CHAPTER: 1: INTRODUCTION OF BANKING

The development of banking is an inevitable precondition for the

healthy and rapid development of the national economic structure.
Banking institutions have contributed much to the development of the
developed countries of the world. Today we cannot imagine the business
world without banking institutions. Banking is as important as blood in
the human body. Due to the development of banking advances are
increased and business activities developing so it is rightly said, " The
development of banking is not only the root but also the result of the
development of the business world." After independence, the Indian
government also has taken a series of steps to develop the banking sector.
Due to considerable efforts of the government, today we have a number
of banks such as Reserve Bank of India, State Bank of India, nationalised
commercial banks, Industrial Banks and cooperative banks. Indian Banks
contribute a lot to the development of agriculture, and trade and industrial
sectors. Even today the banking system of India possess certain
limitations, but one cannot doubt its important role in the development of
the Indian economy.

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 INTRODUCTION OF CO-OPERATIVE BANK

Unlike commercial banks which are engaged in serving the

industrial and commercial sectors of the economy, the cooperative banks,
on the other hand provide credit and allied facilities to the rural and
agricultural sectors. The dawn of this country saw the evolution
cooperative movement in India. Cooperative societies came into being
when the Cooperative Societies Act, 1904, was enacted. The movement
was started with the aim of providing farmers funds with low rates of
interest so that exploitation by the village moneylenders is foiled. The
Act provided for the formation of cooperative credit societies and a
number of small primary credit societies were established in various parts
of the country. These societies, however, could not mobilise enough
resources as compared to loans demanded by its members. This led to the
enactment of a new act in 1912. The Cooperative Societies Act of 1912
provided for starting Central Cooperative Banks with headquarters
located in urban centers. In 1914, necessary steps were taken by the then
government to strengthen the cooperative movement .The government
appointed the Maclagan Committee to look into and make
recommendations for the improvement of a State Cooperative Bank for
each State. The state Cooperative Bank is formed by the federation of
Central Cooperative Banks functioning at the district level. The present
organisation of the cooperatives in India is based on the recommendation
made by the Maclagan Committee. In 1919, the Montague Chemsford
Act made Cooperation a provincial subject. Since then, separate
Cooperative Societies Acts have been passed by all state governments.
Although cooperative banks in India have shown progress since
their establishment, there still exists a number of defects in the

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organisation. This has led qualitative improvement to suffer. However,
the Reserve Bank of India took the initiative to revitalize, reorganize and
promote the growth of cooperative banking in India. Under the Banking
Regulation Act of 1949, Cooperative banks have been brought under the
control of the Reserve Bank of Bank.
Farmers in India are scattered all over the country and need short-
term small borrowings for agricultural purposes. This need is not fulfilled
by commercial banks which are unsuited for financing agriculture. Land
which these farmers can offer to cover bank advances is not generally
accepted as security by commercial banks. Therefore, special types of
banks are necessary for the financing of agriculture. Co-operative banks
are best suited for this purpose. The object of co-operative banks is to
offer banking facilities to persons of limited means requiring credit for
productive purposes in the use of the land and labour at their disposal.
The co-operative banking structure in India may be divided into
three component parts, viz.,

1. Primary co-operative credit societies.

2. Central / district co-operative banks.
3. State co-operative banks (also called as apex banks) at the top.

1. Primary co-operative credit societies: -

Primary credit society is at the bottom of the three-tier structure of

co-operative banks.

The society normally contacts farmers. So, only a few people living
within the area of society are admitted as members. Here individuals of a
particular area meet together inspired by sentiment of co-operation. Every

3
member has to pay his share In a share capital. The price of a share is
nominal so that even a common man can be a member. The functioning
of such society is limited. The society is managed by elected people.
Hon-secretary and members of working committee. Such a society
collects its funds by admission fees ,share capital and deposit of people.
In case of need such society also get finance from central co-operative
banks or state co-operative bank. Normally society grants loans to
members on individual responsibility.

2. District co-operative Bank: -

This bank is a link joining state co-operative bank with the primary
credit society. After the report of all India rural advances inquiry
committee in 1945, the central co-operative banks earned much
importance the flow of rural advances reach to every farmer's home
through this bank via credit society. In reality central co-operative banks
were establish to supply financial help to primary credit society.

3. State Co-operative Banks: -

This is the apex bank in the three tier structure set up of the
country. Maclegan Committee appointed in 1974 recommended to
establish at least one state co-operative bank per state. To day every state
has the state co-operative bank. This bank especially co-operative
ordinates them and give required guidance. There were approximately 26
state co-operative banks at the end of 77/78 in India.

Since state co-operative bank is an apex bank, its main function is

co-ordination of co-operative lending, its balance and controlling. The
financial help for co-operative lending activity given by Reserve Bank is
also given through state co-operative bank.

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 Chapter: 2: History of The Bank

First decade of 20th century has a very important place in the

history of cooperation for entire country and Surat District as well. Many
cooperation institutions were initiated during this period. First coop.
Society in Surat District was registered at Degam, Taluka Chikhli on
dated 23-5-1906 (Now in Bulsar District).
In the year 1908, with the efforts of Late Shri B.A.Modi and Shri
K.G.Desai. The Surat Dist co-op. union Ltd., was registered on dated 17-
6-1909. It was this institution which is known as THE SURAT
DISTRICT CO.OP. BANK LTD.
When the Union was empowered to establish new societies etc. By
1921 The Surat District co.op. (Urban) union was initiated. In 1923 The
Surat District Co.op. Bank Ltd., The work extended to the entire Surat
District, which had 21 talukas and a vast working area with geographical
variation. The coastal area which included city of Surat and towns like
Navasari - Bulsar - Bilimora the fertile flat and than totally tribal area
with hills and dense forests.
The Vast Surat District was bifurcated in 1965 and of Bulsar was
separated. At present there are 14 talukas in the district, of which 9 are in
the tribal area.
Bank had a separated department for agriculture advances form
1944, and become an effective central agency for coordination and
smooth flow of finance to cooperative sector in the district.
After 1960 when shree Khedut Sahakari Khand Udyog Mandali
Ltd., Bardoli came into existence, the entire Surat District gradually
become a sugar belt. All exiting eight-sugar factories had teething
financial troubles in the beginning, Bank had provided them enough
finance and assistance even for share capital also. By lapse of time Sugar

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cane has now become now become principal crop in the district our of
total cultivable area of 419000 hectares 89800 hectares is under sugar
cane cultivation. This revolution in agriculture was amply supported by
The Surat District Co.op. Bank Ltd., These factories have became main
strength of the economic structure of the district, particularly for farmers.
Totally together these factories have a crushing capacity of 37500 tons
per day. Annual sugar production exceeds Rs.500/- crores. Bank has
sanctioned limits exceeding Rs.300/- crores to this sector.
In the year 1965 The Surat Dist.co.op. Bank was separated from
this bank after formation of Bulsar District from old Surat District. After
separation bank's Financial Position is as under.

