CHMM COLLEGE FOR ADVANCED STUDIES KERALA UNIVERSITY

NPAS IN EDUCATION LOAN

Internship Report submitted to SBI in completion of the requirement of Summer Internship at State Bank of India

NAME OF THE STUDENT: MUHAMMED ASHIK.M PROJECT MENTOR :BRANCH MANAGER OF SBI ATTINGAL: MR.AJAY

MAY 28 2013 TO AUGUST 13 2013

CERTIFICATE BY PROJECT MENTOR AT THE BANK

I have read the project/survey/study report submitted by MUHAMMED ASHIK.M and hereby certify that the student has successfully completed the project, in line with the objectives set for the same.

(Signature of the Mentor)

Subject: Evaluation Form

Name of the student Batch

: MUHAMMED ASHIK.M : 2013-14

Period of internship (DD/MM/YYYY): From May 28 2013 to August 13 2013 No. of hours worked every day Details of the Project Mentor Name Designation Contact details: Mob Email id :2 : : MR.AJAY : Branch manager of SBI ATTINGAL : 9447541000 : sbi.04063@sbi.com

Students Evaluation:

Sr. No. 1. 2. 3. 4. 5. 6. 7.

Attributes Initiative Reliability Ability to work in a team Confidence Punctuality and regularity Ability to understand new processes Analytical thinking & problem solving Total

Marks Awarded

Maximum Marks 10 5 5 5 5 10 10

50

Project/Survey/Study Evaluation:

Sr. No. 1. 2. 3. 4. 5. 6. 7.

Attributes Initiative Reliability Ability to work in a team Confidence Punctuality and regularity Ability to understand new processes Analytical thinking & problem solving Total

Marks Awarded

Maximum Marks 10 5 5 5 5 10 10

50

Special Mention if any:

Signature of the Project Mentor

Seal of State Bank of India

Acknowledgement

I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them. I am highly indebted to SBI Branch Manager of ATTINGAL MR AJAY for her guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project. I would like to express my gratitude towards my parents & members of State bank of India for their kind co-operation and encouragement which help me in completion of this project. I would like to express my special gratitude and thanks to industry persons for giving me such attention and time. My thanks and appreciations also go to my colleague in developing the project and people who have willingly helped me out with their abilities

ABSTRACT

The Education sector is in the concurrent list in India such that both the Centre and the State Governments have the responsibility to make budgetary allocations for its growth. Primary and Secondary education in India receive comparatively better allocation than the higher education. With the advent of the Educational Loan Scheme of the Public Sector Banks in India in 2001, there has been a fillip in the enrollment in higher education institutions. The educational loans(EL) paved theway for pursuing professional and job oriented courses offered at the self financing colleges and Universities to deservingstudents . An empirical study of 600 borrowers in the State of Kerala in India reveals that thelions share of the Non PerformingAssets(NPA) are traceable to the borrowers belonging to the General Nursing and Midwifery(GNM) and B.Tech Engineering courses.

KeyTable of contents

1. INTRODUCTION: Brief Profile Of Student Brief Profile Of Project Mentor Brief Profile Of Organization Nature Of Project Brief Objectives/Responsibilities Assigned By Project Mentor

2. FRAMEWORK OF STUDY o o o o o Theoretical Framework Scope Of The Study:Objectives Of The Study:Data Analysis:Limitations Of The Study:-

3. METHODOLOGY AND ANALYSIS o Methodology o Statement of Problem o Limitations of the study o Suggestion o Conclusion BIBLIOGRAPHY QUESTIONNAIRE

Introduction
Brief profile of student

Name Age Sex Address Phone no. Qualification Email id

: Anzar.A.S : 20 :M : Maruthimoottil veedu Palavacode,Kizhakkanela (p.o.) Paripally : 9746008196 : BCOM 5TH SEM : achoooz9@gmail.com

Brief profile of project mentor

Name of mentor Designation Phone No. Email id

: MR.GOORE : Branch Manager of Varkala SBI : 9447506655 : sbi.07845@sbi.com

 Brief profile of organization

The State Bank of India or SBI is a major state owned bank which was established back in 1806. While it has a large presence in India , it also has 82 foreign offices in 32 countries around the world. It provides banking and financial services products and services to Indian individual customers, NRI customers, agriculture and SME businesses as well as corporations. It services it customers through its large network across India including SBI's 21,000 ATMs, 10,000 SBI bank branches and 5,100 associate bank branches. They also engaged electronic self service channels such as Internet banking and mobile banking. SBI offers a wide range of savings and deposit account products to assist their customers to save including term deposit accounts (also called a fixed deposit account), a recurring deposit accounts or a savings bank accounts. HISTORY OF STATE BANK OF INDIA The roots of the State Bank of India rest in the first decade of 19th century, when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15 April 1840) and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were incorporated as joint stock companies, and were the result of the royal charters. These three banks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act, a right they retained until the formation of the Reserve Bank of India. The Presidency banks amalgamated on 27 January 1921, and the reorganized banking entity took as its name Imperial Bank of India. The Imperial Bank of India continued to remain a joint stock company.Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India, which is India's central bank, acquired a controlling interest in the Imperial Bank of India. On 30 April 1955 the Imperial Bank of India became the State Bank of India. The Govt. of India recently acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the RBI is the country's banking regulatory authority. In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries. On Sept 13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with State Bank of India. SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its affiliate, State Bank of Travancore, already had an extensive network in Kerala.

