WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

SUMMER INTERNSHIP ROJECT REPORT

ON

CREDIT APPRAISAL & NON-PERFORMING ASSETS

BY

SANKET YADAV

PGDM 2015 17 TRIMESTER III

SPECIALISATION: FINANCE

ROLL NO :144

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 ACKNOWLEDGEMENT

First and foremost I would like to thank DENA BANK, respected Regional Manager (Thane
regional office), and respected Senior Credit Manager (Regional Office-Thane) for providing me
with the opportunity to work in this esteemed organization. During my term as an intern I have
closely worked with few bank officers & credit managers and have learned many invaluable
things from them. Their attitude towards work was absolutely exemplary. The expertise they
have in their respective fields and the dedication they possess towards their work was
spectacular. I would like to thank them for enriching me with the rich source of knowledge they
possess through their invaluable guidance. I was very astonished with the impromptu answers
they gave for my questions and would like to thank them to bear with me for the same. I am
absolutely sure that these values inculcated in me will be helpful in my future professional life. I
feel very fortunate to work with the Thane Zonal Office, as this lifetime experience has made me
a better future professional.

Thanks again.
Regards,
Sanket Yadav.

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 INDEX

EXECUTIVE SUMMARY 5
OBJECTIVE OF THE STUDY 6
LIMITATION OF THE STUDY: 6
METHODOLOGY: 6
INTRODUCTION OF BANKING SECTOR IN INDIA: 7
Chapter 1: OVERVIEW OF DENA BANK 8
Chapter 2: CREDIT APPRAISAL 11
Chapter 3: PRE-SANCTION SCRUTINY & CREDIT APPRAISALS 19
Chapter 4: NON-PERFORMING ASSETS (NPA) 32
Chapter 5: CLASSIFICATION OF LOANS 34
Chapter 6: NPA IDENTIFICATION NORMS 36
Chapter 7: IMPACT/ EFFECTS OF NPA UPON BANKS 39
Chapter 8: TOOLS FOR RECOVERING NPA 43
Chapter 9: DATA AND STATISTICS 46
Chapter 11: RECOMMENDATIONS 52
Chapter 12: CONCLUSION 53
Chapter 13: BIBLOGRAPHY 54

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 EXECUTIVE SUMMARY

This Project is a study about the Credit Appraisal System & Non-Performing Assets in Banking
Sector. The banking sector is one of the most rapidly growing areas in the financial sector. As an
economy grows over the years, banking sector intensifies and broadens its reach. The banking
sector is scalping new heights it is expanding enormously. A bank with an efficient credit
appraisal and loan recovery system will grow stronger over the years.

Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions which are involved in providing
financial funding to its customers. To observe the movements to reduce various risk parameters
which are broadly categorized into financial risk, business risk, industrial risk and management
risk.

Credit appraisal is done to check the commercial, financial & technical viability of the project
proposed its funding pattern & further checks the primary or collateral security cover available
for the recovery of such funds. Dena Bank loan policy contains various norms for sanction of
different types of loans. These all norms do not apply to each & every case. Dena Bank norms
for providing loans are flexible & it may differ from case to case.

The Indian banking sector has been facing serious problems of raising Non- Performing Assets
(NPAs). The NPAs growth has a direct impact on profitability of banks. Non- performing assets
are one of the major concerns for scheduled commercial banks in India. The recommendations
of Narasimham committee and Verma committee, some steps have been taken to solve the
problem of old NPAs in the balance sheets of the banks. It continues to be expressed from every
corner that there has rarely been any systematic evaluation of the best way of tackling the
problem. 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. NPAs
affect the liquidity and profitability, in addition to posing threat on quality of asset and survival
of banks. 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. It is necessary to trim down NPAs to improve the financial health in the
banking system. An attempt is made in this project to understand NPA, the status and trend of
NPAs in Dena bank, the factors contributing to NPAs, reasons for high impact of NPAs on
Scheduled commercial banks in India and recovery of NPAS through various channels

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 OBJECTIVE OF THE STUDY

The objective of this study is to ascertain in depth, the process used by Dena Bank for Credit
appraisal and various criterias on which such appraisal is done before sanctioning of loans.

The study involves understanding of factors contributed to the selection of borrowers with the
help of financial techniques such as Pre-sanction Scrutiny, Post sanction appraisal, Credit Risk
Rating etc. for the purpose of arriving at a decision.

The study also involves the status of Non-Performing Assets of Indian Scheduled Commercial
Banks in India.

To study the impact of NPAs on Dena Banks.

To know the recovery of NPAS through various channels.
To make appropriate suggestions to avoid future NPAs and to manage existing NPAs in
Banks.

LIMITATION OF THE STUDY:

The important limitations are as follows:

The study of credit appraisal and non-performing assets is limited to the Dena Bank
and till the end of the year 2016.
The basis for identifying non-performing assets is taken from the Reserve Bank of
India Publications.
NPAs are changing with the time. The study is done in the present environment without
foreseeing future developments.

METHODOLOGY:

The present study is aims to analyze the credit appraisal and Non-performing assets of Dena
Bank. For the purpose of the study data has been collected from primary and secondary sources.
The main source of information has been through RBI reports, bulletins and inputs from the
chief credit manager.

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INTRODUCTION OF BANKING SECTOR IN INDIA:

The Indian banking sector is broadly classified into scheduled banks and non-scheduled banks.
The scheduled banks are those which are included under the 2nd Schedule of the Reserve Bank
of India Act, 1934. The scheduled banks are further classified into: nationalised banks; State
Bank of India and its associates; Regional Rural Banks (RRBs); foreign banks; and other Indian
private sector banks. The term commercial banks refer to both scheduled and non-scheduled
commercial banks which are regulated under the Banking Regulation Act, 1949.
Generally banking in India is fairly mature in terms of supply, product range and reach-even
though reach in rural India and to the poor still remains a challenge. The government has
developed initiatives to address this through the State Bank of India expanding its branch
network and through the National Bank for Agriculture and Rural Development with facilities
like microfinance.

Indian banking industry is expected to witness the roll out of innovative banking models like
payments and small finance banks. 11 payment banks are expected to be launched in 2016 and
2017. Separately about 10 small finance banks are also expected to be launched. RBIs new
measures may go a long way in helping the restructuring of the domestic banking industry.

MARKET SIZE:

The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43
foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural
cooperative banks, in addition to cooperative credit institutions. Public-sector banks control
nearly 80 percent of the market, thereby leaving comparatively much smaller shares for its
private peers.

Standard & Poors estimates that credit growth in Indias banking sector would improve to 12-
13 per cent in FY16 from less than 10 per cent in the second half of CY14.

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Chapter 1: OVERVIEW OF DENA BANK

Dena bank is one of the earliest nationalized banks in India. Dena Bank was founded on 26th
May, 1938 by the family of Devkaran Nanjee under the name DevkaranNanjee Banking
Company Ltd. It became a Public Ltd. Company in December 1939 and later the name was
changed to Dena Bank Ltd. In July 1969 Dena Bank Ltd. along with 13 other major banks was
nationalized and is now a Public Sector Bank constituted under the Banking Companies
(Acquisition & Transfer of Undertakings) Act, 1970.Under the provisions of the Banking
Regulation Act, 1949.

Since its inception, the bank has become a renowned name in the field of banking and financial
solutions. It is trusted all over the country by thousands of consumers by being a customer of
Dena bank; one can easily enjoy financial stability and also get good returns on the services and
the financial solutions.

To evolve and position the bank as a world class, progressive, cost-effective and customer
friendly institution, providing comprehensive financial and related services: integrating frontiers
of technology and serving various segment of society especially the weaker section of the
society, committed to excellence in serving the public and also excelling in
the corporate values. Corporate excellence originated from good corporate governance exercised
by adopting standard of transparency, accountability, professionalism, social responsiveness,
and ethical business practices with this in view, the bank has been making efforts for adopting
the best practices. The bank commitment towards corporate governance is to give greater
transparency and openness in the management and to ensure best performance by staff at all the
levels to maximize the operational efficiency. Adopting the corporate governance as a work
ethos, the bank is committed to enhancing the stakeholder

The logo of Dena Bank depicts Goddess Lakshmi, the Goddess of Wealth, according to Hindu
mythology.
It was the desire of the founding fathers of the Bank that the Bank should be a symbol of
prosperity for all its clients, and the logo represents this promise.