No. Of Branches 15
Share Capital Rs. 0.22 Crores
Reserves Rs. 0.09 Crores
Deposits Rs. 3.06 Crores
Advances Rs. 1.71 crores

Management:

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 Since 1965 the structure of Board of directors has remained
unchanged. In all, there are 21 members on the Board as under.

One Director from each Taluka 13

Two Individual Directors 2
One Director from Surat City 1
Three nominated director by state 3
Government
One director from The Gujarat State 1
Co.op. Bank Ltd.
District Registrar (Co.op. Societies) 1
TOTAL MEMBERS 21

Past Chairman of the Board Shri P.K.Desai has been awarded

"Kaka Saheb Gadgil" award forhis outstanding services to the society. He
has also been awarded by the Gujarat State Co.op. Union by "Sahakari
Award". He is Director of the bank since 1952 and Chairman from 1967
to 1975 he continues to be the Chairman up to 8-01-2001.
Management has always remained progressive, be a challenge after
Bank Nationalization introduction of nonfarm advances, introduction of
New banking concepts in liberalized economy.
Board has formed committees for loans, staff matters, Legal
matters, and new construction etc. power have been delegated properly to
smoothen day to day working.

Deposits
Growth of deposit was steady and in harmony with Advances.
Deposit growth was unprecedented during 1994-'95. There was a huge

7
demand from sugar co.op. Factories for funds, Bank has to resort short
term planning for funds.
During the same period RBI removed the interest restrictions on
deposits.
Advances
Major chunk and advances goes to sugar sector:
It is obvious true as the major crop of the district is sugar cane.
There are 8 sugar factories in Co-operative sector, all of them
totally have a turnover exceeding Rs. 600/- crores and as such bank's
major share goes to this sector.
It the last decade, bank has gradually paid more attention to non-
agriculture and Individual advances. New schemes, to finance for
consumer durable, vehicles, House construction. Professional loans also
have been introduced. More attention is paid to develop banking routing
business also. Bank has actively taken up the steps for diversification of
Loan portfolio. Powers are delighted to the branch Manager to sanction
loans up to
Rs.1, 00,000/- for 'A1-Grade branch and Rs.50, 000/- for 'B' Grade
branch under individual confirm sector loans from dec.'98. Also power
are delighted to the branch Manager to sanction loans up to Rs.50, 000/-
for all branch under individual farm sector loans from Nov.'99.

YEAR TOTAL ADVANCES

1965 2.45
1985 45.03
1995 216.77
1998 293.01

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 1999 236.66

Bank has also assisted cooperative institutions and farmers in hours

of crisis, in formation of a sugar factory, sale purchases union, SUMUL.
In a natural calamity like floods, riots etc bank has assisted them oftenly.
Bank has faced successfully overcome may challenges. Banks,
management and staff has worked hand to hand. Mutual confidence
between staff union and management has benefited the organization. The
bank was judged as best bank by NABARD & Beat performance award
for the year 1995-'96 was awarded by NABARD. Reserve bank of India
has granted license to the bank to carry on banking business in India, very
few DCCBs are having such license. Bank has always been securing
Audit classification under category 'A' and has paid highest permissible
dividend under state co.op. Act. To its members.
Under the new environment of liberalization bank has to plan for
modernization of its activities. To keep a pace with modern banking
system, bank has accepted to go for Automation of banking work, at
present five branches are computerized. Has to plan its resources in more
coordinated way and search for new avenues to maximize the profit, has
to provide more effective customer service, to market its products
successfully. This all has to be achieved keeping in view the co-operative
principles and farmer's interest.

CHAPTER 3: OBJECTIVSS OF THE PROJECT

• The main objective of behind this project is to analysis the

actual position of NPA deeply

• To know about the NPA classification and provisioning

requirement for non-performing asset:

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• To calculate the total non-performing asset and compare with other
banks and on the basis to decide the growth rate of different bank.

• The main object is know about the proper system of bank for
reducing non-performing asset or for conversion of non-performing
asset.

• To know the various and strategies for non-performing asset for the
bank.

• To learn about how to solve the problem of non-performing asset.

CHAPTER 4 : LIMITATION

o The bank I have chosen is totally on rural or agricultural bases, so

the bank cannot provide some English literature for helping me
in project.

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 o It is on rural basis, and other banks, which are comparing and
with it are not only rural basis so comparison will not made
properly.

o This bank is on basis of rural or agricultural part so it will not

accept the system of urban banks.

o The amount of loans and advances are also limited so it is obvious

that the non-performing of this bank will les than the other
comparatives banks.

o Non performing asset cannot be totally converted into performing

asset but only these are some solutions for reducing it.

CHAPTER: 5: METHODOLOGY OF THE PROJECT

This project is prepared on Non-Performing Assets. The

methodology used in this project is as follows.

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 • First of all I have the basis studied the basic concept of NPA.
• After the introduction, the asset classification is described and the
provisioning norms for it by NAARD are shown.
• All the above matters according to narsimha committee is shown.
• Then according to NPA statement the NPA analysis is done on the
basis of previous year’s financial data.
• Comparative statement on the basis of various ratios is done.
• At, last the recovery part is shown & various reasons, strategies,
warning signals, recovery procedure and steps for reducing NPA
are included.

