs.1.50 lakh

Balance outstanding Rs.10.00 lakh  

30

Less Realisable value of

security

Rs. 1.50 lakh

Unsecured amount Rs. 8.50 lakh  

Less CGTSI cover (75%) Rs. 6.38 lakh  

Net unsecured and

uncovered portion:

Rs. 2.12 lakh  

    Provision Required

Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)

Unsecured & uncovered

portion

Rs.2.12 lakh Rs. 2.12 lakh ( 100%)

Total provision required   Rs. 2.87 lakh

Example II

Asset classification status : Doubtful – More than 3

years;

 

CGTSI Cover 75% of the amount

outstanding or75% of

the unsecured amount or

Rs.18.75 lakh,

whichever is the least

 

31

Realisable value of Security Rs.10.00 lakh  

Balance outstanding Rs.40.00 lakh  

Less Realisable value of

security

Rs. 10.00 lakh

Unsecured amount Rs. 30.00 lakh  

Less CGTSI cover (75%) Rs. 18.75 lakh  

Net unsecured and uncovered

portion:

Rs. 11.25 lakh  

    Provision Required

Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)

Unsecured & uncovered

portion

Rs.11.25 lakh Rs.11.25 lakh ( 100%)

Total provision required   Rs. 16.25 lakh

Take-out finance

The lending institution should make provisions against a 'take-out finance' turning into NPA

pending its take-over by the taking-over institution. As and when the asset is taken-over by the

taking-over institution, the corresponding provisions could be reversed.

Reserve for Exchange Rate Fluctuations Account (RERFA)

32

When exchange rate movements of Indian rupee turn adverse, the outstanding amount of

foreign currency dominated loans (where actual disbursement was made in Indian Rupee)

which becomes past due, goes up correspondingly, with its attendant implications of

provisioning requirements. Such assets should not normally be revalued. In case such assets

need to be revalued as per requirement of accounting practices or for any other requirement,

the following procedure may be adopted:

The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account.

Besides the provisioning requirement as per Asset Classification, banks should treat the full

amount of the Revaluation Gain relating to the corresponding assets, if any, on account of

Foreign Exchange Fluctuation as provision against the particular assets.

Writing-off of NPAs

In terms of Section 43(D) of the Income Tax Act 1961, income by way of interest in relation to

such categories of bad and doubtful debts as may be prescribed having regard to the guidelines

issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in

which it is credited to the bank’s profit and loss account or received, whichever is earlier.

This stipulation is not applicable to provisioning required to be made as indicated above. In

other words, amounts set aside for making provision for NPAs as above are not eligible for tax

deductions.

Therefore, the banks should either make full provision as per the guidelines or write-off such

advances and claim such tax benefits as are applicable, by evolving appropriate methodology

in consultation with their auditors/tax consultants. Recoveries made in such accounts should be

offered for tax purposes as per the rules.

Write-off at Head Office Level

Banks may write-off advances at Head Office level, even though the relative advances are still

outstanding in the branch books. However, it is necessary that provision is made as per the

classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100

percent provision will have to be made .

33

NPA SITUATION OF BANKING INDUSTRY

 

1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004-

97 98 99 2000 2001 2002 2003 2004 2005

Public Sector Banks

Gross NPA/Total Assets 7.8 7 6.7 6 5.31 4.89 4.21 3.5 2.74

Net NPA/Total Assets 3.6 3.3 3.1 2.9 2.72 2.42 1.93 1.28 0.99

Gross NPA/Gross Advances 17.8 16 15.9 14 12.4 11.09 9.36 7.79 5.53

Net NPA/Net Advances 9.2 8.2 8.1 7.4 6.74 5.82 4.53 2.98 2.06

Scheduled commercial Banks

Gross NPA/Total Assets 7 6.4 6.2 5.5 4.9 4.6 4 3.3 2.5

34

Net NPA/Total Assets 3.3 3 2.9 2.7 2.5 2.3 1.9 1.2 0.9

Gross NPA/Gross Advances 15.7 14.4 14.7 12.7 11.4 10.4 8.8 7.2 5.2

Net NPA/Net Advances 8.1 7.3 7.6 6.8 6.2 5.5 4.4 2.9 2

Source: RBI, Statistical Tables Relating to Banks in India 2004-05, September, 2005; RBI, Report on

Trend andProgress of Banking in India 2004-05, November, 2005; RBI, Handbook of Statistics on the

IndianEconomy 2004-05, September 2005.