The contemporary 'D' in the logo reflects the dynamism, dedication and the drive towards
customer satisfaction.

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1.1VISION

Dena Bank will emerge as the most preferred Bank of customer choice in its area of operations,
by its reputation and performance.

1.2 MISSION

Customers Staff
Premier, Financial Positive work environment
Services of great value Opportunity for growth and
achievement.

MISSION

Shareholders Community
Superior financial returns. Economic growth.

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1.3 HIGHLIGHTS

The Bank has a large network of branches spread throughout the country that enables it
to raise funds competitively. The domestic network of the Bank stood as on 31.03.2016,
which includes 1846 branches and 1471 ATMs.

The Western Region, which is industrially developed and financially vibrant account for
more than 70% of the total branches.

The Bank also has 76 specialized branches to cater to the needs of industrial finance,
trade finance, personal banking, international banking, NRIs and small-scale industries.

A Bank with robust technology infrastructure offering Any Branch Banking, m-banking,
Denabillpay, telebanking, information Kiosks, ATM Network, etc.

Professionally managed Bank with 66 years of existence.

First Drive-in ATM in India at Juhu, Mumbai in 1996

First Fully Computerized branch in Public sector at Nepean Sea Road Mumbai in 1991.

More than 90% of the total business and branches are computerized.

Bank having own net DENANET, connecting over 300 branches across the country.

Pioneer in introducing Minor Saving Scheme a saving account for minors above 10
years.

Pioneer in introducing Dena Krishi Sakh Patra credit card for farmers in 1988

Product portfolio includes Trade Finance, Consumer Loans, Bancassuarance, Credit

Cards and Kisan Cards, Retail Lending products etc.

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Chapter 2: CREDIT APPRAISAL

Credit Appraisal/Analysis is the method by which one calculates the credit worthiness of a
business or organization. In other words, it is the evaluation of the ability of a company to honor
its financial obligations.
The objective of credit analysis is to look at both the borrower and lending facility being
proposed and to assign a risk rating. The risk rating is derived by estimating the probability of
default by the borrower at a given confidence level over the life of the facility, and by estimating
the amount of loss that the lender would suffer in the event of default.
Credit analysis involves a wide variety of financial analysis techniques, including ratio and trend
analysis as well as the creation of projections and a detailed analysis of cash flows. Credit
analysis also includes an examination of collateral and other sources of repayment as well as
credit history and management ability. Analysts attempt to predict the probability that a
borrower will default on its debts, and also the severity of losses in the event of default.

BRIEF OVERVIEW OF LOANS

Credit can be of two types fund based & non-fund based:

a) FUND BASED includes:

Working Capital
Term Loan

b) NON-FUND BASED includes:

Letter of Credit
Bank Guarantee

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FUND BASED:-

1. Working Capital:-

The objective of running any industry is earning profits. An industry will require funds to
acquire Fixed assets like land, building, plant, machinery, equipment, vehicles, tools etc., &
also to run the business i.e. its day to day operations.

Funds required for day to-day working will be to finance production & sales. For production,
funds are needed for purchase of raw materials/ stores/ fuel, for employment of labor, for power
charges etc., for storing finishing goods till they are sold out & for financing the sales by way of
sundry debtors/ receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed capital & working
capital. Working capital in this context is the excess of current assets over current liabilities. The
excess of current assets over current liabilities is treated as net working capital or liquid surplus
& represents that portion of the working capital which has been provided from the long term
source.
Working Capital required is dependent on

(a) The volume of activity (viz. level of operations i.e. Production & sales)

(b) The activity carried on viz. manufacturing process, product, production program, the
materials & marketing mix.

Assessment of Working Capital requirements

Illustration for computation of WC limit

M/S XYZ Co Ltd

Audited Estimated Projected
Sr.No 31.03.2012 31.03.2013 31.03.2014
1 Net Sales 5642.45 6500.00 7550.00
2 Total Current Assets 979.05 1208.29 1406.73
3 Less: Current Liabilities(other than 395.99 295.42 394.91
Bank Borrowing)
4 Working Capital Gap 583.06 912.87 1011.82
5 Minimum stipulated margin 25% of 215.65 236.97 276.68
current assets
6 Actual/Projected NWC 176.28 212.87 261.82
7 III- IV 367.41 675.90 735.14
8 III- V 406.78 700.00 750.00
Max.Permissible Bank Finance 367.41 675.90 735.14
(Min of 7&8)

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 2. Term Loan

A term loan is granted for a fixed term of not less than 3 years intended normally for financing
fixed assets acquired with a repayment schedule normally not exceeding 8 years.

A term loan is a loan granted for the purpose of capital assets, such as purchase of land,
construction of buildings, purchase of machinery, modernization, renovation or rationalization
of plant, & repayable from out of the future earning of the enterprise, in installments, as per a
pre-arranged schedule.

The difference between a term loan & the working capital credit afforded by the Bank are as
follows:

The purpose of the term loan is for acquisition of capital assets.

a) The term loan is an advance not repayable on demand but only in installments ranging
over a period of years.
b) The repayment of term loan is not out of sale proceeds of the goods & commodities
whether given as security or not. The repayment should come out of the future cash
accruals from the activity of the unit.
c) The security is not the readily saleable goods & commodities but the fixed assets of the
units.
d) It may thus be observed that the scope & operation of the term loans are entirely different
from those of the conventional working capital advances. The Banks commitment is for
a long period & the risk involved is greater. An element of risk is inherent in any type of
loan because of the uncertainty of the repayment. Longer the duration of the credit,
greater is the attendant uncertainty of repayment & consequently the risk involved also
becomes greater.

The repayment of a term loan depends on the future income of the borrowing unit. Hence, the
primary task of the bank before granting term loans is to assure itself that the anticipated income
from the unit would provide the necessary amount for the repayment of the loan. This will
involve a detailed scrutiny of the scheme, its financial aspects, economic aspects, technical
aspects, a projection of future trends of outputs & sales & estimates of cost, returns, flow of
funds & profits.

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APPRAISAL OF TERM LOANS

Appraisal of term loan for, say, an industrial unit is a process comprising several steps.
There are four broad aspects of appraisal, namely

Technical Feasibility - To determine the suitability of the technology selected & the
adequacy of the technical investigation & design;

Economic Feasibility - To ascertain the extent of profitability of the project & its
sufficiency in relation to the repayment obligations pertaining to term assistance;

Financial Feasibility - To determine the accuracy of cost estimates, suitability of the

envisaged pattern of financing & general soundness of the capital structure; &

Managerial Competency To ascertain that competent men are behind the project to
ensure its successful implementation & efficient management after commencement of
commercial production.

NON-FUND BASED:-

1. Letter Of Credit

The expectation of the seller of any goods or services is that seller should get the payment
immediately on delivery of the same. This may not materialize if the seller & the buyer are at
different places (either within the same country or in different countries). The seller desires to
have an assurance for payment by the purchaser. At the same time the purchaser desires that the
amount should be paid only when the goods are actually received. Here arises the need of Letter
of Credit (LCs). The objective of LC is to provide a means of payment to the seller & the
delivery of goods & services to the buyer at the same time.

The basic principle behind an LC is to facilitate orderly movement of trade; it is therefore

necessary that the evidence of movement of goods is present. Hence documentary LCs is those
which contain documents of title to goods as part of the LC documents. Clean bills which do not
have document of title to goods are not normally established by banks. Bankers deal only in
documents & not in goods. If documents are in order issuing bank will pay irrespective of
whether the goods are of expected quality or not. Banks are also not responsible for the
genuineness of the documents & quantity/quality of goods. If importer is borrower, the bank has
to advise him to convert all his requirements in the form of documents to ensure quantity &
quality of goods

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 Illustration for computation of LC limit

M/S XYZ Co Ltd

Letter of credit limit of Rs. 20 crore

(Rs. in crores)
Total purchase of raw material 172.64
Purchase of raw materials under LC 69.41

Average monthly purchase of raw material under LC (A) 5.78

Average holding of imported raw materials (2.2 months consumption) 11.30
Average usage period (B) 3 months
Lead time & transit period (C) 1 month
Total of (B) & (C) (D) 4 months
The requirement of LC limit (A) * (D) 23.12

Limit recommended say 23.00

While calculating the amount of raw materials purchases on LC basis, the following points need
to be noted.

a) Raw material consumption

b) Add: Closing stock of raw material

c) Less: Opening stock of raw material

d) Total Purchases during the period

e) Purchases on LC basis as % of total purchases

f) Purchases on LC basis in rupees

g) Import duty payable, if any

h) Purchases on LC basis net on import duty (CIF value) (f-g)

i) Transit time should be treated as nil if usance period starts from shipment date.