CHAPTER:6:

INTRODUCTION OF NON PERFORMANCE ASSET

 WHAT IS NPA?

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 A non performing asset is defined generally as a credit facility in
respect of which interest or installment of principal is in areas for two
quarters or more, however, in respect of agriculture advances if interest
has not been paid during the last two harvest seasons ( covering two half
years) after it has become a past due (i.e. days beyond the due date). Such
advances should be treated as NPA. It is important to note that the
overdue installment only as per the guidelines of RBI on prudential
norms.

 Standard assets
Standard assets is one which does not disclosed and problem and
which does not carry more than normal risk attached to business. Thus an
assets, which is not NPA, may be treated as standard or Good assets.
Such account holders/customers pay interest in cash regularly on
prescribed dates and repay the amount of installment of loan on the due
dates or before the grace period if granted.

 Sub-standard asset
A non-performing asset may be classified as sub-standard asset
when the asset had remained overdue for a period not exceeding three
years. An asset where the terms and conditions of the loans regarding
payment of interest and repayment of principals have been renegotiated
or rescheduled should be classified as substandard for the last two years
of satisfactory performance. Performance can be judged from the
recovery of interest and repayment of installment of principal of loan
credit facility.

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 Double Asset
A non-performing asset may be classified as doubtful asset when
the asset had remained overdue for a continuous period exceeding three
years.

 Loan asset
Loss asset are those where loss was identified by the bank
auditor/RBI/NABARD inspections but the amount has not been written
off wholly or partially. An asset which is considered unrealizable and/or
of such little value that its continuance as a doubtful asset is not
worthwhile, should be considered as loss asset.

 Past Due
A credit facility is treated as past due when it remains outstanding
for days beyond the due date. In agriculture crop loans due dated are
fixed in accordance with harvesting seasons different types of copies I.e.
kharif Corp., cash crop rabicrop etc. In investment term loan due dates or
fixed after some grace period depending the returns to be derived from in
investment.

GUIDELINES ON PRUDENTIAL NORMS INCOME

RECOGNITION, ASSET CLASSIFICATION AND
PROVISIONING NORMS

INCOME RECOGNITION NORMS TO CO-OPERATIVE BANKS

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 The prudential norms for income recognition should be
based on record of recovery and therefore SCBs/CCBs should not take
unrealized income to profit and loss accounts. However in the case of
certain states where the state co-op act provides for taking such
unrealized interest to income head in the P & L A/C. it is necessary for
those SCBs to make full provisioning for equivalent amount by
charging to P & L A/C. In other words, the SCBs which are charging
for interest to all overdue loans and if such interest remains unrealized
the same may be taken to income account provided matching provision
is fully made for the same by charging to P & L A/C. Accured interest
taken to income account in the previous year should also be provided
in full in case the same becomes overdue.

 Fee, commission and other income may be treated as the

income only when the account is classified as standard; Besides, a
matching provision should be created to the extent such items were
treated as income in the previous year but not realized in the
subsequent year.

 Fee and commission earned by banks as a result of

renegotiation or scheduling of outstanding debts should be recognized
on an accrual basis over the period of time covering the renegotiated
of credit.
 Even in the case of credit facilities backed by
Government guarantee, over due interest can be taken to P & L A/C.
only in case of matching provision is made.

15
 The bills purchased should be treated as overdue if the
same remain unpaid. Interest may be charged to such bills and the
same may be P & L A/C provided matching provision is made.

NORMS FOR TREATING LOANS/ADVANCES ETC., AS NPA

(OVERDUE) FOR THE PURPOSE OF ASSET CLASSIFICATION

 Definition of Non-performing asset (NPA)

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 A credit facility is treated as past due when it remains outstanding
for Days beyond the due date, A non-performing asset (NPA) is defined
generally as a credit facility in respect of which interest or installment of
principal is in arrears for quarters or more.

 Treatment of Agricultural Advances

In respect of advances granted for agricultural purposes where
interest payment is on a half yearly basis, In other words, if interest has
not been paid during the last two seasons of harvest(covering two half
years) after it has become past due when such an advance should be
treated as NPA.

 Treatment of Advances for a Allied Agricultural

Activities As Well As the Non-Farm Sector
Credit facility granted for other allied agricultural activities as well
as for non-farm sector activities should be treated as NPA, if amount of
installments of principal and/or interest remain outstanding for a period
of 30 days beyond two quarters from the due date.

 Term Loans (All Types)

Loans in respect of which interest or installments of principal
amount remained as overdue for two quarters as on balance sheet date
may be treated as NPA.

17
 Project/Housing Loans, Etc.
In respect of project (industry and plantation, etc.) where
moratorium is given for payment, loans become due only after
moratorium or gestation period is over i.e. such a loan becomes overdue
if installment is not paid on due date. Similarly, in case of housing loans
or similar advances granted to staff members where interest is payable
after recovery of principal, such loans should be classified as overdue
(NPA) when there is a default in repayment of principal on due date of
payment and overdue criteria will be the basis for classification of asset.

TREATEMENT OF DIFFERENT FACILITIES TO BORROWER

AS OVERDUE (NPA)

Short term agricultural advances are granted by SCBs to PACS for

the purpose of leading. In respect of advances as well as advances for
other purpose, if any, granted under lending system, only that particular
facility which become irregular should be treated as overdue (NPA) and
not all other facilities granted to a borrower, all such loans should be
become overdue (NPA) even if one loan a/c becomes overdue (NPA).

NORMS FOR ASSET CLASSIFICATION

 CRITERIA FOR CLASSIFICATION OF ASSET

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 Classification of agricultural and non-agricultural loans is required
to be done into four categories, on the basis of age overdue, as under.

 Good/standard Assets
Good asset is one which can not disclose any problem and which
does not carry more than normal risk attached to business. Thus, in
general, all the current loans, ST agricultural and non-agricultural loan
which have not become NPA may be treated as standard asset.

 Sub-standard Assets
A non-performing may be classified as sub-standard on the
following basis of criteria.