INTRODUCTION

A strong banking sector is important for flourishing economy. One of the most important and major roles played by banking sector is that of lending business. It is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which also results into economic growth. As there are pros and cons of everything, the same is with lending business that carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. The failure of the banking sector may have an adverse impact on other sectors. Non- performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade.This project deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing, projection of NPAs over next years in banks and concluding remarks. The magnitude of NPAs have a direct impact on Banks profitability legally they are not allowed to book income on such accounts and at the same time banks are forced to make provisions on such assets as per RBI guidelines The RBI has advised all State Co-operative Banks as well as the Central Co-operative Banks in the country to adopt prudential norms from the year ending 31-03-1997. These have been amended a number of times since 1997. As per their guidelines the meaning of NPAs, the norms regarding assets classification and provisioningIts now very known that the banks and financial institutions in India face the problem of amplification of nonperforming assets (NPAs) and the issue is becoming more and more unmanageable. In order to bring the situation under control, various steps have been taken. Among all other steps most important one was the introduction of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by Parliament, which was an important step towards elimination or reduction of NPAs.

An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days, However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facility granted by bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exist certain advances / credit facilities having performing status. The NPA level of our banks is way high than international standards. One cannot ignore the fact that a part of the reduction in NPAs 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 NPAs.

Objectives of the study

(i) To make an empirical study regarding the profile of the defaulters of educational loans in the state of Kerala, who have availed loans for their higher studies in various pro- fessional streams; (ii) To analyse the courses pursued by the borrowers and their employment status; (iii) To analyse the Non Performing Assets and repayment status and (iv) To make suggestions on the basis of the findings of the study.

SCOPE OF THE STUDY Thefollowing are the main scope of the study: Scope of this study is limited to the organization selected ie. state bank of India. Present a picture of the movement of NPA in Education loan SBI is Limited. This study will help to know the drawbacks of the present recovery strategies. This study will help them to think about new innovative recovery strategy. For this purpose I have covered officials of the bank from various department.

1. .

EDUCATION LOAN IN SBI

A term loan granted to Indian Nationals for pursuing higher education in India or abroad where admission has been secured.

Eligible Courses a. Studies in India: Graduation, Post-graduation including regular technical and professional Degree/Diploma courses conducted by colleges/universities approved by UGC/ AICTE/IMC/Govt. etc Regular Degree/ Diploma Courses conducted by autonomous institutions like IIT, IIM etc Teacher training/ Nursing courses approved by Central government or the State Government Regular Degree/Diploma Courses like Aeronautical, pilot training, shipping etc. approved by Director General of Civil Aviation/Shipping Vocational Training and Skill Development Study Courses will not be covered under the regular Education Loan Schemes. A separate scheme for Loans for Vocational Education and Training has been launched which covers financing for such Vocational courses

b. Studies abroad: Job oriented professional/ technical Graduation Degree courses/ Post Graduation Degree and Diploma courses like MCA, MBA, MS, etc offered by reputed universities

Expenses considered for loan

Fees payable to college/school/hostel Examination/Library/Laboratory fees Purchase of Books/Equipment/Instruments/Uniforms, Purchase of computers- essential for completion of the course (maximum 20% of the total tuition fees payable for completion of the course) Caution Deposit/Building Fund/Refundable Deposit (maximum 10% tuition fees for the entire course) Travel Expenses/Passage money for studies abroad Cost of a Two-wheeler upto Rs. 50,000/-

Any other expenses required to complete the course like study tours, project work etc.

Amount of Loan

For studies in India, maximum Rs. 10 lacs Studies abroad, maximum Rs. 30 lacs

Processing Fees

No processing fee/ upfront charges Deposit of Rs. 5000/- for education loan for studies abroad which will be adjusted in the margin money

Repayment Tenure Repayment will commence one year after completion of course or 6 months after securing a job, whichever is earlier.

Maximum Loan Limit Upto Rs. 4 Lacs Above Rs. 4 Lacs and upto Rs. 7.5 Lacs Above Rs. 7.5 Lacs

Repayment Period 5-7 years 5-7 years

Upto 12 years

Security Particular Upto Rs. 4 lacs loan amount Security Only Parent/ Guardian as coborrower Parent/ Guardian as co-borrower and Collateral security in the form of suitable third party guarantee*.

Above Rs. 4 lacs to Rs. 7.50 lacs loan amount

*Third Party Guarantee can be replaced with Parent/Guardian as co-borrower provided the Gross Annual Income of

Parent/Guardian

(co-borrower)

as given in latest Income Tax Return is 3 times of the loan amount. Above Rs. 7.50 lacs loan amount Parent/ Guardian as co-borrower and tangible collateral security

In case of married person, co-obligator can be either spouse or the parent(s)/ parents-inlaw

Margin

For loans up to Rs.4.0 lacs : No Margin For loans above Rs.4.0 lacs:
o o

Studies in India: 5% Studies Abroad: 15%

Documentation Required

Completed Education Loan Application Form. Mark sheets of last qualifying examination Proof of admission scholarship, studentship etc Schedule of expenses for the specified course 2 passport size photographs PAN Card of the student and the Parent/ Guardian Borrower's Bank account statement for the last six months Income tax Returns/ IT assessment order, of last 2 yrs (If IT Payee) Brief statement of assets and liabilities, of the Co-borrower Proof of Income (i.e. Salary slips/ Form 16 etc. if applicable)

The genesis (origin) of an NPA There are many reasons as to why a loan goes bad. For a business, it could be because it fails to take off. Such a situation may arise because of sudden health expenditure or job loss or death. Often, as in the US today, it can be because of over-leveraging, when consumers borrow against most of their assets and, maybe, have unsecured loans too. In such a case, any hit on income can jeopardize all repayments. They, however, can file for bankruptcy under Chapters 7, 11 and 13 of the United States Bankruptcy Code. Indians dont have such an option. In India, the situation has worsened due to banks aggressively pushing loans, even unsecured ones, to individuals to prevent idle assets on their books. President and founder of International Consumer Rights Protection Council, an NGO, says most customers in India are not financially educated and banks are luring them to take more and more loans, often without checking their financial position Definitions:_-An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A 'non-performing asset' (NPA) was 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.

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.