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 2. Bank Guarantees

A contract of guarantee is defined as a contract to perform the promise or discharge the liability
of the third person in case of the default.

Purpose of Bank Guarantees

Bank Guarantees are used for both preventive & remedial purposes. The guarantee executed by
banks comprises both performance guarantees & financial guarantees. The guarantees are
structured according to the terms of agreement, security, maturity & purpose.

Branches may issue guarantees generally for the following purposes:

a) In lieu of security deposit/earnest money deposit for participating in tenders;

b) Mobilization advance or advance money before commencement of the project by the
contractor & for money to be received in various stages like plant layout,
design/drawings in project finance;
c) In respect of raw materials supplies or for advances by the buyers;
d) In respect of due performance of specific contracts by the borrowers & for obtaining full
payment of the bills;
e) Performance guarantee for warranty period on completion of contract which would
enable the suppliers to realize the proceeds without waiting for warranty period to be
over;
f) To allow units to draw funds from time to time from the concerned parties against part
execution of contracts, etc.
g) Bid bonds on behalf of exporters
h) Export performance guarantees on behalf of exporters favouring the Customs
Department under EPCG scheme.

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 Format of Bank Guarantee
a. Purpose of the Limit Tender amount for different
Govt.organisation& DGFT,India
for procurement of wheat & rice
b. Nature & amount of limit sanctioned Fresh sub limit
c. Outstanding as on Nil
d. Whether the existing limit is proposed to be Yes
continued, if so justification
e. Name of the Beneficiary/i.e. in whose favor Different Govt. Organizations
guarantee to be issued
f. Nature of the guarantee limit required i.e. P/F
performance/financial/Bid bond etc.
g. Assessment & justification for the limit proposed Bank guarantee limit is required
for tender submission for sale of
pulses & other agriculture
products
h. Margin proposed (As applicable to SME)
Performance-5%
Financial-10%
i. Security NA
j. ECGC cover for export performance guarantee
k. Asset coverage for Non-fund based limits

Assessment of Bank Guarantee Limit:

Illustration for computation of BG limit

M/S XYZ Co Ltd

Bank Guarantee limit of Rs. 79.12 lacs

Number of Tenders likely to be submitted by the firm 60

At any point of time participation in tender by the firm 50
Average value of Tender Rs.7.50 lacs
Bid Bond 5% Rs.18.75 lacs
Performance Guarantee 10% of tenders accepted Rs.37.50 lacs
during the year
Security Deposit
Aggregate value of supply made as per projection Rs.305 lacs
Guarantee to be issued from 5% to 10% ,taken as Rs.22.87 lacs
avg.@7.5%

Total Bank Guarantee limit required Rs.79.12 lacs

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 CREDIT APPRAISAL PROCESS

Receipt of application from applicant

|
Receipt of documents
(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and Properties
documents)
|
Pre-sanction visit by bank officers
|
Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list, etc.
|
Title clearance reports of the properties to be obtained from empanelled advocates
|
Valuation reports of the properties to be obtained from empanelled valuer/engineers
|
Preparation of financial data
|
Proposal preparation
|
Assessment of proposal
|
Sanction/approval of proposal by appropriate sanctioning authority
|
Documentations, agreements, mortgages
|
Disbursement of loan
|
Post sanction activities such as receiving stock statements, review of accounts, renew of
accounts, etc.
(On regular basis)

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 Chapter 3: PRE-SANCTION SCRUTINY & CREDIT APPRAISALS

All pre-sanction exercises includes unit visit, exchange of information, KYC, due diligence,
credit reports etc. is obtained by Dena Bank.
Pre-sanction visit / inspection is conducted by the Banks branch officials to ascertain the facts
about infrastructure facilities available at the site of the unit/ project. In case of new accounts,
Branch Visit Report and Format for Discussion form plays an important role in appraisal
proposal.

In case of multiple/ consortium arrangements, close co-ordination with other banks/financial

institutions at the time of the appraisal and disbursement and follow up of advances are ensured
so that timely exchange of data / information is made for effective monitoring and control of
advance.

The Bank carries out dynamic financial analysis by scrutinizing the audited accounts for
previous years so as to ascertain the trend of growth in production, sales, profitability and
improvement in all important financial parameters in order to know the overall health of the
borrower account.

The Bank follows policy of appraising financial position of a borrower (for sanction of new
limits / enhancement of existing limits and for renewal / review) based on the audited financial
statements of the borrower for previous financial year after analyzing the trend as well as
comparison of actuals with the corresponding projections. However in case of
fresh/enhancement/renewal proposal received after 3 months from the date of book closure,
provisional balance sheet pertaining to previous financial year is obtained and analyzed.
Further suitable undertaking is taken from borrower that there will not be adverse variation for
more than 10% in Sales/Revenue, Net profit and Net Worth. If the adverse variation exceeds the
limit of 10%, the account should be put up for review immediately before competent authority as
per discretionary powers. Further, the Bank follows a system of introducing disincentives to
borrowers who fail to submit audited accounts within 8 months from the closing of financial
year by levying interest rate of 1% above the existing rate of interest from the due date i.e. after
8 months period is over till the time Audited Financials are submitted.

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3.1 Due Diligence of Borrowers

Due Diligence of borrowers is the first step of Credit Appraisal, Due diligence is done in order
to authenticate identity of borrower as a person and as a businessman. For borrowing of Rs. 5
Crore & above. Due diligence is undertaken by respective external authorities. This is over and
above due diligence done by the Branches.

3.2 Appraisal cum Proposal Memorandum

The appraisal cum proposal memorandum is placed before the competent authority for
consideration with specific recommendations as to whether or not to approve the credit facilities.
The recommendation for approval include nature and extent of credit facilities proposed,
purpose, securities, margin, rate of interest, commission, repayment, tenor of bills, guarantee etc.
Further, the Bank stipulates all necessary agreements to ensure that:

A. the Bank funds are utilized for the purpose it is lent

B. there is no diversion of funds
C. the business entity maintains financial stability
D. securities stipulated are charged properly
E. the Bank is able to have proper monitoring and control over the exposure
F. the borrower complies with laid down guidelines of the Bank/regulatory requirements

3.3 Credit Approval Authorities:

a) The authority to approve credit, both fund based and non-fund based or a combination of
both, including enhancements in respect of existing borrowers is as per the Banks Delegation
of Discretionary Powers for Conducting Banks Business as approved by the Board of
Directors from time to time.

b) The Board of Directors is the competent authority to revise / amend / modify the Delegation
of Discretionary Powers for Conducting Banks Business from time to time. No delegate
exceeds the powers vested in him/her for according credit approvals except as provided for in
the Delegation of Discretionary Powers for Conducting Banks Business.

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3.4 Requirement of Documents for Processing of Loan

1. Application for requirement of loan.

2. Copy of Memorandum & Article of Association.

3. Copy of Incorporation of business.

4. Copy of commencement of business.

5. Copy of resolution regarding the requirement of credit facilities.

6. Brief history of company, its customers & supplies, previous track records, orders in
hand. Also provide some information about the directors of the company.

7. Financial statements of last 3 years including the provisional financial statement for the
year 2007-08.

8. Copy of PAN/TAN number of company

9. Copy of last Electricity bill of company.

10. Copy of GST/CST number.

11. Copy of excise number.

12. Photo ID of all directors.

13. Address proof of all the directors.

14. Copies related to the property such as 7/12 8A utara lease/sales deed,2R permission,
Allotment letter, Permission.

15. Bio-data form of all the directors duly filled & notarized.

16. Financial statements of associate concern for the last 3 year.

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3.5 Sanction of Facilities:
The bank respective authorities attempt to dispose all credit applications within a certain time
frame.