1) An Asset which has remained overdue for a period not

exceeding
3 years in respect of both agricultural and non agricultural loan
should be treated as sub standard.

2) In case of all types of loans, where installments are overdue

for a
Period not exceeding 3 years, the entire outstanding in term
loan should be treated as sub standard.

3) An asset, where the terms and condition of the loans regarding

payment of interest and repayment of principal have been
renegotiated rescheduled after commencement of production,
should be classified as substandard and should remain so in

19
 such category for at least two years of satisfactory performance
under the renegotiated terms In other words, the classification
of asset should be upgraded merely as a result of rescheduling
unless there is satisfactory compliance of the above condition.

 Doubtful Asset
A non performing asset may be classified as doubtful on the basis
of following criteria.

1) An Asset which has remained overdue for a period exceeding 3

years in respect of both agricultural and nonagricultural loans
should be treated as doubtful asset.
2) In case of all type of loans, where installments are overdue for
more than 3 years, the entire outstanding in terms of loans
should be treated as doubtful

 Loss Asset
Loss asset are those where loss is identified by the bank inspectors
but amount has not been written off wholly or party. In other words an
asset which is considered un realizable or such little value of its
continuance as a doubtful asset is not worthwhile, should be treated as a
loss asset such loss asset will include overdue loans in which cases-

1) Decreases of executions petitions have been time barred or

documents are loss or no other legal proof is available to claim
the debt.
2) Where the members and their sureties are declared insolvent or
have died leaving no tangible assets.

20
 3) Where the members are left the area of operation of the society
leaving no properly and their securities have also no means to
pay the dues.
4) Where the loans is fictitious or when gross utilization is notified
5) An amount which can not be recovered in case of liquidated
societies.

PROVISIONING NORMS ON THE BASIS OF ASSET

CLASSIFICATION

21
1) Provisioning is necessary considering the value of security charges
to the banks over a period of time. Therefore, after the assets of SCBs
are classified in to various categories necessary provision has to be
made for the same. The details of provisioning requirements in the
respects of various categories of assets are mention below.

2) The following aspects, however, may be kept in view while

making provisions.

A. Agricultural Loans As Secured

All agricultural loans may be treated as fully secured as the
same are disbursed against charge on land as provided in the
respective state co-operative societies rules.

B. Treatment to P.F. and gratuity Amount

Liability towards PF and gratuity should be estimated on
actuarial basis and fully provided for.

C. Loans exempted from provisioning

Advances against term deposit NCSs eligible for surrender,
life policies are exempted from provisioning. Therefore, the above
account may not be classified as NPA.

D. Loans against gold/Govt. securities

Advances against gold, government securities are exempted
from provisioning requirements.

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E. Depreciation in investment-accounting procedure.
The investment portfolio of the bank would normally consist
of approved securities and other shares, debentures and bonds of
co-operative and other institution. Investment in the approved
securities should be bifurcated into permanent and current
investments. Permanent investment are those, which banks intend
to hold till maturity and current investment are those, which bank
intend to deal in, that buy and sell 0 day-to-day basis. Bank should
keep not more than 50% of their investment in permanent category.
While the depreciation in respect of permanent investment is not
likely to affect their realizable value of maturity, depreciation need
not be provided for investments in the permanent category.
Investment in the current category should be carried at lower of
cost value or market value, on a consistent basis. Depreciations in
the current investments, if any, therefore be fully provided for.
Banks following a more prudent method of valuation (e.g. all the
investments marked to market) should continue to do so and there
should not be any slip back in their case.

Investment should be shown in the balance sheet net of

depreciation. It is however, open to bank to show the book value of
investment, the depreciation against and net amount of investments
separately.

As regard valuation of securities other than approved

securities they should be valued at lower of cost price or market

23
values. Investments in the shares of co-op. institutions, however,
may be valued at carrying cost price.

GENERAL GUIDELINES TO PRUDENTIAL NORMS

24
1. With a view to preparing the profit and loss a/c. and balance sheet,
reflecting bank’s actual financial health, a proper system for recognition
of income, classification of asset and provisioning on a prudential basis is
necessary. The prudential norms for recovery rather than on any
subjective consideration. Likewise, the classification of norms, regarding
provisions should be made on the basis of classifications of assets into
four different categories. In this connection, we advise that such
prudential norms have already been made applicable to SCBs with
suitable modification has been decided that these prudential norms should
be adopted by SCBs on prudential norms for income recognition, asset
classification and provisioning on the basis of classification of asset are
given in the Annexure enclosed. These guidelines may please be studied
carefully and arrangement made for their implication.

2. Year of Implementation
Banks are advised to implement the instructions from the
accounting year 1996-97. Each branch should undertake competent
officials from the internal inspection departments should verify the
exercise of classifications of assets, making provisions and the same. The
bank should also get the classification, verified by auditors and a
certification to this effect obtain

from the Auditors. The balance sheet for the year ending 31.03.97 should
reflect the financial position of the bank as arrived at on the basis of
instructions now issued to banks. After the exercise is completed banks

25
are advised to prepare a comprehensive note indicating the banks
position in the light of instructions contained in the circular and put it up
loss a/c and balance sheet as required under sec. 29 of B.R. act, (AACS)
and instructions issued from time to time on the subject.

3. Provisioning Requirement - Phasing

In order to give some time to co-operative banks to adjust
themselves to the new system, phasing of provision is suggested as
indicated below;

a) First Year
100% in respect of loss assets and less than 30% of the
provisioning needed in respect of sub-standard and doubtful assets.

b) Second Year

The balance provisioning needed in respect of the above

categories of assets together with current provision needed in
respect of assets classified in the second year. In other words, all
the doubtful and sub-standard assets have to be provided fully from
second year onwards in addition to 100% for loss assets.