35

ANALYSIS:-

Performance of commercial banks since the initiation of financial reforms and adoption of

international best-practice regulatory framework has been most impressive. As Table attests, both

PSBs and other category of banks have successfully overcome the hurdles posed by the new

environment. Between 1996-97 and 2004-05, gross NPAs of scheduled commercial banks as a ratio of

total assets and total advances were brought down from 7.0 and 15.7 to 2.7 and 5.2 per cent

respectively. Banks also undertook massive cleaning up of their balance sheet through loan-loss

provisioning so that at end -March, 2005 net NPAs as a proportion of total assets and advances were

no more than 0.9 and 2.0 per cent respectively. More noteworthy in this regard was the performance of

PSBs: though they were initially saddled with much larger NPAs, by 2005 their ratios to assets and

advances were not significantly different from those of private and foreign banks.

Though the performance of banks has shown overall improvement in the last three years especially in

the area of income, profits and the level of NPAs. The gross NPAs, which were Rs.56,473 crore as on

March, 2002, came down to Rs.51,538 crore as on March, 2004. There has been a similar decline in

the net NPAs also. The net NPAs came down from Rs.27,958 crore to Rs.18,860 crore for the same

period. Accordingly, the percentage of Net NPAs to Net Advances also came down from 5.82 per cent

to 3 per cent during the above period. Thus, there has been a consistent decline in the level of NPAs.

This has been made possible by stringent measures adopted by the Government and the Reserve Bank

of India with the help of the banks concerned. These include:-

Banks are effecting larger number of compromise settlements through the forum of Lok Adalats.

"The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002" has been enacted empowering Banks for speedy recovery of overdue loans. I may add, it was

recently amended by this House.

A scheme of Corporate Debt Restructuring (CDR) for restructuring of corporate debts has been put in

place.

The management Committee and the Board of Directors are periodically reviewing the top 300 NPA

accounts and NPA accounts of Rs.1 crore and above respectively.

Banks have strengthened the risk management systems by putting in place institutional framework for

identifying, monitoring and management of credit risk.

The seriousness and success of the Bank managements to recover thousands of crores of NPAs can be

seen from the following:-

Total recoveries effected by Public Sector Banks (including write-offs) increased from Rs.18,730

crore on 31st March, 2003 to Rs.20,704 crore on 31st March, 2004.

36

As on 31st March, 2003, the public sector banks have settled 8.87 lakh NPA accounts involving

Rs.4,649 crore under the RBI’s One-Time Settlement Scheme for NPAs up to Rs.5 crore.

Till September 30, 2004, the 27 Public Sector Banks have issued 70254 notices for an outstanding

amount of Rs.21,988.74 crore and have recovered an amount of Rs.2,237.95 crore from 29301 cases

filed under the Securitisation Act.

Out of 63131 cases (involving Rs.90,852.01 crore) filed by the commercial banks, DRTs have

adjudicated 27373 cases (involving Rs.25,402.74 crore) resulting in a recovery of Rs.7,592.98 crore

till 31st March, 2004.

Despite the aforementioned measures, the process of recovery has somewhat been eclipsed by the fact

that the big industrial companies/borrowers have been the top defaulters to the Public Sector Banks.

An amount of Rs.3,908 crore has been outstanding against ten top companies. Government is

concerned on this and has clearly spelled out ways to tackle willful defaulters. The strengthening of

the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002 after certain amendments has further tightened the grip over these defaulters.