Sr No. Category / Sector Maximum time

limit for sanction
A Proposals under Anti 30 days
PovertyProgrammes /
Government sponsored
Schemes
B Proposals from MSE & 30 days
Other priority sectors with
limits of less than Rs 10 lakh
C Proposals under Retail 30 days
Banking Schemes
D Proposals for Export Finance
(i) Proposals for sanction of 45 days
fresh/enhancement of credit
limits.
(ii) Proposals for renewal of 30 days
existing limits
(iii) Proposals for sanction of ad- 15 days
hoc credit facilities
E In all other cases:

(i) Proposals for sanction of fresh/ 60 days

enhancement of credit limits.
(ii) Proposals for renewal of 45 days
existing limits
(iii) Proposals for sanction of ad- 30 days
hoc credit facilities

The Bank recognizes that above time limits are outer limits only and prompt disposal even
before expiry of above time limits, preferably within 30 days from the date when the application,
complete in all respects with usually required information and financial statements, is submitted
to the Bank, endeavored at all levels.

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3.6 Rejection of Loan Applications:

1) Any decision on rejection of loan application/s along with reasons is communicated to the
applicant/s within a reasonable time period.

2) Rejection of credit proposal is done by respective sanctioning authority and rejection is

conveyed to the applicant. However in case of following advances rejection of credit proposals
is done by next higher authority:

(i) SC/ST Applicants in Priority Sector advances

(ii) Education Loan Applicants

3.7 Methods of assessment

1. Tandon committee norms:

Like many other activities of the banks, method and quantum of short-term finance that can be
granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was
exercised on the lines suggested by the recommendations of a study group headed by Shri
Prakash Tandon.

The study group headed by Shri Prakash Tandon, the Chairman of Punjab National Bank, was
constituted by the RBI in July 1974 with eminent personalities drawn from leading banks,
financial institutions and a wide cross-section of the Industry with a view to study the entire
gamut of Bank's finance for working capital and suggest ways for optimum utilisation of Bank
credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The
report of this group is widely known as Tandon Committee report.

As per the recommendations of Tandon Committee, the corporates should be discouraged from
accumulating too much of stocks of current assets and should move towards very lean
inventories and receivable levels. The committee even suggested the maximum levels of Raw
Material, Stock-in-process and Finished Goods which a corporate operating in an industry
should be allowed to accumulate these levels were termed as inventory and receivable norms.
Depending on the size of credit required, the funding of these current assets (working capital
needs) of the corporates could be met by one of the following methods:

First Method of Lending:

Banks can work out the working capital gap, i.e. total current assets less current liabilities other
than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a
maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned
funds and term borrowings. This approach was considered suitable only for very small
borrowers i.e. where the requirements of credit were less than Rs.10 lacs.

23 | P a g e
 Second Method of Lending:

Under this method, it was thought that the borrower should provide for a minimum of 25% of
total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain
level of credit for purchases and other current liabilities will be available to fund the build-up of
current assets and the bank will provide the balance (MPBF). Consequently, total current
liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated
that the working capital needs of all borrowers enjoying fund based credit facilities of more than
Rs. 10 lacs should be appraised (calculated) under this method.

Third Method of Lending:

Under this method, the borrower's contribution from long term funds will be to the extent of the
entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing
the absolute minimum level of raw materials, process stock, finished goods and stores which are
in the pipeline to ensure continuity of production and a minimum of 25% of the balance current
assets should be financed out of the long term funds plus term borrowings. As can be seen
above, the basic foundation of all banks' appraisal of the needs of creditors is the level of current
assets. The classification of assets and balance sheet analysis, therefore, assumes a lot of
importance. RBI has mandated a certain way of analysing the balance sheets. The analysis of
balance sheet in Credit Monitoring Analysis (CMA) data is said to give a more detailed picture
of the affairs of a corporate. The corporates are required by all banks to analyse their balance
sheet in this specific format called CMA data format and submit to banks.

2. Cash Budget Method:

Cash Flow Based Lending is more SME customer friendly. Here, bank finance is sanctioned in
the form of short term loan which may be repaid in suitable instalments. This is well suited
particularly when SME units are dealing in seasonal products / construction activities / order
based activities. The customer is assured of bank finance which is based on projected cash flows
which are estimated by him and approved by the bank. Hence, the Cash Flow Based Lending
method is popular in developed countries. Recognizing the importance of this, in March 1997,
the Reserve Bank of India rightly asked the banks to switch over from MPBF method to Cash
Flow Based Lending. But the banks are hesitant to do so due to the element of fear of credit risk.
Credit risk is believed to be on the higher side due to heavy dependence on projected cash flows
which can be over stated 236 to avail of more bank finance. Therefore, banks are worried about
lack of transparency on the part of entrepreneurs. Moreover, there is no stock statement which is
submitted under MPBF method. The stock statement facilitates the bank to ensure the end-use of
funds. Under the Cash Flow Based Lending, the end use of funds is ensured through the
monitoring of cash flows i.e. actual cash flows to be compared with budgeted cash flows.

24 | P a g e
3. Turnover Method:
The WC requirements may be worked out on the basis of Naik Committee recommendations for
working capital limit upto Rs.6 crores from the banking system, on the basis of minimum of
20% of their projected annual turnover for new as well as existing units, beyond which WC be
computed on the basis of WC cycle, after fixing stipulated margins, on each component of the
WC. In case of borrowers desiring facilities under Naik Committee recommendations and
having a WC cycle of more than 3 months in a year, the WC requirements will be funded after
assessing his requirements on the basis of his WC cycle, after fixing proper margins.

Illustration for computation of limit under Turnover Method

M/S XYZ Co Ltd

Cash Credit limit of Rs. 20 crore

Net Sales Rs.100 lacs

Cash Credit Requirement Rs.40 lacs
Bank Financing (20% of Net Sales) Rs.20 lacs
Margin (5%) Rs.5 lacs
Cash Credit Amt.sanctioned Rs.25 lacs
Credit Assessment at Dena Bank

Type of borrower Method of assessment

For Credit limits upto Rs.2 crore (Rs.5 crore in Turnover Method; however, In case working
case of MSMEs) capital cycle is higher, the borrower will have
the choice to be assessed under Turnover
method or Modified MPBF method.

For Credit limits beyond Rs.2 crore (Rs.5 crore Modified MPBF Method
in case of MSMEs)
For operating cycle is reasonably uniform and
working capital remains more or less stable
For industries, where operations are seasonal In case of software Industry
or project based in nature like, Tea, Sugar,
Software, Contractors, Builders & Developers Working Capital Turnover method
etc. limit upto Rs.2 Crs with an option to
borrower to be
assessed under Cash
Budget method
Above 2 Crs Cash Budget Method

Contractor / Builder & Developers

Cash Budget Method / Modified MPBF
Method as deemed fit on case to case basis.
Other seasonal industries viz. sugar, tea,
jute etc
Cash Budget Method
25 | P a g e
 3.8 Financial Ratio Analysis

A ratio is a statistical yardstick that provides a measure of the relationship between two variables
or figures. Appraisal Officials experience and objectives of analysis help him/her in
determining which of the ratios are more meaningful in a given situation. Further, ratios do not
provide a definite answer to financial problems. There is always the question of judgment as to
what significance should be given to the figures. While some standards of reference and sources
of background material may be found useful in this connection, in the final analysis, one must
rely upon one's own good sense in selecting and evaluating the ratios. The following are the
desired / indicative levels fixed by the Bank for different classes of borrowers:
While considering credit proposal for working capital & term loan, bank analyze following
financials ratios:

1. Current Ratio & Adjusted Current Ratio:

(i)Current Ratio:

Working Capital Term Loan

Assessment Method Ratio (benchmark)

Turnover Over Method 1.10:1

Modified MPBF Method :- 1.17:1 #

i) Working capital limit uptoRs.10.00 Crore 1.25:1 #
ii) Working capital limit above Rs.10.00 Crore
# While working out MPBF, minimum margin to be taken @ 15% or 20% of total current assets
so that minimum current ratios are maintained at 1.17 and 1.25 respectively.