The requirements of state co-operative societies Acts and or

Rules made there under or other statutory attachment may continue
to be followed if they are more stringent than the guidelines now
prescribed by us.
A copy of this latter is being sent to the RCS of your state
Territory for his information with request to advised the statutory

26
Auditors of SCBs to look into compliance of the guidelines at the
time of their audit.

27
 INCOME RECOGNITION

Till march 1992, some commercial banks have been accounting

interest income on accrual basis i.e. total interest accrued were being
accounted as interest income irrespective of its actual collection. Based
on the recommendation of Mr. narsimhan committee, RBI has now issued
a directive that the policy of income recognition should be objective and
it should be based on the record, of recovery rather than on any subjective
consideration.

It has been suggested that the income from the non performing
asset (NPA) cannot be recognized on accrual basis unless the same is
actually received.
For the purpose of this prudential accounting, past due status have
been defined as follows;

 PAST DUE STATUS

Any amount, which remains outstanding for 30 days beyond the date will
be reckoned as ‘past due’ whereas an asset become NPA, when it ceases
to generate income for bank.

NPA is defined as a credit facility in respect of which the interest

has remained unpaid for a period of four quarters during the year ending
31st march, 1993, three quarterly during the year ending 31st march, 1994,
and two quarters during the year ending 31st march, 1995, and onwards.
This shows that from 31st march, 1995, onwards, interest pending
collection for more than 2 quarters prior to the date of the balance sheet

28
should not be accounted as income. This is applicable to term loans, cash
credits, overdrafts and other types of advances also.

In respect of advance granted for agricultural purposes, where

interest payment is on half yearly basis synchronizing with harvest, then
the bank should adopt agricultural seasons after “past due” then such
advance will become NPA.

In respect of cash credits and over drafts, in addition to the above

norms, the account should be treated as ‘out of order’ if the out standing
balance remains continuously in excess of the sanctioned limits drawing
power. In cases, where the outstanding balance is within the sanctioned
limit/drawing power, but there are no credits continuously for six months
as on the date of balance sheet or credit are not enough to cover the
interest debited during the same period, this accounts should be treated as
‘out of order’.

 REMARKS ON CO-OPERATIVE BANKS

In the light of the prescription illustrated above, it is of urgent necessary

that the co-operative banks also implement this prudential norms
either into or with modification in a planned and phased manner. This
prescription has also been implemented for the urban co-operative
banks. The following critical points may come up in the course of the
implementation of the above prudential norms.

29
As per the existing accounting system in the co-operative banks, the
interest income is sanctioned on accrual basis. But a corresponding
provision as ‘ overdue reserves’ is being made for the overdue interest in
respect of-

I. Interest accrued on loans and demanded during the period for which it
remains unrealized as on the date of the balance sheet.

II. Interest realize by debiting un-renewed cash credits and overdrafts.

But as per prudential norms prescribed by RBI for commercial

banks, a provision should be made for the interest accrued on the non
performing assets. It indicates that no such provision is required to be
made for the interest accrued on the asset till it becomes NPA. Whereas,
the system now being followed by the co-operative banks, regarding
income recognition ensures that interest overdue on irrespective of period
of overdue is not included as income. Hence the existing income
recognition norm of co-operative banks is more stringent than those
prescribed by RBI for commercial banks.

To illustrate the interest accrued and due on a particular accounts

as on 31st December. 1992 can be treated as income, even thought it is not
realized as on 31st march 1993, as per the norms prescribed by the RBI
for commercial banks. But in case of co-op. banks, even the interest
accrued and due for payment on 31st march 1993, if not realized then it
will not be treated as income for the purpose of profit as on 31st march
1993.

30
 SYSTEM OF REVERSAL OF UNREALISED INTEREST

As per the state co-operative society Act and by Low of the co-
operative banks, at last 40% of the profit each year is to be appropriated
to statutory Reserve Fund and Agriculture Credit Stabilization fund at the
rate of 25% and 15% respectively. the remaining amount of profit is also
appropriated as per by low provisions. But there is no system of carrying
over the profit or part of here is required to be made, then there may not
be sufficient profit left in that year to carry out such reversal.

31
 TRANSPARENCY IN ACCOUNTS & PROVISIONING
REQUIREMENTS AND ITS LIKELY IMPACT ON RURAL
CREDIT

Government of India set-up a committee on financial system which

is known as narsimhan committee to examine all aspects relating to the
structure, organization, functions, procedure of the financial system of
our country including banking and non banking organizations.

On consequent upon the nationalization of commercial co-

operative banks, exhibits true picture and become transparent. Here it is
humbly tried to examine and to study such recommendation on income
recognition, asset classification and provisioning on P & L a/c. and its
likely impact on rural credit provided by co-operative bank as well as
commercial bank.

1) INCOME RECOGNITION

The committee was of the view that the banks in India should
follow the international practice of treating an account as non-performing
asset (NPA) when interest is overdue for at least two quarters. No income
should be recognized on such accounts. Having accepted this
recommendation, the RBI has already issued guidelines to all scheduled
commercial banks indicating that an amount under any credit facility to
be treated as ‘ past due’ when it has remind outstanding for 10days
beyond the due date. Further, a NPA should be defined as a credit facility
I respect of which interest has reminded unpaid for period of our quarters
during the year ending March 1933, three quarters during the year ending

32
31st March 1994 & two quarters during the year ending 31st March 1995
and onwards. N case of agricultural loans the account will be treated as
NPA if interest has not been paid during the last two seasons of harvest
after it has become past due.

2) The bank should not charge and take to income account interest on all
NPAs. The RBI instructions indicate that the interest accrued and credited
to income account only during 1991-92 with respect to NPAs should be
reversed or provided for on the current accounting period i.e. 1992-93 if
uncollected.

3) For applying these norms credit facilities with outstanding balance of

Rs.25000/- and above alone need e considered. Credit facilities backed by
government guarantees though ‘past due’ should not be treated as NPA.

(4) As in the case of income reorganization, the provisioning norms will

apply only for such credit facilities with an outstanding balance of
Rs.25000/- and above, however, in respect of amounts below Rs.25000/-
aggregate provision to the extent of 2.5% of the total outstanding should
be made as prudential norms. Incase of advances guaranteed by ECGC
provision should be made only for the balance in excess of the amount
guaranteed by this corporations. The banks also been allowed to face half
of their provision requirements during the year 1992-93 to the subsequent
year.