37

DIFFICULTIES WITH THE NON-PERFORMING ASSETS

1. Owners do not receive a market return on their capital. In the worst case, if the bank fails,

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

2. Depositors do not receive a market return on savings. In the worst case if the bank fails,

depositors lose their assets or uninsured balance. Banks also redistribute losses to other borrowers by

charging higher interest rates. Lower deposit rates and higher lending rates repress savings and

financial markets, which hampers economic growth.

3. Non performing loans epitomize bad investment. They misallocate credit from good projects,

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

and, by extension, labour and natural resources. The economy performs below its production potential.

4. Non performing loans may spill over the banking system and contract the money stock, which

may lead to economic contraction. This spillover effect can channelize through illiquidity or bank

insolvency; (a) when many borrowers fail to pay interest, banks may experience liquidity shortages.

These shortages can jam payments across the country, (b) illiquidity constraints bank in paying

depositors e.g. cashing their paychecks. Banking panic follows. A run on banks by depositors as part

of the national money stock become inoperative. The money stock contracts and economic contraction

follows (c) undercapitalized banks exceeds the banks capital base.

Lending by banks has been highly politicized. It is common knowledge that loans are given to various

industrial houses not on commercial considerations and viability of project but on political

considerations; some politician would ask the sbank to extend the loan to a particular corporate and the

bank would oblige. In normal circumstances banks, before extending any loan, would make a thorough

study of the actual need of the party concerned, the prospects of the business in which it is engaged, its

track record, the quality of management and so on. Since this is not looked into, many of the loans

become NPAs. The loans for the weaker sections of the society and the waiving of the loans to farmers

are another dimension of the politicization of bank lending.

This project is conducting study on IDBI ltd. related to the above mentioned problem of NPA’s in the

Indian banking industry

ABOUT IDBI LTD

Industrial Development Bank of India (IDBI) was established in 1964 by the Government of India

under an Act of Parliament, the Industrial Development Bank of India Act, 1964 (the IDBI Act). The

functions and working of IDBI are governed by the IDBI Act. Initially, IDBI was set up as a wholly-

owned subsidiary of Reserve Bank of India (RBI) to provide credit and other facilities for the 38

development of industry. In 1976, the ownership of IDBI was transferred to the Government of India

and it was entrusted with the additional responsibility of acting as the principal financial institution for

coordinating the activities of institutions engaged in the financing, promotion or development of

industry.

IDBI’s portfolio relating to its International Finance Division (which was providing export finance to

industry) and that relating to the small scale industrial sector were transferred to Export-Import Bank

of India (EXIM Bank) and Small Industries Development Bank of India (SIDBI) in 1982 and 1990

respectively.

IDBI Bank looks confidently into the future to face and thrive in the intense competitive environment

that is emerging. The bank has now gained experience and has in place the strategies required for

gaining a leadership position. With cutting edge relevant technology, aggressive marketing,

innovation, tight control over costs and with its motivated workforce, the bank is all set to emerge as a

model global corporate citizen in the days ahead.   

IDBI, the tenth largest development bank in the world has promoted world-class institutions in India.

A few of such institutions built by IDBI are The National Stock Exchange (NSE), The National

Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL) etc. IDBI is

a strategic investor in a plethora of institutions that have revolutionized the Indian Financial Markets.

IDBI promoted IDBI bank to mark the formal foray of the IDBI Group into commercial Banking. This

initiative has blossomed into a major success story. IDBI Bank, which began with an equity capital

base of Rs.1000 million (Rs.800 million contributed by IDBI and Rs.200 million by SIDBI),

commenced its first branch at Indore in November 1995. Thereafter in less than seven years the bank

has attained a front ranking position in the Indian Banking Industry.

Industrial Development Bank of India (IDBI) and Small Industries Development Bank of India

(SIDBI), two of India’s premier financial institutions, promoted bank. The Reserve Bank of India

conveyed its“in principle” approval to established Bank on February 11th, 1994.Thereafter the Bank

was incorporated at Gwalior under Companies Act on 15th of September 1994 with its Registered

Office at Indore. The Certificate for Commencement of Business was received on 2nd of December,

1994.