(ii)Adjusted Current Ratio= CA / CL (excluding TL installments due within 1 year)

26 | P a g e
2. Total Debt Equity Ratio: The benchmark Debt Equity Ratio for different classes of
borrowers is given below.
Sr.No. Category of the Borrower Benchmark In Case of 100% or
Total D/E Ratio more Collateral
Security Benchmark
Total D/E Ratio
1 Industries (Medium & Large) 3:5:1 4:5:1

2 Industries (MSE) 4:1 5:1

Traders 5:1 6:1

3 Ship Breaking 6:1 7:1

4 Service Industry 5:1 6:1

5 Infrastructure Sector 5:1 6:1

6 NBFC 8:1 10:1

3. Interest Coverage Ratio: Interest Coverage is an indicator as to the number of times the
profit covers the interest liability of the company. This is a risk parameter and an indicator to the
extent to which the interest liability will be serviced on time. Profit for this purpose would mean
the gross profit before interest. The ratio should be minimum 1.5:1.

4. Current Assets Turnover Ratio: {Gross Sales/ (Debtors+ Inventory)}: This ratio indicates
the turnover of the current assets in a year. Generally this is above 1.75.CATR, applicable only
in case where the Bank is sanctioning WC Limit

5. Debt Service Coverage Ratio (DSCR): The Bank normally considers projects having
average DSCR between 1.50 and 2 as adopted by the FIs (1.35 & above for infrastructure
projects).

6. Internal Rate of Return: In case of term loans of Rs.15.00 crore and above, this needs to be
worked out and the same should not be lower than the rate of interest on term loan. The
benchmark IRR may be relaxed in cases where repayment is made through fixed topline.

7. Sensitivity Analysis: In case of term loans of Rs.15.00 crore and above, sensitivity analysis
should be worked out. It is clarified that Sensitivity Analysis is required to be carried out for
Term Loans for funding projects and the same is not required for Short Term Loans, Unsecured
Loans approved by the Banks. In case of advances to Public Sector Undertakings including State
Electricity Boards/ Corporations.

27 | P a g e
3.9 Credit Disbursement

The Bank ensure that the company/ borrower have achieved financials before disbursement of
term loans
Term Loan: In case of new/existing accounts, if all the consortium members are agreeable and
at least 90% of the financial documents is in place, respective credit officers may allow releasing
of Term Loan in line with the consortium banks.

Working Capital: In case of working capital limit, in existing accounts, respective sanctioning
authority may take a view on case to case basis for release of working capital limit under
consortium, pending full financial tie up, subject to limits assessed, approved and released by
lead bank.

Unless all terms and conditions as per sanction terms are compiled by any borrower, No branch
disburse loans/funds or open Letters of Credit or issue any Guarantee in respect of any borrower

Before disbursing funds under Fund Based Limit (FBL) or open Letters of Credit or issue any
Guarantee under Non Fund Based Limit (NFBL), certificate on record is taken by branch that all
terms and conditions are complied with and that all required documentation is completed in
respect of sanction at Branch level. In cases of sanctions by Zonal Manager and above, the
Branch Manage furnish such certificates to respective authorities. Norms related to release of
limit is as under

1. In case of sanction up to branch level

Limit to be disbursed / released only after compliance of all pre-disbursement terms &
conditions, vetting of documentation (in case of limit of Rs.10 lacs & above) and submission of
compliance certificate to Zonal manager

2. In case of sanction by Zonal Office (ZO) & above

a) Inspection of documents is done by advocate / legal officer at Zonal Office

b) Zonal Manager Review Status periodically. Cross verification of the compliance of terms
& condition as certified by the branch is done at the time of visit of ZO officials,
inspection/ audit of the branch.
c) Wherever disbursements under FBL or opening / issuance of Letters of Credit /
Guarantee is necessary before full compliance to all terms and conditions, the permission
of original sanctioning authority is obtained giving justification for the same.

28 | P a g e
3.10 Requirement of Security

The Banks policy with regard to security against credit is one of obtaining a charge (by way of
charge/lien/mortgage as the case may be) on the assets created out of Bank credit.
The Bank prefers to have its credit exposure covered by tangible security (either primary or
collateral) to the full extent of its liability.
In case, security is not available for any reason, the concerned sanctioning authority have to get
itself satisfied about the need for waiving security cover, partially. Nevertheless, assets created
out of credit exposure must be charged to the Bank under first charge.
Collateral Security is obtained to cover any shortfall in value of prime security in case of
existing borrowers and in the case of new borrowers.

1. Primary Securities Margin Norms:

Bank has prescribed detailed guidelines for margins to be stipulated for various credit
facilities/securities. The respective sanctioning authority at the ZO-CAC and above level deviate
from prescribed margin with due justification. For sanction at Branch level, lower margin may
permitted by Zonal Manager. Since margin requirement has impact on financial ratios also, the
sanctioning authority take into account approval for relaxation, if any, required in respect of
financial ratios also.

2. Collateral Securities:
For New Borrowers:

a) The Bank tries to obtain collateral security by way of fixed assets/ cash margin / shares
etc.

b) Branch obtain reasonable collateral security looking to the overall risk factor of the
exposure not less than 15% of exposure proposed if collateral security is not surrendered
specifically. While considering collateral security requirement, asset coverage ratio is
taken into account.

c) In case of PSU borrower, no collateral security to be insisted upon having internal credit
rating of minimum OR-7 irrespective of external credit rating. For other borrowers no
collateral to be insisted upon having OR 3 & above rating (internal) or AAA, AA & A
rating (external)

d) In case of Consortium advances, the Bank follows the decision on the Collaterals as
agreed by the Consortium bankers.

e) In case of Medium Enterprise borrowers, Bank insists on collateral security up to 10%.

29 | P a g e
 For existing Borrowers (upon sanction of enhanced FBL/NFBL limits):

a) Branch try to obtain reasonable collateral security looking to the overall risk factor of the
exposure but in no case, not less than 15% of exposure proposed, if collateral security is
not waived specifically. While considering collateral security requirement, overall asset
coverage ratio is considered.

b) Normally no collateral security may be insisted upon over and above existing collateral
security, if prescribed margins are maintained and the borrower is having good track
record, sound financial position and satisfactory dealings with the Bank

c) In case of PSU borrowers, no collateral security to be insisted upon having internal credit
rating of minimum OR-8 irrespective of external credit rating. For other borrowers no
collateral may be insisted upon having OR 3 & above rating (internal) or AAA, AA & A
rating (external).

d) In case of Consortium advances, the Bank follow the decision on the Collaterals as
agreed to by the Consortium bankers.

Personal Guarantees of promoters:

The Bank insist for personal guarantee of promoters/major shareholders in all borrower accounts
except in PSU, Listed Companies / Large Customer having AAA, AA, A rating and under
consortium arrangement

Credit worthiness of borrower accounts are examined based on net worth as per
Audited/Provisional balance sheet and in case of directors/partners/proprietors on the basis of
CA certified assets and liabilities or annexure CC.

30 | P a g e
3.11 Valuation of Securities

a) The valuation of security of fixed assets including landed properties is obtained from
Banks approved valuers. In case of immovable properties purchased within one year, the
valuation of property is taken as purchase price or realizable valuation price, whichever is
lower. Valuation of securities such as immovable properties charged to bank is taken
once in three years.

b) In case of hypothecation of plant and machinery, the book value reported in last audited
balance sheet is considered as value of security

c) At the time of valuation of the property along with realizable value, distress sales value of
the property also insisted upon and realizable value is considered as valuation.

d) In case of securities other than plant & machinery or land & building etc. like Term
Deposits, LIC Policies, NSCs etc. the latest / surrender value is considered.

e) In case of shares,

(i) Latest value or 52 weeks average closing balance, whichever is less is taken for
valuation purpose.

(ii) Pledge of own companys or Associate companys shares (listed or unlisted) is not
treated as Collateral security.

(iii) Pledge of shares by Pvt. Ltd. Cos. for management control purpose is not treated as
Collateral security.

f) In case of value of immovable security is Rs. 5 crores& above

(i) Bank obtains two valuation reports initially at the time of fresh sanction.

(ii) At the time of revaluation (i.e. after three years), second valuation report is obtained only
if revaluation amount is more than 50% of previous value. As far as possible, second
valuation report is obtained from the valuer other than who has done previous valuation.

g) In case of consortium, bank may accept valuation / search report empanelled with any of
the member bank of consortium.

h) Search report is obtained before sanction and thereafter CERSAI search report every
year.