33
(5) Transparency in accounts

The committee also felt that the banks balance should follow the
recommendation of the International Accountant Standards (IAS).
Committee with regard to transparency and disclosures.

(6) Income recognition

The income recognition norms, prior to the fresh guidelines issued

by the RBI, were not aligned to the international norms as recommitted
by the committee. The earlier guidelines required scheduled commercial
banks not to recognize income in respect of degree, suit field and identify
bad doubtful accounts. The application of these norms allowed a major of
subjective ness compare to the objective assessment on income
reorganization to be followed under the IAS norms. It has been
understood that most of the scheduled commercial bank to which the
norms where apply had indicated that the recognition of income as per
the prudential nouns would put them into losses, leading to the revision of
the norms by the RBI in December 1992. the separate treatment of
agriculture accounts for classifying them as NPA being co related to
harvest seasons is appropriate logical.

(7) As per the provisions of sections 29 and 31 of the BR act 1949 the co
operatives are require to take the total interest accrued to the profit and
loss account and make full provisions for the interests not realized.
However the provisions actually made may not be adequate in many
cases. since the BR act does not cover all the co-operatives, 1949 some of
them follow a system of taking only the realize interest to the profit and
loss account. If any notice in this regard are followed up for rectification.

34
(8) Provisioning requirements.

The need for an objective definition to identify non-performing

assets has been felt since as the Health Code Classification applicable
leaves much to the discretion of the individual banks. The classification
into four bored groups, as suggested by the committee, is likely to
minimize the subjective element. Extent of provision to be made in
respect of the assets will now depend upon their classification into four
groups with specific time dimensions. It is understood that the proposal to
provide tax incentives to induce to make adequate provisions against loan
losses is under consideration.

(9) Transparency in accounts

Under the provision of the B.R. Act 1949 the RBI has already
introduce a new format for reporting the annual accounts which, among
others, in corporate number of schedules for reporting item wise brake
up. The schedule commercial bank s have reported there annual accounts
for the final year 1991-1992 as per the new format. However it has been
felt that the co-operatives may continue to report their annual accounts in
the existing formats since the requisite data needed for the monitoring
and analysis is already available them.

35
 CHAPTER 7 : COMPARATIVE FINANCIAL STATEMENT

As the name indicates we simply compare the changes, which have

taken place in the various items of financial statements, in percentage
terms. The increase and the decrease in various items of assets and
liability and similarly the changes in the figures of profit and loss account
indicate the effects of a business being conducted during certain period.

 SURAT DISTRICT CO-OPERATIVE BANK

PARTICULARS 2000-2001 2001-2002 2002-2003

Standard Asset 33431.85 43597.49 37206.50
Sub-standard 785.39 794.95 793.48
Asset
Doubtful Asset 1003.63 1352.32 1145.38
Loss Asset 241.11 263.58 288.98
Total Provision 646.01 747.65 846.47
Outside Liability 99845.70 110574.59 113999.72
Capital & Surplus 6934.53 7559.43 8233.94
Interest Earned 2106.91 2313.40 1932.33
Interest Paid 236.24 234.37 215.58
Total Assets 113357.09 126855.34 128395.66

 PRIME DISTRICT CO-OPERATIVE BANK

PARTICULARS 2000-2001 2001-2002 2002-2003

36
Standard Asset 4722.50 6020.56 7375.84
Sub-standard 138.01 210.85 290.65
Asset
Doubtful Asset 58.38 80.34 110.69
Loss Asset ---- ---- ----
Total Provision 21.28 18.78 14.24
Outside Liability 8324.59 9981.50 13434.87
Capital & Surplus 851.97 1215.84 1688.79
Interest Earned 1028.03 1442.27 1784.13
Interest Paid 517.04 754.09 859.77
Total Assets 9488 14932 23608

CHAPTER: 8: RATIO ANALYSIS

A ratio can be worked out to between two variables having either

cause and effect relationship or connected with other in some other
manner. These two variables can be selected either from balance sheet
and another from profit and loss account.

37
 Ratio are expressed in mathematical terms, like percentage or the
number of time of or in numbers. Some ratio are better expressed when
worked out in percentage like the gross or operating profit to sales. But
certain ratios appear to be more effective when expressed in number of
times like the stocks turnover.

The following ratios are found out for ratio analysis as well as
comparative statement analysis.

• Gross NPA Ratio

• Net NPA Ratio
• Problem Asset Ratio
• Depositor’s Safety Ratio
• Shareholder’s Risk Ratio
• Provisions Ratio
• Interest Spread Ration
• Sub-standard Asset Ration
• Doubtful Asset Ration
• Loss Asset Ratio

RATIO ANALYSIS

1. GROSS NPA RATIO

Gross NPA is sum of all the loan assets that are classified as NPA
as per the RBI guidelines as on the balance sheet data. Gross NPA ratio is
the ratio of gross NPA to gross advantages of the bank. When it is to be
expressed in percentage, it is known as gross NPA percentage.

38
 Gross NPA Ratio = Gross NPAs x 100
Gross advances
2002-2003 2001-2002 2000-2001
BANK
5.65% 5.23% 5.75%
SURAT DIST.
5.16% 4.16% 3.99%
PRIME

Gross NPA Ratio

8
5.65 5.75
Percentage

5.16 5.23
6
4.16 3.99
4
2
0
2002-03 2001-02 2000-01
Year

Surat Prime

Interpretation:

Above table and chart indicates the quality of credit portfolio of the
banks. High gross NPA ration indicates low quality credit portfolio of the
bank and vice-versa. We can see from the above two banks gross NPA
ratio that is Surat district co-operative bank has stable at 5 to 6% and
prime bank ratio has increasing from the last 3 year. It indicates that the
quality of credit portfolio of Surat District Bank is lower.

2. NET NPA RATIO :

The net NPA percentage is the ration of NPA to net advances,

whereas the net NPA can be simply worked out as the gross NPA minus

39
provisions held for NPA account, and net advances can be simply worked

out as the gross advances minus provisions held for the NPA account.