IDBI Bank’s Corporate Office is at Mumbai and Registered Office at Indore. Being a new private

sector bank it has to face direct competition, interalia, with Foreign Banks functioning in the country.

Consequently it has launched a number of matching innovative products especially in the field of retail

banking with a view to secure enough business and sustains the competition. Some of the important

products launched by the Bank are Ô Demat Account; NRI Banking; Personal Loans; Car Loans;

39

Phone/Mobile Banking; Investment Advisory Services; Education Loans; Corporate Payroll Savings

Account; Anywhere/Anytime Banking and so on.

IDBI Bank successfully completed its public issue in February 99, which led to its paid-up capital

expanding to Rs.1400 million. The promoters holding consequent to this public issue stood reduced to

71% with IDBI holding 57% and SIDBI 14% of the paid up capital of IDBI Bank. This is in line with

the requirement of RBI, which stipulates that eventually the promoters holding should be brought

down to 40%. The paid-up capital of the Bank after the public issue stands enhanced to Rs 140 crores.

Out of this, IDBI and SIDBI have initially contributed Rs 80 crores and Rs 20 crores respectively and

the rest Rs. 40 crores were mobilsed during the public issue. The Bank made a beginning from Indore

on 13th of November 1995.

Now it has a network of 53 branches. 7 more branches are proposed to be opened by the end of year

2002.The Bank has made considerable investments in acquiring relevant state-of-the-art technology,

well appointed premises and in recruiting highly experienced professional Bankers with a strong

service orientation. It has already attained a reputation for excellence in the pursuit of its corporate

mission of raising the threshold of quality in customer service standards. After long deliberations the

Bank has chosen “Branchpower & Bankmaster”, software for its operations. It is providing Anywhere-

Anytime banking and is a fully technology driven bank.

All the branches are linked to Information Technology center at Mumbai. All the staff members are

expected to keep themselves abreast with technology adopted by the Bank and keep on updating

themselves with the latest developments in the field. Over the last four decades, IDBI’s role as a

catalyst to industrial development has encompassed broad spectrum of activities. IDBI can finance all

types of industrial concerns covered under the provisions of the IDBI Act, irrespective of the size or

form of organization.

IDBI primarily provides finance to large and medium industrial enterprises and is authorized to

finance all types of industrial concerns engaged or to be engaged in the manufacture, processing or

preservation of goods, mining, shipping, transport, hotel industry, information technology, medical

and health services, leasing, generation or distribution of power, maintenance, repair, testing or

servicing of vehicles, vessels and other types of machinery and the setting up and development of

industrial estates. IDBI may also assist industrial concerns engaged in the research and development of

any process or product or in the provision of special technical knowledge or other services for the

promotion of industrial growth. In addition, floriculture, road construction and the establishment and

development of tourism related facilities including amusement parks, cultural centres, restaurants,

40

travel and transport facilities and other tourist services, film industry and construction activity have

been recognised as industrial activities eligible for finance from IDBI.

IDBI has been assigned a special role for co-ordinating the activities of institutions engaged in

financing, promoting or developing industries as also provision of technical, legal and marketing

assistance to industry and undertaking market surveys, investment research as well as techno-

economic studies in connection with the development of industry.In the past, the Government had

provided direct and indirect financial assistance and support to IDBI including access to low cost

funds and assistance with restructuring of high cost liabilities. The Government, however, has no legal

obligation to provide financial assistance or support to IDBI.

IDBI Bank IDBI Bank has been a pioneer and an innovator at bringing state-of-the-art services to its

customers.

It's the First Indian Bank to provide:

ATM Next -an information portal on ATMs

Instant Account Opening

Talking ATMs

Gift Card - the Prepaid Gift Card, a gift that cant go wrong

Easy Fill - Instant Mobile Refill Service; amongst many other services

IDBI Bank has a strategic alliance with Birla Sun Life Insurance, providing the best life

insurance plans and products through select branches.