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Chapter 4: NON-PERFORMING ASSETS (NPA)

4.1Concept
The three letters NPA strike terror in banking sector and business circle today. NPA is a
short form of Non-Performing Assets.
In banking, NPA are loans given to doubtful customers who may or may not repay the loan on
time. There are two types of assets viz. performing and non-performing. Performing loans are
standard loans on which both the principle and interest are secured and their return is
guaranteed.
Non-Performing assets means the debt which is given by the Bank is unable to recover it is
called NPA .Non- Performing Asset [NPA] is a result of asset Liability mismatch, A NPA
account in the books of accounts is an asset as it indicates the amount receivable from the
Defaulters. It means if any bank gives loan to the customer if the interest for that loan is not
paid by the customer till 90 days then that account is called as NPA account. A loan or lease
that is not meeting its stated principal and interest payments. Banks usually classify as
nonperforming assets any commercial loans which are more than 90 days overdue and any
consumer loans which are more than 180 days overdue. More generally, an asset which is not
producing income.

4.2 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. The
specified period was reduced in a phased manner as under:

w.e.f. 31.03.1993 : four quarters

w.e.f. 31.03.1994 : three quarters
w.e.f. 31.03.1995 : two quarters
w.e.f. 31.03.2001 : 180 days
w.e.f. 31.03.2004 : 90 days
90 days delinquency norms are not applicable to Agriculture segment

With the effect from March 31, 2004, NPA shall be a loan or an advance where:

1. Term loan: Interest and /or installment of principal remain overdue for a period of more
than 90 days.
2. Cash credit/overdraft: The account remains out of order for a period of more than
90 days.

32 | P a g e
 3. Bills: The bill remains overdue for a period of more than 90 days from due date
of payment.
4. Other Loans: Any amount to be received remains overdue for a period of more than 90
days.
5. Agricultural Accounts: In the case of agriculture advances, where repayment is
based on income from crop. An account will be classified as NPA as under:
a) If loan has been granted for short duration crop: interest and/or installment
of Principal remains overdue for two crop seasons beyond the due date.
b) If loan has been granted for long duration crop: Interest and/or installment
of principal remains overdue for one crop seasons beyond due date.

RBI introduced, in 1992, the prudential norms for income recognition, asset
classification & provisioning IRAC norms in short in respect of the loan portfolio of the
Cooperative Banks. The objective was to bring out the true picture of a banks loan portfolio.
The fallout of this momentous regulatory measure for the management of the CBs was to divert
its focus to profitability, which till then used to be a low priority area for it. Asset quality
assumed greater importance for the CBs when Maintenance of high quality credit portfolio
continues to be a major challenge for the CBs, especially with RBI gradually moving towards
convergence with more stringent global norms for impaired assets. The quality of a banks loan
portfolio can impact its profitability, capital and liquidity. Asset quality problems are at the root
of other financial problems for banks, leading to reduced net interest income and higher
provisioning costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital strength is
reduced. Reduced income means less cash, which can potentially strain liquidity. Market
knowledge that the bank is having asset quality problems and associated financial conditions
may cause outflow of deposits. Thus, the performance of a bank is inextricably linked with its
asset quality. Managing the loan portfolio to minimize bad loans is, therefore, fundamentally
important for a financial institution in todays extremely competitive and market driven business
environment. This is all the more important for the CBs, which are at a disadvantage of the
commercial banks in terms of professionalized management, skill levels, technology adoption
and effective risk management systems and procedures. Management of NPAs begins with the
consciousness of a good portfolio, which warrants a better understanding of risks in lending. The
Board has to decide a strategy keeping in view the regulatory norms, the business environment,
its market share, the risk profile, the available resources etc. The strategy should be reflected in
Board approved policies and procedures to monitor implementation. The essential components
of sound NPA management are:-

i) quick identification of NPAs,

ii) their containment at a minimum level,
iii) Ensuring minimum impact of NPAs on the financials.

33 | P a g e
Chapter 5: CLASSIFICATION OF LOANS

In India bank loans are classified on the following basis:

5.1 Performing Assets:

Loans, where the interest and/or principal are not overdue beyond 180 days at
the end of the financial year.

5.2 Non-Performing assets:

Any loan repayment, which is overdue beyond 180 days or two quarters, is
considered as NPA. According to the securitization and re construction of financial assets and
enforcement of security interest Ordinance, 2002 non-performing assets (NPA) means an
asset or a/c of a borrower, which has been classified by a bank or financial institution as sub-
standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset
classification issued by the Reserve Bank.

34 | P a g e
5.3 Asset classification

Assets can be categorized into Four categories namely (1) Standard (2) Sub -Standard
(3) Doubtful (4) Loss the last three categories are classified as NPAs based on the period for
which the asset has remained non-performing and the realisability of the dues.

(1) Standard assets: The loan accounts which are regular and do not carry more than
normal risk. Within standard assets, there could be accounts which though have not
become NPA but are irregular. Such accounts are called as special Mention accounts.
(2) Sub-Standard Assets: With effect from 31.3.2005, a sub- standard asset is one, which is
classified as NPA for a period not exceeding 12 Months (earlier it was 18 months). In
such cases, the current net worth of the borrower/ guarantor or the current market value
of the security charged is not enough to ensure recovery of the dues to the bank in full. In
other words, such an asset will have well defined credit weakness 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.
(3) Doubtful Assets: With effect from 31st, March 2005, an asset is to be classified as
doubtful, if it has remained NPA or substandard for a period exceeding 12 months
(earlier it was 18 months). A loan classified as doubtful has all the weaknesses inherent in
assets that were classified as sub-standard, with the added characteristic that the
weakness makes collection or liquidation in full, - on the basis of currently known facts,
conditions and values- highly questionable and improbable.
(4) Loss assets: A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off wholly.
In other words, such an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some salvage or
recoverable value.

When a Sub Standard account is classified as Doubtful or Loss without waiting for 12 months: If
the realizable value of tangible security in a sub Standard account which was secured falls below
10% of the outstanding, it should be classified loss asset without waiting for 12 months and if
the realizable value of security is 10% or above but below 50% of the outstanding, it should be
classified as doubtful irrespective of the period for which it has remained NPA.

35 | P a g e
Chapter 6: NPA IDENTIFICATION NORMS

With effect from 31st March2004, a loan or advance would become NPA where;

i) Interest and/ or installment of principal remain overdue for a period of more than
90 days in respect of a term loan,
ii) The account remains out of order for a period of more than 90 days, in respect of
an Overdraft/Cash Credit (OD/CC),

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

iv) With effect from September 2004, loans granted for short duration crops will be
treated as NPA, if the installment of principal or interest thereon remains overdue for two
crop seasons and loans granted for long duration crops will be treated as NPA, if
installment of principal or interest thereon remains overdue for one crop season, and

v) Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

Out of Order: An account should be treated as 'out of order' if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power. In cases where
the outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 90 days as on the date of
Balance Sheet or credits are not enough to cover the interest debited during the same
period, these accounts should be treated as 'out of order'.

Overdue: Any amount due to the bank under any credit facility is overdue if it is not
paid on the due date fixed by the bank.

The date of NPA will be the actual date on which slippage occurred, as mentioned :
For Term Loan/Demand Loan Accounts
The date on which interest and/or installment of principal have remained overdue for a
period of more than 90 days.
For Overdraft/Cash Credit Accounts
The date on which the account completed a period of more than 90 days of being
continuously out of order.

36 | P a g e
6.1 Income Recognition Policy

1. The Policy of income recognition has to be objective and based on the record of
recovery. Internationally income from non-performing asset (NPA) is not
recognized on accrual basis but is booked as income only when it is actually
received. Therefore, the banks should not charge and take to income account
interest on any NPA.
2. On an account turning NPA, banks should reverse the interest already charged
and not collected by debiting profit and loss account, and stop further
application of interest. However, banks may continue to record such accrued
interest in a memorandum account in their books.
3. 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.
4. If government guaranteed advances become NPA, the interest on such
advances should not be taken to income account unless the interest has been
realized.
5. If any advance, including bills purchased and discounted, become s NPA as at
the close of any year, the entire interest accrued and credited to income account
in the past periods, should be reversed or provided for if the same is not
realized.