Basis of non-performing assets The basis of treating a credit facility as N.P.As is as detailed below: ASSET- In respect of which interest has remained past due for six months. 1. TERM LOAN

Inclusive of unpaid interest, when the installments is overdue for more than six months/on which interest amount remained past due for six months.

2. Bills: - Which remains overdue for six months 3. OTHER CURRENT ASSETS

The interest in respect of a debt/income on a receivable in the nature of short-term loans/advances, which remains overdue for a period of six months.

4. SALE OF ASSETS/SERVICE RENDERED 5. Any dues on account of these/reimbursement of expenses rendered, which remained overdue for a period of six months. 5. LEASE RENTAL/HIRE PURCHASE INSTALMETS

The installments, which has become overdue for a period of more than twelve months. 6. OTHER CREDIT FACILITES

The balance outstanding including interest accrued made available to the borrower/beneficiary in the same capacity when any of the credit facilities become N.P.A Identification of assets as NPAs should be done on an ongoing basis

The system should ensure that identification of NPAs is done on an on-going basis and 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 prescribed norms. Banks should also make provisions for NPAs as at the end of each calendar quarter i.e. as at the end of March/ June/ September/ December, so that the income and expenditure account for the respective quarters as well as the P&L account and balance sheet for the year end reflects the provision made for NPAs.

Treatment of Accounts as NPAs Record of Recovery

The treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA. Borrowers have been regularized by repayment of overdue amounts through genuine sources (not by sanction of additional facilities or transfer of funds between accounts), the accounts need not be treated as NPAs. In such cases, it should, however, be ensured that the accounts remain in order subsequently and a solitary credit entry made in an account on or before the balance sheet date which extinguishes the overdue amount of interest or installment of principal is not reckoned as the sole criteria for treatment the account as a standard asset.

Types of non-performing assets

Classified as 1) gross NPA 2) net NPA

1) Gross NPA Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets.

2) Net NPA Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high.

Difference between gross NPA and net NPA Gross NPA is the amount outstanding in the borrowal account, in books of the bank other than the interest which has been recorded and not debited to the borrowal account. Net NPAs is the amount of gross NPAs less (1) interest debited to borrowal and not recovered and not recognized as income and kept in interest suspense (2) amount of provisions held in respect of NPAs and (3) amount of claim received and not appropriated. The Reserve Bank of India defines Net NPA as Net NPA = Gross NPA (Balance in Interest Suspense account + DICGC/ECGC claims Received and held pending adjustment + Part payment received and kept in suspense Account + Total provisions held). The Reserve Bank of India Banks has advised the banks to compute their Gross Advances, Net Advances, Gross NPAs and Net NPAs as per the following format w.e.f. September 2009.

ASSET CLASSIFICATION Banks should classify their assets into the following broad groups, viz. 1. Standard Assets 2. Sub-standard Assets 3. Doubtful Assets 4. Loss Assets 1. Standard Assets Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA. 2. Sub-standard Assets (I) with effect from March 31, 2005 an asset would be classified as Sub-standard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers/ guarantors 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 assets will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. (ii) An 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 substandard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condition. 3) Doubt full assets With effect from March 31, 2005, an asset is required to be classifieds doubtful, if it has remained NPA for more than 12 months. For Tier I banks, the 12-month period of classification

of a substandard asset in doubtful category is effective from April 1, 2009. As in the case of sub-standard assets, rescheduling does not entitle the bank to upgrade the quality of an

advance automatically. A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses Make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Note: Consequent to change in asset classification norms w.e.f. March 31, 2005 banks are permitted to phase the consequent additional provisioning over a five year period commencing from the year ended March 31, 2005, with a minimum of 10 % of the required provision in each of the first two years and the balance in equal installments over the subsequent three years. 4) Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly. In other words, such an asset is considered un-collectible 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

Basic Considerations

(I) broadly speaking, classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realization of dues. (ii) In respect of accounts where there are potential threats to recovery on account of erosion in the value of security and existence of other factors such as, frauds committed by borrowers, it will not be prudent for the banks to classify them first as sub-standard and then as doubtful after expiry of 12 months from the date the account has become NPA. Such accounts should be

straight away classified as doubtful asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA.

Internal System for Classification of Assets as NPA I) 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. (ii) Responsibility and validation levels for ensuring proper asset classification may be fixed by the bank. (iii) 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. (iv) RBI would continue to identify the divergences arising due to non-compliance, for fixing accountability. Where there is willful non-compliance by the official responsible for classification and is well documented, RBI would initiate deterrent action including imposition of monetary penalties.

INCOME RECOGNITION Income Recognition Policy 1. The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis. 2. 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. 3. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. 4. If Government guaranteed advances become 'overdue' and thereby NPA, the interest on such advances should not be taken to income account unless the interest has been realized.

Provisional norms and disclosure norms of NPA

RBI guidelines on provisioning requirement of bank advances

As and when an asset is classified as an NPA, the bank has to further sub-classify it into substandard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets. Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank advances where the recovery is doubtful. Banks are also required to comply with such guidelines in making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares.

In case of loss assets, guidelines specifically require that full provision (100%) for the amount outstanding should be made by the concerned bank. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset.

Also in case of doubtful assets, guidelines requires the bank concerned to provide entirely the unsecured portion and in case of secured portion an additional provision of 20%-50% of the secured portion should be made depending upon the period for which the advance has been considered as doubtful. For instance, for NPAs which are up to 1-year old, provision should be made of 20% of secured portion, in case of 1-3 year old NPAs up to 30% of the secured portion and finally in case of more than 3 year old NPAs up to 50% of secured portion should be made by the concerned bank. In case of a sub-standard asset, a general provision of 10% of total outstanding should be made. Standard Assets general provision of a minimum of 0.25% Reserve Bank of India (RBI) has merely laid down the minimum provisioning requirement that should be complied with by the concerned bank on a mandatory basis. However, where there is a substantial uncertainty to recovery, higher provisioning should be made by the bank concerned.