Net NPA Ratio = Net NPA x 100

Net Advances

Net NPA Ratio = Net NPA - provisions x 100

Gross advances - provisions

2002-2003 2001-2002 2000-2001

BANK
3.58% 3.67% 4%
SURAT DIST.
4.99% 4.33% 3.57%
PRIME

Net NPA Ratio

6 4.99
5 4.33 4 3.75
Percentage

3.58 3.67
4
3
2
1
0
2002-03 2001-02 2000-01
Year

Surat Prime

Interpretation:

Above table and charts indicates the degree of risk in the portfolio
of the bank. High NPA ratio indicates high quantity of the risky assets in
the bank for which no provision was made. Above table of two banks are
indicates that the net NPA ration of the Surat district bank was higher
than prime bank. It saws that Surat district bank consist of risky assets on

40
which no provision has been made. It will become dangerous in the long-
term solvency.

3. PROBLEM ASSET RATIO:

It is the ratio of gross NPA to total assets of the bank.

Problem asset Ratio = Gross NPAs x 100

Total asset
2002-2003 2001-2002 2000-2001
BANK
1.74% 1.90% 1.8%
SURAT DIST.
1.70% 1.95% 2.07%
PRIME

Problem Asset Ratio

2.5 2.07
1.9 1.95
2 1.74 1.7 1.8
Percentage

1.5
1
0.5
0
2002-03 2001-02 2000-01
Year

Surat Prime

Interpretation:
It has been direct bearing on return of assets as well as liquidity
risk management of the bank. High problem assets ratio means high
liquid. Above table shows that Surat District bank becomes successful in
achieving lower problem asset ratio whereas prime bank have
comparatively higher ratio indicates.

41
4. DEPOSITORS SAFETY RATIO :

It is also known as standard asset to total outside liquidity ratio.

Here standard asset means total standard loans assets and investments.
Outside liquidities are total liquidities minus capital and reserves.

Depositors safety Ratio = Total Standard Asset x 100

Total Outside liability

2002-2003 2001-2002 2000-2001

BANK
33.22% 39.43% 33.48%
SURAT DIST.
54.90% 60.32% 56.73%
PRIME

Depositors Safety Ratio

80
60.32 56.73
54.9
60
Percentage

39.43
33.22 33.48
40
20
0
2002-03 2001-02 2000-01

Year

Surat Prime

Interpretation:
It indicates the degree of safety of depositor’s money. The above
table of two bank saws the ratio of depositor’s safety ratio is lower than
compare to prime bank in each year. Surat District Bank should improve
in order to win the confidence of depositors.

5. SHAREHOLDERS RISK RATIO :

42
 It is the ratio of NET NPA to total of capital and reserve of the
bank.
Shareholder’s Risk Ratio = Net NPAs x 100
Total Capital & Surplus
2002-2003 2001-2002 2000-2001
BANK
16.78% 21.99% 20.10%
SURAT DIST.
22.92% 22.41% 20.55%
PRIME

Shareholder's Risk Ratio

25 22.92 21.99 22.41

20.1 20.55
20 16.78
Percentage

15
10
5
0
2002-03 2001-02 2000-01
Year

Surat Prime

Interpretation:
It indicates the degree of risk associated with the shareholders
investment. High ratio means high risk to the shareholder. Above table of
two bank indicates the prime bank is able to reduce the shareholder’s risk
in the last three years while in case of Surat district correlated-operative
bank’s ratio is moderate but increasing which may leads to divert their
funds to other bank which has lower risk. Bank should keep constant eye
on this ratio to maintain and attract the funds of shareholders.

43
6. PROVISION RATIO:
It is the ratio of total provision held in respect to gross NPA of the
bank.
Provision ratio = Total Provision x 100
Gross NPAs
2002-2003 2001-2002 2000-2001
BANK
38% 31% 31.67%
SURAT DIST.
3.55% 6.45% 10.84%
PRIME

Provision Ratio
38
40 31.67
31
30
Percentage

20
10.84
6.45
10 3.55

0
2002-03 2001-02 2000-01

Year

Surat Prime

Interpretation:
It indicates the degree of safety measures adapted by the banks. It
has direct bearing on profitability, dividend and safety of the shareholders
fund. If the provision ratio is less, it indicates that the bank has made
under provision. The above table indicates the provision ratio of two
bank’s which saws Surat district bank has more than 30% of its gross
NPA from last three year which saws over provision of NPA which
indicates that bank believe in top keep higher safety for profitability,

44
 dividend and safety of shareholder’s funds. The prime bank has not more
provision ratio so the bank has to improve this ratio.

7. INTEREST SPREAD RATIO:

This is the excess of total interest earn over the total interest
expanded.
( Interest earned during the year-
Interest Spread ratio = Interest paid during the year x 100
Standard Assets

2002-2003 2001-2002 2000-2001

BANK
4.61% 4.77% 5.60%
SURAT DIST.
12.53% 11.43% 10.82%
PRIME

Interest Spread Ratio

15 12.53
11.43 10.82
Percentage

10
5.6
4.61 4.77
5

0
2002-03 2001-02 2000-01
Year

Surat Prime

45
Interpretation:
This ratio indicates the efficiency of the bank in managing and
marching the interest expenditure and interest income effectively. Interest
spread is critical to a bank’s success as it exerts a strong influence on its
bottom line. The above table shows that Surat district bank is leading in
interest spread ratio compare to prime bank but we can also see that from
last three year its interest spread ratio increasing which indicates that
banks earning asset is increasing and non-performing account is rapidly
converting in the performing account.

8. SUBSTANDARD ASSETS
It is the ratio of total substandard assets to gross NPA of the bank.

Substandard assets = Total substandard Assets x 100

Gross NPAs

2002-2003 2001-2002 2000-2001

BANK
35.62% 32.97% 38.99%
SURAT DIST.
72.42% 72.41% 70.27%
PRIME

46
 Sub-Standard Asset Ratio

80 72.42 72.41 70.27

60
Percentage

35.62 38.99
32.97
40
20
0
2002-03 2001-02 2000-01
Year

Surat Prime

Interpretation:
It indicates the scope of up gradation / improvement in NPA.
Above table of different ratio of substandard shows that prime co-
operative Bank has highest ratio which means in all NPA’ substandard
ratio has major proportion which indicates that there is the highest scope
for advance up gradation on improvement because it will be very easy to
recover the loan as minimum duration of defaults. The ratio of Surat
district co-operative bank has not much scope of loan gradation or
improvement as their ratio is very low.