A key achievement for the Bank is that it has emerged as the Highest Distributor for two top Mutual

Fund schemes consistently for the past six months, thereby demonstrating the strength of the Bank's

distribution channel of TPD business. The Bank also registered huge success as a collecting banker to

several market IPOs that consequently leveraged the IPO Financing Business of the Bank. IDBI Bank

launched a strategic B2B E-Commerce platform with BPCL to facilitate on line payments from BPCL

to its dealers, thereby enhancing corporate business through new-age technology and offering supply

chain financing solutions.

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Corporate Banking and Credit

IDBI bank offers Total Banking Solutions to its corporate customers. Corporate Banking

relationships are presently offered at 20 locations across the country.

Corporate Solutions are provided in:

Structured Finance Solutions

Fund based and non-fund based requirements of Corporate customers

Cash management Services (payment and collections)

Supply Chain Finance Solutions to complement the supply chain management efforts of

corporates covering their suppliers and Dealers

Tax collection facilities

e-payment solutions to help companies and their clients for online settlement of transactions

Trade Finance (Domestic and International)

Treasury solutions and advisory services

Investment Advisory services and MF distribution

IDBI Bank also actively manages:

IPA services for CP issues

Debt Syndication

Acting as Collecting Bankers for IPO, Debt issues

The products are delivered through a large team of relationship managers, who provide single window

support to corporates. The Agri Business Group has recently been set up to identify opportunities for

lending to the agri-sector and developing products, including structured solutions to tap the potential

available in the rural sector.

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The Value Chain Management Group offers supply chain finance solutions to corporates and offer

special products like loan against credit card receivables and other products.

The IDBI Bank family

The lifeline of IDBI Bank are it's people, and we are growing at a very fast pace. As of 1st Jan 2004,

the number of employees has crossed 1600. The average age of the employee at IDBI Bank is 31 yrs.

The male: female ratio of the banks’ employees is 79: 21 respectively. Approx. 83% of our employee

strength falls in the junior management category (which includes trainees and probationers) while

about 14% make up the middle level management. The remaining constitutes the Senior and Top

management of the bank. The various business units comprise of 75% while support functions make

up for 12% and operations for the remaining 13% of the total manpower strength of the bank. 85%.

The bank has rolled out broad based grant of stock options covering 75% of the employees to align

their interests with those of its shareholders. The Bank also has a state-of-the-art training centre at

Belapur and every employee receives on an average at least 40 hours of training in a year.

Promoters of IDBI

The promoters of IDBI are Industrial Development Bank of India IDBI and Small Industries

Development Bank of India SIDBI. The Government of India under an Act of Parliament, the IDBI

Act 1964, established IDBI in 1964. IDBI's role as a catalyst to industrial development has

encompassed a broad spectrum of activities. It provides finance to all types of industrial concerns and

also has a special role for coordinating the activities of institutions engaged in financing, promoting or

developing industries as also for provisions of technical, legal and marketing assistance to industry and

undertaking market surveys, investment research as well as tech-economic studies in connection with

the development of industry. SIDBI, the second promoter, was established as a wholly owned

subsidiary of IDBI in 1990 when IDBI's portfolio relating to the small industrial sector was transferred

to them. The Bank came out with its maiden public issue in February 1999. The paid-up capital of the

Bank after the public issue stands enhanced to Rs.140 crores. Out of this, IDBI has contributed

Rs.80.00 crores (57%), SIDBI Rs.20.00 crores (14%) and the rest 40.00 crores (29%) were mobilized

during the public issue

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Source: Annual Report 2006

IDBI- IDBI Bank Merger

The merger will create an entity with assets worth over Rs80,000 crore and attain the size and strength

comparable to the big players. The merged entity would have operations in retail, commercial and

development banking.

The quick succession of mergers wakes us up to the realisation that bank consolidations are no longer

pipe dreams. The towering plans of IDBI are just a case in point.