ASSETS

PROVISION NORMS

Standard assets

General provision of 0.25%

Sub standard assets

10% on total outstanding balance, 10 %

on unsecured exposures identified as sub-standard & 100% for unsecured doubtful assets.

Doubtful debts

100% to the extent advance not covered by realizable value of security. In case of secured portion, provision may be made in the range of 20% to 100% depending on the period of asset remaining sub-standard

Loss assets

100% of the out standing

Disclosure Norms: Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and borrowings. Apart from this, banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. These disclosures were to be made for the year ending March 2000

In fact, the banks must be forced to make public the nature of N.P.As being written off. This should be done to ensure that the taxpayers money given to the banks, as capital is not used to write off private loans without adequate efforts and punishment of defaulters. # A Close look: For the future, the banks will have to tighten their credit evaluation process to prevent this scale of sub-standard and loss assets. The present evaluation process in several banks is burdened with a bureaucratic exercise, sometimes involving up to 18 different officials, most of whom do not add any value (information or judgment) to the evaluation. But whether this government and its successors will continue to play with bank funds remains to be seen. Perhaps even the loan waivers and loan "melas" which are often decried by bankers form only a small portion of the total N.P.As. As mentioned above, much more stringent disclosure norms are the only way to increase the accountability of bank management to the taxpayers. A lot therefore

depends upon the seriousness with which a new regime of regulation is pursued by RBI and the newly formed Board for Financial Supervision. Treatment of NPAs Borrower-wise and not Facility-wise (i) In respect of a borrower having more than one facility with a bank, all the facilities granted by the bank will have to be treated as NPA and not the particular facility or part thereof which has become irregular.

(ii) However, in respect of consortium advances or financing under multiple banking arrangements, each bank may classify the borrowal accounts according to its own record of recovery and other aspects having a bearing on the recoverability of the advances.

Global Developments and NPAs The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation A question that arises is how much risk can a bank afford to take? Recent happenings in the business world - Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks. In case after case, these giant corporate became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting

their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. Why such huge levels of NPAs exist in the Indian banking system (IBS)? The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. Why NPAs have become an issue for banks and financial institutions in India? To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets.

Health code system A critical analysis of a comprehensive and uniform credit monitoring was introduced in 1985-86 by RBI by way of the Health Code System in banks, which inter alia, provided information regarding the health of individual advances, the quality of credit portfolio and extent of advances causing in relation to total advances. It was considered that such information would be of immense use to bank management for control purposes. The RBI advised all commercial banks to introduce the Health Code Classification indicating the quality of individual advances in the following eight categories with a health code assigned to each borrowal account: 1. Satisfactory: Conduct is satisfactory, all terms and conditions are compiled with, all accounts are in order, and safety of the account is not in doubt. 2. Irregular: The safety of the advances is not suspected, though there may be occasional irregularities, which may be considered to be as a short-term phenomenon. 3. Sick-Viable: Advances to units, which are sick but viable under nursing and unit in respect of which nursing/revival programs are taken up. 4. Sick-Nonviable/Sticky:

The irregularities continue to persist and there are no immediate prospects of regularization, the accounts could throw some of the usual signs of incipient sickness. 5. Advances Recalled: Accounts where the repayment is highly doubtful and nursing is not considered worthwhile, includes where decisions have been taken to recall the advances. 6. Suit Filed Accounts: Accounts where legal actions or recovery proceedings have been initiated.

7. Decreed Debts: Where decrees have been obtained. 8. Bad and Doubtful Debts: Where the recoverability of the banks dues has become doubtful on account of shortfall in value of security, difficulty in enforcing and realizing the securities, or inability/unwillingness of the borrowers to repay the banks dues partly or wholly.

FACTORS CONTRIBUTING TO NPAs According to recent study conducted by the RBI, the underlying reasons for NPAs in India can be classified into two heads, namely: a) internal factors b) external factors

INTERNAL FACTORS The following internal factors contribute to NPAs in the order of performance: 1. Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial banks since long Principles of safety Principle of liquidity Principles of profitability

Principles of safety:By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a. Capacity to pay b. Willingness to pay

Capacity to pay depends upon: 1. Tangible asset 2. success in business Willingness to pay Character Honest Reputation of borrower The banker should, there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.

2. Inappropriate technology- Due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial Accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized

3. Improper SWOT analysis-The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_ A. From bankers. B. Enquiry from market/segment of trade, industry, business.

C. From external credit rating agencies. Analyze the balance sheet:-True picture of business will be revealed on analysis of

profit/loss a/c and balance sheet. Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing 4. Poor credit appraisal system--Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs 5. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_ 1. Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the principle of diversification of risk based on the famous maxim "do not keep all the eggs in one basket"; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), And the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). 6. Absence of regular industrial visit--The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. 7. Re loaning process--Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day. EXTERNAL FACTORS The external factors that contribute to NPAs are the following: 1. Ineffective recovery tribunal--The Govt has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity. 2. Willful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans. 3. Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there

loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. 4. Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. 5. Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it. 6. Change on Govt, policies With every new govt, banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Cooperative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.

PROBLEMS DUE TO NPAs

1. Owners do not receive a market return on there capital .in the worst case, if the banks fails, owners loose their assets. In modern times this may affect a broad pool of shareholders. 2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors loose their assets or uninsured balance. 3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth. 4. 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.

IMPACT OF NPA 1. Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn't affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.

2. Liquidity:-Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to

the Company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Routine payments and dues.

3. Involvement of management:Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now day's banks have special employees to deal and handle NPAs, which is additional cost to the bank. 4. Credit loss:Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks. Preventive measures of NPAs

1. Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it's too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank's dues. Identification of weakness in the very beginning that is: When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoter's intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse.