This will apply to government guaranteed accounts also.

37 | P a g e
6.2 Provisions

Definition Provision
Asset Classification

Sub-standard Assets which has

remained NPA for a i. 15% of in case of
period less than or equal secured exposure.
to 12 months ii. 25% of in case of
secured exposure
up to Rs. 4 lacs
iii. 20% of in case of
unsecured
exposure in
respect of
infrastructure loan
account where
certain safeguards
are available
Doubtful 1 Assets which has 25% of secured + 100%
remained in Sub- of unsecured portion.
Standard category for a
period of 12 months. It
will remain doubtful up
to 1 year
Doubtful 2 Assets which has 40% of secured + 100%
remained doubtful above of unsecured portion.
1 year to 3 years
Doubtful 3 Assets which has 100% outstanding
remained doubtful above
3 years
Loss Assets where loss has 100% outstanding
been identified and the
realisable value of
security is less than 10%
of the outstanding

38 | P a g e
Chapter 7: IMPACT/ EFFECTS OF NPA UPON BANKS

A strong banking sector is important for flourishing economy. The failure of the banking
sector may have an adverse impact on other sectors. Non-performing assets are one of the
major concerns for banks in India. The only problem that hampers the possible financial
performance of the public sector banks is the increasing results of the Non- performing Assets.
The Non-performing Assets impacts drastically to the working of the banks. The efficiency of
a bank is not always reflected only by the size of its balance sheet but by the level of return on
its assets. NPAs do not generate interest income for the banks, but the same time banks are
required to make provisions for such NPAs from their current profits.

They erode current profits through provisioning requirements.

They result in reduced interest income.
They require higher provisioning requirements affecting profits and accretion to
capital. They limit recycling of funds, set in assets-liability mismatches, etc.
Adverse impact on Capital Adequacy Ratio.
ROE and ROA goes down because NPAs do not earn.
Banks rating gets affected.
Banks cost of raising funds goes up.
RBIs approval required for declaration of dividend if Net NPA ratio is above 3%.
Bad effect on Goodwill.
Bad effect on equity value.

The RBI has also develop many schemes and tools to reduce the NPA assets by
introducing internal checks and control scheme, relationship mangers as stated by RBI who have
complete knowledge of the borrowers, credit rating system , and early warning system and so
on. The RBI has also tried to improve the securitization Act and SRFAESI Act and other acts
related to the pattern of the borrowings.
Though RBI has taken number of measures to reduce the level of the Non-performing
Assets the result is not up to expectations. To improve NPAs each bank should be motivated to
introduce their own precautionary steps. Before lending the banks must evaluate the feasible
financial and operational prospective results of the borrowing companies or customer. They must
evaluate the borrowing companies by keeping in considerations the overall impacts of all the
factors that influence the business. NPAs reflect the performance of banks. A high level of NPAs
suggests high probability of a large number of credit defaults that affect the profitability and net-
worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of
provisions, which reduces the overall profits and shareholders value.

39 | P a g e
7.1 Causes for an Account becoming NPA

Those Attributable to Borrower

a) Failure to bring in required capital.

b) Too ambitious project.
c) Longer gestation period.
d) Unwanted Expenses.
e) Over trading.
f) Imbalances of inventories.
g) Lack of proper planning.
h) Dependence on single customers
I) Lack of expertise.
j) Improper working Capital Management.
k) Mis-management.
l) Diversion of Funds.
m) Poor Quality Management.
n) Heavy borrowings.
o) Poor Credit Collection.
p) Lack of Quality Control.

Causes Attributable to Banks

a) Wrong selection of borrower.
b) Poor Credit appraisal.
c) Unhelpful in supervision.
d) Tough stand on issues.
e) Too inflexible attitude.
f) Systems overloaded.
g) Non inspection of units.
h) Lack of motivation.
i) Delay in sanction.
j) Lack of trained staff.
k) Lack of delegation of work.
l) Sudden credit squeeze by banks.
m) Lack of commitment to recovery.
n) Lack of technical, personnel & zeal to work.

40 | P a g e
7.2 Early symptoms by which one can recognize a performing asset turning in to Non-
performing asset

Four categories of early symptoms:

Financial:

Non-payment of the very first installment in case of term loan.

Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that partial amount is diverted to sister concern
or parent company.

Operational and Physical:

If information is received that the borrower has either initiated the process of winding up
or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower
conduct his business.
Frequent changes in plan.
Nonpayment of wages.

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Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.
Problem between partners.

Others:

Changes in Government policies.

Death of borrower.
Competition in the market.

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Chapter 8: TOOLS FOR RECOVERING NPA

For recovery of NPA there are different tools are available. The important
purpose of these tools is to recover the loan amount from borrower. These tools can
be use according to Loan amount.
Following are the different recovery tools:
LOK ADALATS
DEBT RECOVERY TRIBUNALS (DRT)
SARFAESI ACT, 2002
ASSET RECOVERY CONSTRUCTION INDUSTRY LIMITED(ARCIL)
CORPORATE DEBT RESTRUCTURING (CDR)
ASSET MANAGEMENT COMPANY (AMC)

1. Lok Adalats :
Lok Adalats is a mechanism to settle matters relating to recovery of dues, out of
court. These are convened by Debt Recovery Tribunals / Debt Recovery Appellate
Tribunals. Lok Adalats have no judicial powers. It is a mutual forum for the bank and
the borrower to meet and arrive at a mutual settlement. Once the settlement is signed
by both the parties, the same is placed before the court. The court would then pass a
suitable decrees / orders as per the terms of settlement. Such decrees cannot be
challenged in the next higher courts. At present, accounts in doubtful and loss
category with outstanding above Rs. 5.00 lacs can be referred to this forum. Lok
Adalats Proved to be quite effective for speedy justice and recovery of small loans.

2. DEBT RECOVERY TRIBUNALS (DRT):

To recover their bad Debt quickly and efficiently.
33 Debt Recovery Tribunal and 5 Debt Recoveries Appellate Tribunal.
It is the special court established by central government for the purpose of bank or
any financial institutions recovery.
The judges of this court are the retired judges of high court.
In this court only the recovery cases of Rs.10 lakhs and above can be filed.

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 3. SARFAESI Act:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 empowers Banks / Financial Institutions to recover their non-
performing assets without the intervention of the Court.

The Act provides three alternative methods for recovery of non-performing assets,
namely: -
Securitization
Asset Reconstruction
Enforcement of Security without the intervention of the Court.
NPA loans with outstanding above Rs. 1.00 lac.
NPA loan accounts where the amount is less than 20% of the principal and interest
are not eligible to be dealt with under this Act
o This Act empowers the Bank:
To issue demand notice to the defaulting borrower and guarantor, calling upon them
to discharge their dues in full within 60 days from the date of the notice.
To give notice to any person who has acquired any of the secured assets from the
borrower to surrender the same to the Bank.
To ask any debtor of the borrower to pay any sum due or becoming due to the
borrower.
Any Security Interest created over Agricultural Land cannot be proceeded with.

4. ARCIL:
A company which is set up with the objective of taking over distressed assets (NPA)
from banks or financial institutions and to reconstruct or re-pack these assets to make
those assets saleable.
To buy out troubled loans from banks and make special efforts at recovering value
from the assets, if necessary by special legislation, with special powers for recovery.
Restructuring of weak banks to divest the bad loan portfolio.

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 Indias first ARC with an initial equity of Rs.10 crore with State Bank of India, IDBI
and SBI to pick up 24.5% stake each(and remaining to be acquired by HDFC and UTI
Bank).
Incorporated as a public limited company on February 11, 2002.

OBJECTIVES
Unlocking capital for the banking system and the economy.
Creating a vibrant market for distressed debt assets /securities in India offering a
trading platform for lenders.
To evolve and create significant capacity in the system for quicker resolution of
NPAs by deploying the assets optimally.