In terms of asset base, post merger, IDBI ranks seventh. Smitten by the merger benefits of size,

strength and asset worth, IDBI has plans for more mergers up its sleeves. And the plans are nothing

short of ambitious. It aims to displace ICICI from its current number two position in the short term and

SBI from its dominance of the banking sector in the medium term.

But undoubtedly, mergers are not all roses. Both for IDBI bank and OBC one of the parties has been a

traditional public sector dwelling whereas the other has been a high profile private outfit. So while

OBC has been a public sector bank, GTB a technology- savvy private bank. On the other hand, IDBI is

a conservative development financial institution and IDBI bank is a new-age private sector bank.

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Owing to these differences, the mergers would throw up challenges relating to legacy, corporate

culture and technology for the successful fusion of the human resources of the two entities with

distinct work cultures into a cohesive team. The daunting task at both the places would be to handle

the mindset, salary differences and comfort levels with technology.

On the positive side, the profitability of IDBI would increase after the merger, as IDBI bank's portfolio

of assets and liabilities also earn better. The 95 branches, 302 ATMs and nearly one million customers

of IDBI bank will help IDBI to raise finances for its development finance activities. It would also

enable IDBI to reduce its cost of borrowing and lend infrastructure projects at a lower rate.

For OBC, visibly, the positive is an effortless network in the south. It also gains approximately Rs300

crore worth of fixed assets of GTB. Its deposit base of Rs35,673.5 crore would also increase by

Rs6,920.9 crore. On the flip side, GTB's non-performing assets of Rs9,000 crore would be adjusted

against OBC's assets.

Besides the fiscal issues, the bigger challenge would be human resource management and operation

integration. Both IDBI and OBC have been a typical government functional unit - average salaries,

lackadaisical attitude on the part of the management, no aggressiveness on technology. On the other

hand, both IDBI bank and GTB have been high paying and technology-savvy institutions. For these

employees, the merger would bare them to the massive clash between work cultures that can actually

be daunting.

Post merger, the employees and customers of both IDBI bank and OBC would face similar

opportunities and set of problems. However, the shareholders of GTB stand to lose everything unlike

those of IDBI who will benefit from the swap ratio. Sadly, the GTB shareholders have been left to face

losses with not even an assurance of consideration for any compensation from the amalgamation of

GTB with the OBC.

Earlier, in June 2002, the Benares State Bank was integrated with Bank of Baroda and in March 2003,

Punjab National Bank took over Nedungadi Bank. These too, like the recent GTB-OBC amalgamation

were driven by crises. The IDBI bank-IDBI merger though not driven by a crisis, is technically a

bailout for IDBI — with the Rs9000 crore-government assistance to facilitate a clean up of its balance

sheet.

The shareholders of IDBI Bank will get 100 shares of IDBI for every 142 shares held by them. The

boards of IDBI and IDBI Bank approved the share swap ratio for the merger on Thursday. IDBI will

transfer 2.5 per cent of its shareholding in IDBI Bank to a trust in order to give value to IDBI's

shareholders,

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IDBI will extinguish the balance shares held by it in IDBI Bank. The central government holding in

the merged entity will be at 51.4 per cent, he told reporters, on the sidelines of the board meetings

here.IDBI's holding in the bank at the end of December 2004 quarter was 55.33 per cent, while SIDBI

held 13.83 per cent. The amalgamation will be with retrospective effect from October 1, 2004, and the

process is expected to be completed by March 31, 2005. "We need to recast the balance sheet of IDBI

for the six-month period

Challenging one of the most aggressive banks in the country i.e. ICICI Bank in the retail space and

gaining market share is no mean task! But IDBI Bank, post its merger with parent company IDBI,

seems to be gearing up to achieve this feat.

A scrutiny of the fundamentals of the two merging entities (read IDBI and IDBI Bank), suggests that

both the entities will be equal beneficiaries of the synergy. The “merger ratio”, which will reflect their

respective bargaining powers, will also give an indication of the future valuations to be assigned to the

merged entity. The following is an estimation of the said valuations in two different scenarios.