2. Identifying Borrowers with Genuine Intent:Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who have intelligent inputs with regard to promoters' sincerity, and capability to achieve turnaround. Bases don this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance.

In this regard banks may consider having "Special Investigation" of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category

3. Timeliness and adequacy of resources

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoter's commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.

4. Focus on Cash Flows While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh

credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.

5. Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit's fortunes. A bank may commit additional finance to an align unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done - it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered.

6. Multiple Financing

A.)During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.

b). In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to

Offer credit facilities to such defaulting clients. Current account facilities may also

be

denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd. (CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.

C) In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost - by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account. D) Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub standard accounts with consortium/multiple banking arrangement.

Different Approaches to Valuation of Non Performing Assets

N.P.As are by-product of most financial systems and the level of N.P.As is an indicator of the health of the financial system of an economy. Valuation techniques should present the situation, which maximize the overall interest of all the concerned parties. The broad objectives of the valuation framework are essentially: 1. To set a sound basis for the selling bank/institution to finalize theSale of assets, 2. To provide a basis for the fair market value of the assets,

3. To promote transparency of the valuation processes and,. 4. To comply with internationally accepted practices.

The valuation of an asset or the pool of assets is a precursor to any restructuring exercise. Any valuation exercise shall attempt to address the following issues: The fair market value of the asset should represent the price at which market participants would undertake a restructuring. The transaction value should reflect the potential for income generation and return of principal, balanced against the applicable risk profile and market lending margins. The valuation framework should allow for valuation of specific assets as well as a portfolio of assets (i.e. portfolio of loans to be acquired from a bank.) In most cases, a single value will apply to each loan required. For larger loans, however, an element of risk/return sharing with the selling bank may be considered.

There are various methodologies used to value the companies or their debt.

Typically, cash

flows, assets or replacement values, or a combination of these, are considered when determining the value of the company or its debt. Some of the widely used approaches towards valuation of an NPA by the valuation firms are detailed as under: 1. Discounted Cash Flows One of the commonly used methods for estimating the value of the companys debt is the anticipated cash flow. The cash flow stream will represent the interest and principal payments expected to be received by the lender, primarily out of the internal cash flow generation from underlying business activities. Where the asset is a partly completed project, the cash flow stream will have to take onto account whether the project will be completed and if so how it will be financed. If certain lenders decide to fund through extended facility, this will be taken into account I the assets cash flow stream. Essentially the decision on the projects financial viability

will be determined by using an incremental cash flow analysis. Normally, the value of a healthy asset is computed as the discounted value of the expected future cash flows. However, a company is distress or an NPA may have negative earnings and may be likely to incur operating losses for the next few years. For such companies, the estimation of future cash flows is not so easy, as there is a strong possibility of bankruptcy. Under such a scenario the asset valuation is also based on subjective parameters. A company under financial distress has some or all of the following characteristics: operating loss, inability to meet the debt obligations and high debt equity ratio. When dealing with such cases, the credit analysts need to evaluate the possibility and timing of positive financial performance of the company of infusion of additional funds and the overall macro economic environment. If the company is expected to improve its financial position in the future, the following discounted cash flow model may be used for the distress companies/ NPAs.

2. Liquidation Value Approach If the loan is in default with no or low expectations of its being services, the cash flow from liquidation of the asset and collateral will be the primary approach rather than net present value of the cash flow. In this case, the take out of the lender is primarily by way of exercise of their rights on the assets and attached collateral. The liquidation value of the company is the aggregate of the value of the assets of the company if solid at the market rates, net of transactions and legal costs. The estimation of the assets becomes quite complicated when the assets of the company cannot be easily separated like in a steel, textile or petrochemical plant. If such assets are sold individually, majority of the asset may not fetch a price closer to their books value. Further, when such sale is to take place at a quick place, the value of the assets further fall down, as it is more or less equal to forced sale of the assets. As a result of this forced sale, the seller has to accept a discount on the fair market value of such assets. In most cases, such a realization is not able to cover even the secured debt fully and hence the valuation of the debt would be limited by this realized value. This approach has been widely used in countries like Thailand where a significant number of loans were secured by real estate and other marketable securities of various kinds.

3. Earning Model

In performing companies, the P/E ration of the industry or other similar companies may be used as a tool for determining the market value of the assets of company. If the debt of the company is more than its assets, then a proportionate discount may be applied to the debt. The above approach, however, cannot be used for most of the N.P.As, as they would have negative EPS. In such cases, the cash earning per share of the company and cash P/E ratio of the similar companies may be used to arrive at a market value of the NPA debt.

4. Case Specific Valuation Model Depending on case to case, various models have been evolved and used for specific requirements. I shall discuss here one of such models to provide an insight as to how provide varied models can be from the conventional approaches.

Segmentation into buckets: For a huge portfolio of small loans, different kind of approach may be used for arriving at the realistic valuation. One of them is categorizing the loans in various buckets and then analyzing a sample picked from various buckets. Post currency crisis of late 1990s in Thailand, the price of real estate had declined to abysmally low levels and majority of the property-linked loans had become N.P.As in the books of the local banks. One of the leading financial companies in the world was contemplating to purchase these loans totaling over 20,000 small loans. For arriving at the appropriate valuation, they had followed the following methodology:

Segmentation of the assets in various buckets. Selection of a sample out of each bucket. Detailed analysis of each sample. Statistical extrapolation of the sample to the entire bucket. Arriving at the final range of the valuation of the portfolio.