9. DOUBTFUL ASSET RATIO:

It is the ratio of total doubtful assets to gross NPA of the bank.

Doubtful Asset = Total doubtful Assets x 100

Gross NPAs

47
 2002-2003 2001-2002 2000-2001
BANK
51.41% 56.10% 49.19%
SURAT DIST.
27.58% 27.59% 29.73%
PRIME

Doubtful Asset Ratio

56.1
60 51.41 49.19
Percentage

40 27.59 29.73
27.58

20

0
2002-03 2001-02 2000-01

Year

Surat Prime

Interpretation:
It indicates scope of compromise of up NPA’s reduction. Above
table shows the Surat District Bank ratio is considerably decreasing for
the last three years, which implies that it has to go for compromise as its
substandard assets consist highest portion in the total NPA’s. While in
prime bank it remains very stable.

IN COMPARISON TO THE PREVIOUS YEAR PERFORMANCE

DISTRICT DISTRICT PTIME PRIME

RATIO (02-03) (01-02) (02-03) (01-02)

48
 Increase Increase Increase Increase
Gross NPA
Increase Increase Increase Increase
Net NPA
Increase Decrease Increase Increase
Gross NPA
Rat
io
Decrease Decrease Increase Increase
Net NPA
Rat
io
Decrease Increase Increase Increase
Problem
As
set
Rat
io
Decrease Increase Decrease Increase
Depositor’s
Saf
ety
Rat
io
Decrease Increase Increase Increase
Shareholder’s
ris
k
Rat
io
Increase Decrease Decrease Decrease
Provision
Rat
io
Decrease Decrease Increase Increase
Interest
Spr
ead
Rat
io
Increase Decrease Increase Increase
Sub-Standard
As

49
 set
Rat
io
Decrease Increase Decrease Decrease
Doubtful
As
set
Rat
io

WORKING

SURAT DISTRICT BANK FOR 2002-2003

1. Gross NPA Ratio = 2227.84 x 100

39434.34

= 5.65%

2. Net NPA Ratio = 2227.84-846.47 x 100

39434.34-846.47

= 3.58%

3. Problem Asset Ratio = 2227.84 x 100

128395.66

= 1.74%

4. Depositor’s Safety Ratio = 37206.5 x 100

113999.72

= 33.22%

5. Shareholder’s Risk Ratio = 2227.84-747.65 x 100

50
 8233.94

= 16.78%

6. Provision Ratio = 846.47 x 100

2227.84

= 38%

7. Interest Spread Ratio = 1932.33-215.58 x 100

37206.5

= 4.61%

8. Sub-standard Asset Ratio = 793.48 x 100

2227.84

= 35.62%

9. Doubt-full Asset Ratio = 1145.38 x 100

2227.84

= 51.41%

51
 CHAPTER: 9: FINDIGS

1) From the gross NPA Ratio of the bank in 2001 is 5.75%. Which
suddenly decreases in 2002 i.e. 5.23% by 0.52%. It is good for the
bank But in increases in 2003 i.e. 5.65% by 0.42%, which is bad
for the bank.
2) Gross NPA Ratio i.e. surat district co-operative bank has stable 5 to
6 % and Prime bank ratio has increases from the last three years.
So quality of credit portfolio of surat district bank is lower.
3) Net NPA Ratio of The Surat District Bank was higher than Prime
Bank. It shows that Surat District Bank consist of risky assets. It
will become dangerous in the long term solvency.
4) Depositor’s Safety ratio is lower than compare to prime bank in
each year. So Surat district bank should improve it.
5) The prime bank is reduce the share holder’s risk in last three years
while in case of surat District Bank Ratio is moderate but
increasing, So bank is divert their funds to other banks.

52
6) Provision ratio find that total provision divided gross NPAs of the
bank in 2001 is 31.67% and it decreasing in 2002 i.e. 31% by
0.67% and it also increases in 2003 i.e. 38% by 7% increases. So
we can say that firm keep higher safety to compare the prime bank.
7) Substandard Asset Ratio find that total substandard asset upon
gross NPAs of the bank in 2001 is 38.99% it decreases in 2002 i.e.
32.97% by 5.02% decrease and also increase in 2003 i.e. 35.62%
by increase 2.5% in other side prime bank ratio is increases its ratio
in each year.
8) Substandard ratio of surat district bank has not much scope of loan
gradation or improvement as their ratio is very low.

53
 CHAPTER: 10 : SUGGESTIONS

 Identifying reasons for turning of each account of a branch into

NPA is the most important factor for upgrading the asset quality, as
that would help initiate suitable steps to upgrade the accounts.

 The bank must focus on recovery form those borrows who have the
capacity to repay but are not repaying initiation of coercive action a
few such borrows may help.

 The recovery machinery of the bank has to be streamlined, targets

should be fixed for field officers / supervisors not only for recovery
in general but also in terms of upgrading number of existing NPAs.

 In the bank there should be a proper manpower planning.

 Bank should try to establish the branches in competitive market, so
it will increase their profit.
 Now a day more competition increase in the market so bank should
give more facility to its customers like ATM facilities by which it
can attract more and more customers.
 Bank has required increasing the cash and bank balances by
reducing the unnecessary expenses for future plan.

54
  Increase the advances, which is beneficial for the bank to meet
cash requirements from the out side.
 Bank should increase the deposits through the advertisement &
dividend payment etc.
 In last, I suggest that bank should update its website for better
marketing so customer see the bank's position progress.

BIBLIOGRAPHY

Introduction of company

• Annual Report 2000-2001/ 2001-2002 / 2002-2003.

Norms For NPAs

• NABARD guidelines 2000

 Ration Analysis

• IBA Bulletin October 2000

55