Conclusion

It provide a more comprehensive approach to management of NPAs in bank. It is argued that if the

goal is to deal with NPAs (and more generally the health of the financial system) in a definitive

manner and “root them out”, then it is necessary to first deal with the micro level issues at the level of

each individual intermediary. And, unless these issues are dealt with prudently, even after the systemic

issues are resolved, these problems may resurface even in economies where on the face of it many of

these systemic issues apparently are not operative. So there is a case to build institutions that are

intrinsically strong and healthy by “rooting out” those issues that on a continuous basis create perverse

incentive structures. In this light the role of consistent (consistent in terms of shareholder and

regulatory expectations and behaviour) business model to guide the behaviour of the bank each of

the phases of a credit process . It is argued that the current set of organisational competencies, the

regulatory framework in which the banks operate, the quality of disclosure and the incentive structure

of the management and Boards produce an inconsistent framework, which leads to an unsustainable

performance level for a Bank. In this light, the role of parsimonious but sufficient statistics such as the

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Economic Value of Equity (EVE) and EVE at Risk (EVER) has been emphasized in bank. It is argued

that if these measures are mandatorily disclosed on a monthly basis, it will help in making these

inconsistencies visible. Infact, EVE and EVER could also become effective methods by which the

regulator could exercise a macrolevel control over the banks and could also drive the development of

internal competencies at all levels as Boards, Managements and employees strive to understand the

drivers of these two metrics. Therefore, the authors argue that while dealing with the NPA problem,

many of the issues that were traditionally considered to be systemic issues (for example overexposure

to real-estate) could perhaps be more accurately seen to be institution specific issues but that the true

systemic issues had more to do with the management of the macro-financial system – hard landings

versus soft landings, level of interest rates problems associated with very high and very low interest

rates, micro-management combined with non-transparency leading to uniformity of behaviour

resulting in a consequent absence of well functioning markets for fixed income instruments.

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FINANCIAL HIGHLIGHTS OF IDBI Ltd.( FY 2006)

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SIGNIFICANT DEVELOPMENTS DURING 2006

Amalgamation with united western bank which will operate as a special business unit of IDBI.

Now IDBI comprise of 430 branches ,18 extension counters and 503 ATM across 150 centers.

IDBI and fortis have found federal bank as their third parterner for life insurance business in

India. IDBI is awarded with two special wards “Best internet bank for corporate customers”

and IT team of the year”

During the year, IDBI launched several key technologically innovative and customer-centric

initiatives, providing customers with effective alternate channels of service. These include

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ATM, Phone Banking, Mobile Banking Internet Banking, etc. All channels are integrated to

the core banking system, on a secure and real time basis.

IDBI became the first bank in the Asia-Pacific region to launch money transfer, using the

Card-to-Card mode of transaction. The service allows IDBI customer to transfer money to any

VISA Credit/Debit Cardholder in India, even through ATM/Internet Banking.

IDBI also became the first Indian Bank to introduce online payment of Direct and Indirect

Taxes through the Internet.

It also became the first Indian bank to launch International Travel Cards in six foreign

currencies viz. US Dollar, which are accepted at all VISA card outlets.

IDBI also became the only Indian bank to introduce a web-enabled ATM with audio

capabilities.

IDBI tied up with Indian to unveil the Airline Ticketing Machine, a first of its kind retail

innovation that allows customers to book airline tickets through IDBI ATMs.

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CONCLUSION AND SUGESTIONS FINDINGS

lDBI Bank has witnessed a steady but modest growth in business volumes during the past few years.

The Bank has implemented a host of initiatives during this period. It recognizes that people, processes

and technology will build leadership position. It has brought in best of management talent from

foreign and private sector banks across various functionalities. It has significantly increased

investments in revamping the technology platform. It has moved the credit risk profile and tightened

credit and risk management processes. The Bank is focusing on attaining a dominant position in retail

banking and to consolidate, with some repositioning, the strengths already built in corporate banking.