1. LokAdalat: Lok Adalat institutions help banks to settle disputes involving account in "doubtful" and "loss" category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. The progress through this channel is expected to pick up in the coming years. Referring the cases to lakadalats constituted under the legal services authorities act, 1987 which help in resolving disputes between the parties by conciliation, mediation, compromise, or amicable settlement. Every award of the lokadalt shall be deemed to be a decree of a civil court. 2. CDR: -Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable substandard accounts with consortium/multiple banking arrangements. The objective of CDR is to ensure a timely and transparent mechanism for restructuring of the

debts of viable corporate entities affected by internal and external factors, outside the purview of BIFR, DRT or other legal proceedings. The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA). All participants in the CDR mechanism must enter the ICA with necessary enforcement and penal clauses. The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with outstanding exposure of Rs.10 crore and above. The CDR system is applicable to standard and

sub-standard accounts with potential cases of NPAs getting a priority. Packages given to borrowers are modified time & again Drawback of CDR Reaching of consensus amongst the creditors delays the process 3.DRT ACT: The banks and FIs can enforce their securities by initiating recovery proceeding under the Recovery if Debts due to Banks and FI act, 1993 (DRT Act) by filing an application for recovery of dues before the Debt Recovery Tribunal constituted under the Act. On adjudication, a recovery certificate is issued and the sale is carried out by an auctioneer or a receiver. DRT has powers to grant injunctions against the disposal, transfer or creation of third party interest by debtors in the properties charged to creditor and to pass attachment orders in respect of charged properties. In case of non-realization of the decreed amount by way of sale of the charged properties, the personal properties if the guarantors can also be attached and sold. However, realization is usually time-consuming. Steps have been taken to create additional benches. 4.PROCEEDING UNDER CODE OF CIVIL PROCEDURE: For claims below Rs.10 lacks, the banks and FIs can initiate proceedings under the Code of Civil Procedure of 1908, as amended, in a civil court. The courts are empowered to pass injunction orders restraining the debtor through itself or through its directors, representatives, etc from disposing of, parting with or dealing in any manner with the subject property. Courts are also empowered to pass attachment and sales orders for subject property before judgment, in case necessary. The sale of subject property is normally carried out by way of open public auction subject to confirmation of the court. The foreclosure proceedings, where the DRT Act is not applicable,

can be initiated under the Transfer of Property Act of 1882 by filing a mortgage suit where the procedure is same as laid down under the CPC. 5.BIFR AND AIFR:BIFR has been given the power to consider revival and rehabilitation of companies under the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA), which has been repealed by passing of the Sick Industrial Companies (Special Provisions) Repeal Bill of 2001. The board of Directors shall make a reference to BIFR within sixty days from the date of finalization of the duly audited accounts for the financial year at the end of which the company becomes sick. The company making reference to BIFR to prepare a scheme for its revival and rehabilitation and submit the same to BIFR the procedure is same as laid down under the CPC.The shelter of BIFR misused by defaulting and dishonest borrowers It is a time consuming process. 6.NATIONAL COMPANY LAW TRIBUNAL:In December 2002, the Indian Parliament passed the Companies Act of 2002 (Second Amendment) to restructure the Companies Act, 1956 leading to a new regime of tackling corporate rescue and insolvency and setting up of NCLT. NCLT will abolish SICA; have the jurisdiction and power relating to winding up of companies presently vested in the High Court and jurisdiction and power exercised by Company Law Board The second amendments seeks to improve upon the standards to be adopted to measure the competence, performance and services of a bankruptcy court by providing specialized qualification for the appointment of members to the NCLT. However, the quality and skills of judges, newly appointed or existing, will need to be reinforced and no provision has been made for appropriate procedures to evaluate the performance of judges based on the standards

Writing off of NPAs

1. 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 banks profit and loss account or received, whichever is earlier. 2. 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. 3. Therefore, the banks should either make full provision as per the guidelines or writeoff 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. 4 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 therefore. Credit Risk and NPAs

Quite often credit risk management (CRM) is confused with managing non-performing assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e. they represent credit risk that has already materialized and default has already taken place. On the other hand managing credit risk is a much more forward-looking approach and is mainly concerned with managing the Quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk.Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business. To create a defense against such uncertainty, bankers are expected to develop an effective internal credit risk models for the purpose of credit risk management.

How important is credit rating in assessing the risk of default for lenders? Fundamentally Credit Rating implies evaluating the creditworthiness of a borrower by an independent rating agency. Here objective is to evaluate the probability of default. As such, credit rating does not predict loss but it predicts the likelihood of payment problems. Credit rating has been explained by Moody's a credit rating agency as forming an opinion of the future ability, legal obligation and willingness of a bond issuer or obligor to make full and timely payments on principal and interest due to the investors. Banks do rely on credit rating agencies to measure credit risk and assign a probability of default. Credit rating agencies generally slot companies into risk buckets that indicate company's credit risk and is also reviewed periodically. Associated with each risk bucket is the probability of default that is derived from historical observations of default behavior in each risk bucket. However, credit rating is not fool-proof. In fact, Enron was rated investment grade till as late as a month prior to it's filing for Chapter 11 bankruptcy when it was assigned an in-default status by the rating agencies. It depends on the information available to the credit rating agency. Besides, there may be conflict of interest which a credit rating agency may not be able to resolve in the interest of investors and lenders. Stock prices are an important (but not the sole) indicator of the credit risk involved. Stock prices are much more forward looking in assessing the creditworthiness of a business enterprise. Historical data proves that stock prices of companies such as Enron and WorldCom had started showing a falling trend many months prior to it being downgraded by credit rating agencies. Usage of financial statements in assessing the risk of default for lenders For banks and financial institutions, both the balance sheet and income statement have a key role to play by providing valuable information on a borrowers viability. However, the approach of scrutinizing financial statements is a backward looking approach. This is because; the focus of accounting is on past performance and current positions.The key accounting ratios generally used for the purpose of ascertaining the creditworthiness of a business entity is that of debt-equity ratio and interest coverage ratio. Highly rated companies generally have low leverage. This is