5. CORPORATE DEBT RESTRUCTURING (CDR):

For the revival of the corporate as well as for the safety of the money lent by the
banks and FI.
Based on the experience in other countries like the U.K., Thailand, Korea, etc.
Objective was to ensure timely and transparent mechanism for restructuring of the
corporate debts.
CDR mechanism will be a voluntary system based on debtor creditor agreement and
inter-creditor agreement.
CDR mechanism will cover only multiple banking accounts / syndication /
consortium accounts.
An outstanding exposure of Rs.20 crore and above by banks and institutions.

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Chapter 9: DATA AND STATISTICS

BANK PROFILE:

Business Profile:

Y-o-Y %
Parameter March, 2014 March,2015 March,2016 Growth

Gross Advances 78,622 80,629 85,811 6.43

Total Deposits 1,10,028 1,15,936 1,17,431 1.29

Total Business 1,88,650 1,96,565 2,03,242 3.41

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ADVANCES- CLASSIFICATION

Graphical Presentation March, 2016

102.00%

100.00% 0.44%
98.00%

96.00% 7.09%
Loss
94.00% Doubtful
92.00% Sub standard
2.45%
90.00% Standard

88.00%
90.02%
86.00%

84.00%

Actual Data
(INR Crores)
Asset Category March,15 March,16
Amount %age Amount %age

Standard 76,236.21 94.55 77,250.18 90.02

Sub standard 1,568.49 1.95 2,104.81 2.45

Doubtful 2,571.96 3.19 6,076.71 7.09

Loss 252.59 0.31 378.97 .44

Total NPAs 4,393.04 5.45 8,560.49 9.98

Total 80,629.25 100 85,810.67 100

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MOVEMENT OF NPA:

(INR Crores)
Full Year Quarter
Particulars March, March, March, March,
2015 2016 2015 2016

Gross NPA Opening Balance 2,616.03 4,393.04 4,229.92 7,916.47

Less: Cash recoveries 594.70 728.00 324.80 360.11

Less: Up gradations 786.98 443.34 247.12 179.06

Less: Write off 515.30 759.66 292.57 452.70

Total Reductions 1,896.98 1,931.00 864.49 991.87

Add: Slippage & Debit Operations 3,673.99 6098.45 1,027.61 1,635.89

GROSS NPA 4,393.04 8560.49 4,393.04 8560.49

GROSS NPA [%] 5.45 9.98 5.45 9.98

NET NPA 3,014.30 5230.47 3,014.30 5230.47

NET NPA[%} 3.82 6.35 3.82 6.35

Recovery in w/oA/cs 33.99 73.21 13.15 19.33

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EXPOSURE TO MAJOR INDUSTRIES:

Graphical Presentation

Sector-wise distribution
3.57 Infrastructure
2.09
0.87 Power

15.26 Telecom
3.53
Road & Ports
1.34
Other Infra

Metal Inc. Iron & Steel

5.01 Textiles

Chemical & Chemical

Products
All Engineering

Gems & Jewellery

5.54
8.65
Food Processing

1.76 Construction
3.19 1.67

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Actual Data Sector-wise

Particulars March,15 March,16

Sector Amount %age Amount %age

Infrastructure 15,335.71 19.02 13,098.20 15.26

Power 9,945.68 12.34 7,420.44 8.65

Telecom 1,204.06 1.49 1,431.10 1.67

Road & Ports 2,650.51 3.29 2,734.36 3.19

Other Infra 1,535.46 1.90 1,512.27 1.76

Metal Inc. Iron & Steel 4,333.69 5.37 4,754.02 5.54

Textiles 4,308.49 5.34 4,296.40 5.01

Chemical & Chemical Products 1,237.81 1.54 1,148.78 1.34

All Engineering 2,783.96 3.45 3,025.16 3.53

Gems & Jewelry 769.51 0.95 745.89 0.87

Food Processing 1,471.22 1.82 1,792.39 2.09

Construction 1,593.78 1.98 3,064.60 3.57

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RECOVERY THROUGH VARIOUS CHANNELS:

Graphical Presentation

79.65 92.91
100%
90%
22.43
80%
70%
60%
50% Amount Recovered
40% Amount Involved
30% 50.51 1,472.70
4,630.61
20%
10%
0%
LOK DRT SARFESI
ADALATS

Actual Data

ITEMS LOK DRT SARFESI

ADALATS
Cases/Notices/Accounts 8,972 4,815 1,412
Amount Involved 50.51 Cr. 4,630.61 Cr. 1,472.70 Cr.
Amount Recovered 22.43 Cr. 79.65 Cr. 92.91 Cr.
%Amount Recovered 44.40% 1.72% 6.30%

The Bank recorded highest cash recovery of 728 crore (594.70 crore 2014-15), upgradations of
443.34 crore (`786.98 crore 2014-15).
Recovery in Written Off accounts stood at 73.21 crore (33.99 crore 2014-15).

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Chapter 11: RECOMMENDATIONS

RBI should revise existing credit appraisals and monitoring systems.

Banks should improve upon and strengthen the loan recovery methods

Credit appraisal and post loan monitoring are crucial steps which need to concentrate by
all the public sector banks.

There must be regular follow-up with the customers and it is the duty of banker to ensure
that there is no diversion of funds. This process can be taken up at regular intervals.

Personal visits should be made after sanction and disbursal of credit and further close
monitoring of the operations of the accounts of borrowed units should be done
periodically.

Analyze the global crisis. Draw lessons from the global crisis as they relate to
liquidity risks, fund transfer pricing, the future of capital regulation and performance-
related pay.
Gain insights from psychology. Draw on recent results from psychology research into
behavioral risk assessment.
Board members and senior executives of banks need to be clear on how risk
categories impact capital allocation and value.

RBI may initiate actions against defaulters like, publishing names of defaulters in
Newspapers, broadcasting media, which is helpful to other banks and financial
institutions.

As a part of curative measures, bankers may resort to Compromise Settlement or

One Time Settlement. Lok Adalats and Debt Recovery Tribunals are other ways for
the recovery of dues. It has been observed that Banks these days are highly
resorting to SARFAESI Act for the management of NPA.

If the delinquencies are due to reasons beyond the control of borrower which are
namely draughts, floods, or other natural calamities, the banker should suitably
restructure the loans taking into account the genuine difficulty of the borrowers.

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Chapter 12: CONCLUSION

Considering the rapidly increasing NPA accounts of banks, Credit Appraisal has become
important task to be undertaken by banks. The objectives of credit risk management are to:
minimize bad loans by improving the risk/return profiles of the portfolio, price credit risk
adequately or risk based pricing, maximize benefits from potential credit opportunities,
setting of concentration and exposure limits, active portfolio management, adhere to credit
policies and maintain and maintain a reliable database In simple words, 5 Cs are important
from banks point of view while sanctioning the Credit facilities.

This method of evaluating a borrower incorporates both qualitative and quantitative

measures. The first factor is character, which refers to a borrower's reputation. Capacity
measures a borrower's ability to repay a loan by comparing income against recurring debts.
The lender will consider any capital the borrower puts toward a potential investment, because
a large contribution by the borrower will lessen the chance of default. Collateral, such as
property or large assets, helps to secure the loan. Finally, the conditions of the loan, such as
the interest rate and amount of principal, will influence the lender's desire to finance the
borrower.

Also the money locked up in NPAs has a direct impact on profitability of the bank as banks
are highly dependent on income from interest on funds lent. The bank management should
speed up the recovery process. The problem of recovery is not with small borrowers but with
large borrowers and a strict policy should be followed for solving this problem. The
government should also make more provisions for faster settlement of pending cases and also
it should reduce the mandatory lending to priority sector as this is the major problem creating
area. So the problem of NPA needs lots of serious efforts otherwise NPAs will keep killing
the profitability of banks which is not good for the growing Indian economy at all.

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Chapter 13: BIBLOGRAPHY

1. Risk Management in Banking-Alina Mihaela Dima, Ivona Orzea

2. Reserve Bank of India (RBI)Basel III-Capital Regulations-Master Circular
3. Dena Bank-Credit Rating Policy-2015
4. Dena Bank-Credit Risk Management Policy-2015
5. Dena Bank-Loan Policy Including MSME, Small Branch & Retail Lending 2015-16
6. Dena Bank-Management of Non-performing Assets

Websites
http://www.denabank.com
http://www.rbi.org
http://crisilresearch.com
http://www.investopedia.com
http://www.wikipedia.com

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