The emphasis will be on lowering the cost of deposits, improving fee-based income, improving

operations efficiency and managing cost. Viewed in the backdrop of the macroeconomic outlook and

general outlook for banks, IDBI Bank has made commendable progress during the last few years,

consistently turning out performances, which are far superior to the overall Banking Industry

performance parameters.

Positive Capital Adequacy of the Bank: IDBI The NPA’s of banks have shown a declining trend since

the enactment of new legislative measures in 2002.Given the current socio-political scenario in the

country only such a tough legislation can succeed in bringing down the level of NPA’s. The

formulation of Asset Reconstruction Companies have help disposal of debt ridden assets in a very

smooth manner. Debt Recovery Tribunals have speeded up the judicial process of reclaiming an asset

to a great extent. The concept of settlement of dues between the bank and its creditors through LOK

ADALATS has taken off in a big way. This has lead to a decline in the level of NPA’s for the first

time in the history of the Indian Banking Sector. Such as been the impact of the new laws such that

some aggrieved parties have even approached the Supreme Court of India to get the new laws

annulled. The Supreme Court is currently hearing the petition challenging the validity of the

securitization ACT. But a lot more has to be done .The NPA level of our banks is way high than

international standards. One cannot ignore the fact that a part of the reduction in NPA’s is due to the

writing off bad loans by banks. Indian banks should take care to ensure that they give loans to credit

worthy customers. In this context the dictum “prevention is always better than cure” acts as the golden

rule to reduce NPA’s

Suggestions:-

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The challenges facing the Bank are massive but not insurmountable. Every challenge can be looked at

as giving an opportunity. To overcome these challenges, the Bank will need to look into the following

mentioned points:

Maximize earnings from Priority Sector through a well-defined strategy. Efforts should be made to

provide more advances to agricultural sectors as well as small-scale industries.

Control the level of Non-Performing Assets by making proper provisions for NPA’s.

Specialize and effectively address needs of well-defined target segments. This will enable the Bank to

offer advisory services on a proactive basis and to offer an effective tailored product range.

Develop excellent risk assessment capabilities. Bank’s risk management policies should be developed

in line with best practices prevailing in the industry across the world.

Device and exploit new sources of funds. For this, the Bank should built up a large customer base.

Thereby, the Bank will naturally target all quality accounts in the category .

Tap traditional sources in most cost efficient manner. Thus, the Bank will be a cost-effective provider

of high quality products and services to retail and corporate clients.

Have access to expertise, recruit talented people and address staff concerns to minimize attrition. The

Bank should provide the best environment to bring out quality performance from its employees. The

Bank has implemented a host of initiatives during the year under review. It recognizes that leadership

position will be built by people, processes and technology. It has brought in the best of management

talent from foreign and private sector banks across various functionalities. IDBI Bank is a progressive,

technology driven, professionally managed entity well geared to meet competition from existing as

well as new banks effectively.

Webpages

www.equitymaster .com

www.rbi.org.in

www.icai.org

www.idbibank.com

www.crisil.com

www.indiainfoline.com

www.nseindia.com

www.bseindia.com

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www.google.com

www.rru.worldbank.org

www.adb.org

www.rbi.org

www.statebankofindia.com

www.ilfsindia.com

www.idbi.com

www.icicibank.com

Annexure referred from RBI

1 Architecture of the INFINET

2 Design of terrestrial network and integration with VSAT Network

3 Access modes in the VSAT based INFINET

4 Applications Architecture

5 Schematic Application Architecture

6 Inter-branch reconciliation

7 Settlement Server Architecture

8 Standards for Security

9 Security Standards for Financial Applications

10 Situating Firewalls

11 A typical firewall configuration

12 Standards for message formats

13 Standards for System Software

14 Guidelines for a healthy outsourcing Strategy

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15 Data Warehousing and Data Mining

16 Extracts from the proposed Electronic Commerce Bill,1999

17 Technology Plan

18 Glossary of abbreviations used

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