because; high leverage is followed by high fixed interest charges, non-payment of which results into a default. Capital Adequacy Ratio (CAR) of RBI and Basle committee on banking supervision (BCBS) Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian banks. The minimum CAR which the Indian Banks are required to meet at all times is set at 9%. It should be taken into consideration that the bank's capital refers to the ability of bank to withstand losses due to risk exposures. To be more precise, capital charge is a sort of regulatory cost of keeping loans (perceived as risky) on the balance sheet of banks. The quality of assets of the bank and its capital are often closely related. Quality of assets is reflected in the quantum of NPAs. By this, it implies that if the asset quality was poor, then higher would be the quantum of non-performing assets and viceversa. Market risk is the risk arising due to the fluctuations in value of a portfolio due to the volatility of market prices. Operational risk refers to losses arising due to complex system and processes. It is important for a bank to have a good capital base to withstand unforeseen losses. It indicates the capability of a bank to sustain losses arising out of risky assets. The Basel Committee on Banking Supervision (BCBS) has also laid down certain minimum risk based capital standards that apply to all internationally active commercial banks. That is, bank's capital should at least be 8% of their risk-weighted assets. This in fact helps bank to provide protection to the depositors and the creditors The main objective here is to build a sort of support system to take care of unexpected financial losses thereby ensuring healthy financial markets and protecting depositors. Excess liquidity? No problem, but no lending please!!! One should also not forget that the banks are faced with the problem of increasing liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system through

various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default. In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks. On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time. A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBI's vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. as a result of which, banks are little reluctant in granting loans to corporate. As such, though in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers. High cost of funds due to NPAs Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lenders losses caused due to high level of NPAs. Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher. With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60 days. Once the borrower receives a notice from the concerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders.

The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution is paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, banks can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the assets of the defaulting companies or change their management. But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty increases with the passage of time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch good price. If faced with such a situation than the very purpose of getting protection under the Securitization Act, 2002 would be defeated and the hope of seeing a must have growing banking sector can easily vanish. Reporting of NPAs to RBI 1) 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 Annex I. 2) 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 and net advances. 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.

3) 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.

Growth of Educational Loans and Higher EducationSector in India

In India, over a period of seven years starting from the year 2005 to 2011 the educational loans have risen from INR 51bn to INR 437bn[19]. It can be translated into a CAGR of 43.05 per cent. In the year 1990-91 there were 190 universities and 7,346 colleges. These grew to 611 universities and 31,324colleges as of August 2011. During the same period the student enrolment grew from 4.9m to 16.9m in the universities and col- leges. The Gross Enrolment Ratio has risen from 11% in 2005 to 13.8% in 2011 in India.[24] The national target of higher education enrolment in India is fixed at 30% in 2020. To achieve this objective the present ca- pacity of 14.6m seats should be raised to 40m rendering an additional seat of 25.4m. The share of private unaided institutions operating in higher education increased from 43% in 2001 to63% in 2006 and the enrolment in the same institutions grew from 33% to 53%. To raise the capacity from the present 14.6m seats to 40m seats by 2020, India needs an additional investment of INR 10,000bn and assuming that private sector partici- pation will continue to be 53per cent (53% in 2006 mentioned as above) investment of the private players will be INR 5300bn. That is on an average of INR 530bn per year. Performance of Educational Loans in the state of Kerala The number of outstanding EL rose from 265,573 in December 2009 to 350,574 in December 2011 in Kerala State. The outstanding loan amount has grown from INR 45,970 m in 2009 to INR 70360 m in 2011. The Non performing assets numbered 6,803 and amounted to INR 1,340m in 2009. In 2010 the number of NPA rose to7,860 at an amount of INR 2,280m. In 2011 these figures were respectively 24,858 and INR 4,470m. The NPA generated at the state level was 2.91 per cent in2009, 3.9 per cent in 2010 and 6.35 percent in 2011.

Demographics and Socio-Economic Profile of the Education loan Borrowers under survey 600 education loan beneficiaries surveyed in Ernakulam District are in the age group of 17-26 years. 197 males and 403 females consti- tuted the sample. 86 per cent of the samples parents are hav- ing annual income less than INR 0.5 million. 78 per cent of the parents are Higher Secondary or below qualified. 22 percent of the parents are graduates or post graduates.

ANALYISIS AND INTERPRETATION

STATE BANK OF INDIA

TOTAL ASSET 2003YEAR TOTAL ASSET(RS. CR) 407185 459883 494029 566565 721526 04 200405 200506 200607 200708

800000 700000 600000 500000 400000 300000 200000 100000 0 1 2 3 YEAR 4 5 6 YEAR TOTAL ASSET(RS. CR)

Interpretation:-Above graph show that total assets of SBI is increased in 2004-05 by 52658 crore, in 2007-08 increased by 154961rs. crore. So assets of the SBI bank increased from last five year.

GROSS NPA

2003YEAR 04

200405

200506

200607

200708

_GROSS NPA(RS.CR) 12667 12456 9628 9998 12837

_GROSS NPA(RS.CR) 14000 12000 10000 8000 6000 4000 2000 0 2003- 2004- 2005- 2006- 200704 05 06 07 08 _GROSS NPA(RS.CR)

Interpretation:- above graph shows that Non-performing assets of SBI decreased from 2003-04 to2006-07 and increased in 2007-08. There are so many reason of increases of npa

NET NPA

2003YEAR NET NPA(RS. CR.) 04 5442

200405 5349

200506 4906

200607 5258

200708 7424

NET NPA(RS. CR.) 8000 7000 6000 5000 4000 3000 2000 1000 0 2003- 2004- 2005- 2006- 200704 05 06 07 08 NET NPA(RS. CR.)

Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and increased in 2006-07 to 2007-08.

GROSS NPA (RATIO%) 2003YEAR GROSS NPA(RATIO%) 7.75 5.96 3.61 2.92 3.04 04 200405 200506 200607 200708

GROSS NPA(RATIO%) 8 7 6 5 4 3 2 1 0 2003- 2004- 2005- 2006- 200704 05 06 07 08 GROSS NPA(RATIO%)

Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased from 2004-05 to 2006-07 and increased in 2007-08.

NET NPA(RATIO%)

2003YEAR NET NPA(RATIO%) 04 3.48

200405 2.65

200506 1.88

200607 1.56

200708 1.78

4 3.5 3 2.5 2 1.5 1 0.5 0 1 2 3 4 5 6 YEAR NET NPA(RATIO%)

Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is decreased from 200405 to 2006-07 and increased in 2007-08 PROVISION COVER

2003YEAR PROVISION COVER 57.04 04

200405

200506

200607

200708

59.45

49.04

47.41

45.04

PROVISION COVER 70

POVISION COVER %

60 50 40 30 20 10 0 2003-04 2004-05 2005-06 2006-07 2007-08 yEAR PROVISION COVER

Interpretation: Above graph shows that in 2003-04 provision cover of NPA is 57.04% and increased in 2004-05. It decreased from 2005-06 to 2007-08

Courses Pursued and Placement Status of the Education loan Beneficiaries Major courses pursued by the EL beneficiaries consisted General Nursing & Midwifery(GNM), B.Tech Engineering, Medicine(MBBS), Management(MBA/PGDBM) and Other courses like B.Sc. Nursing, Bachelor of Phisio Therapy, B.Sc. Optometry, M.Sc.Bio Technology, Bachelor of Education(B. Ed.), Master of Education(M.Ed.), etc. Of the 600 sample, 298 pursued GNM, 136 B.Tech Engineering, 54 Medicine(MBBS),63 Management and 49 Other courses. 97 per cent of the EL borrowers have completed the course and 72 per cent of them are placed in employment. Only 57 per cent of the GNM borrowers could be employed right after studies. The first hypothesis regarding no association between place- ment and the right course is rejected. It is evident that there is wide variations in the availability of jobs in different courses. Similarly the second hypothesis regarding no variation in the choice of courses is also rebutted since 50 per cent of the samples who pursued the GNM course remained unemployed soon after the course.

STATEMENT OF PROLEM A casual interaction with the officials of the bank revealed that NPA is a severe factor, which has been affected their profitability for years. Therefore the problem identified is to understand and identify the drawback of the current recovery strategy and to come out with a set of recommendation which will help them to effective recovery of borrowings. Therefore the problem chosen for the study of NPA S in education loan in SBI.

LIMITATIONS OF THE STUDY The major limitation of the study was the paucity of time. Even then, maximum care has been taken to arrive at appropriate conclusion. Following are the limitations of the study: 1. This study is restricted to State Bank of India Ltd., Kerala only. 2. For the purpose of collecting vital information, officials of the bank is only contacted & interviewed. Since he is an individual, his biases may have creped into the data given. Though the subject matter pertains to commercial banks, only one scheduled bank. i.e. SBI bank ltd. is considered for this study. Other commercial banks, as also the other scheduled banks are outside the purview of this study

SUGGESTIONS AND CONCLUSIONS By 2013 the number of defaulters have been increased . That is one or two years is too early for a good number of EL borrowers to start repayment. Hence, the present system of 7 to 10 years (Now revised to 10-15 years) should be stretched to longer periods for such people. Many of the education loan borrowers are landing up in foreign employment and they too lag their repayment but nevertheless make one time settlement. Therefore, the concept of NPA in their case should be reconsidered. The best way to tackle the issue is to constitute the Credit Guarantee fund to periodically give relief to the scheduled banks with respect to the NPAs. At the same time A Debts Recovery Cell can be constituted at the state level which can take over NPA or Education loan issued to students without mortagage. The issue of the loan is now vitiated by arbitrary decisions of some of the officers of the bank branches. A national level eligibility test for the issue of educational loans should be introduced. The educational loan is a powerful tool for the development of the human resource for a developing economy like India.

BIBLIOGRAPHY www.yahoo.com www.google.com www.wikipedia.com www.hdfcbank.com www.statebankofindia.com www.federalbank.com QUESTIONNAIRE EDUCATION LOAN 1.What is your name? .. 2. Educational Qualification 10th or below 10+2 or below Graduate

Post Graduate and above 3. Your residence is Owned Ancestral/Family Rented

Others(please specify)

Company Provided

PG Accomodation

4. Your Ocuupation Salaried Student Self Employed Retired Housewife

NRI(Please specify the country you belong)

5. If Salaried, employed with Private Limited Public Sector Partnership Proprietorship Public Limited Multinational

Government

Mention the type of industry your employed, Advertising/market research Construction/real estate Telecom Textile Banking Transport

Travel/Tourism Insurance

Entertainment/Media Export/Import

Consumer goods NBFC Finance Others

Internet services Hotel/Restaurant Pharmaceuticals

Call centres/BPO/ITES Information Technology

6. If self-employed your firm is

Private Limited

Partnership

Proprietorship

Your nature of work in the firm, Broker Journal Landlord Software Professional

Chartered Accounted Consultant Lawyer Engineer

Films/Entertainment professional Manufacturer Financier Doctor Retailers/Grocers

Trade/Distributor

Real Estate Agent Please specify company name

Designation 7. Are you an account holder in SBI bank? Yes If yes, Current savings FD Demat No

Mention the account number If No, Are you an account holder in any other bank? Yes No

If yes, specify name of the bank and type of account 8. Have you availed loan facilities from any bank? Yes No

If yes, type of loan Car loan personal loan consumer durable loan others(please specify) loan against shares

Housing loan

9. Are you assessed to tax?

Yes

No

10.Do you have any other source of income? Yes No

If yes,please specify Average income per annum

Date:

Signature of the customer: