Chapter-6 RECOVERY OF LOANS AND NPAS

Transcription

1 Chapter-6 RECOVERY OF LOANS AND NPAS RECOVERY Performance analysis of a bank cannot be conducted solely on the basis of resources mobilised or advances made. Resources mobilisation, deployment of resources and recycling of resources are three main centres of banking business operations. Therefore, recovery is equally important activity in banking. Recovery in co-operative banks is still more important as they are supposed to meet their social commitments too. Any delay in recovery hampers the recycling of funds and banks ability to return the loans to higher financial institutions is also impaired. As a result, good borrowers and prospective members suffer. Overdue problem is harmful for defaulter borrowers too. When they fail to return the money, bank charges them penal rate of interest. It burdens them with more financial liabilities and they could not avail of fresh loans. Any delay in recovery on the part of co-operative bank management also creates a situation for mis-utilization of funds at the hands of borrowers as they may spend their borrowings on nonproductive activities. The advances of co-operative banks are mainly directed towards agriculture, tiny/small scale industries and small business enterprises. These sectors are characterised by higher risks and lower returns. These activities can easily succumb to the vagaries of nature, changes in government policies and other pulls from various quarters. (Padmanabhan, (1997) found that the following factors have a bearing on recovery of loans in the agriculture and rural sector: 136

2 - Low production/productivity level in the farms owned by small and marginal farmers on account of inadequate finance, non-adoption of scientific agriculture practices, etc; - Occurrence of natural calamities (drought, flood, pest attack, etc.) - A large number of small farmers/small units have been facing marketing problems; - Crowding of activities leads to non-viability of large number small/tiny industrial units; - Lack of managerial expertise and technical competence; - Imperfect rural markets-farmers/rural entrepreneurs not realising remunerative prices and exploitation by middlemen; - Infrastructure constraints-absence of backward and forward linkage; - The mortality rate is very high in case small borrowers who are not getting adequate extension support at the appropriate time from various agencies; and - The recovery climate has been vitiated by waiver of loans and therefore, a part of borrower community, despite income generation, is unwilling to repay bank s dues. Finding that the recovery of loans is essential for the smooth and efficient working of co-operative banks, an effort has been made to study the recovery position of some of these selected banks in Punjab and Haryana. Absolute amount recovered during a year is important for a bank for its funds management. It helps the bank to rotate and plough back the funds. On the other hand, per centage of recovery to total demand of bank (demand means amount to be recovered during the year/ season) is also an important factor and indicates the 137

3 efficiency of the bank in recovery management. Therefore both absolute and relative recovery positions have been studied. Tables 6.1A, 6.3A, 6.5A, 6.7A, 6.9A, 6.11A, 6.13A and 6.15A present total demand of the DCCBs, which are annexured as annexure I. PUNJAB DCCBs HIGH PROFITABILITY DCCBs IN PUNJAB Trend Analysis Table 6.1 : Trends in Recovery of Loans in High Profitability DCCBs in Punjab : to ( in lakh) Year Short-term Medium-term Other Total Agrl. Non-Agrl. Agrl. Non- Agrl. Loans Loans Average C.V C.G.R t-value 6.76*** ** 8.96*** Trend Equation Constant Beta t-value 5.26*** 2.26* *** 6.56*** Note : *** Significant at 1% level ** Significant at 5 % level *Significant at 10 % level 138

4 It is clear from Table 6.1 that total recovery increased significantly from lakh in to lakh in at the compound growth rate of per cent per annum in high profitability DCCBs, Punjab. Similarly, there was a significant increase in the recovery of short-term agricultural loans (8.55%) and medium-term non-agricultural loans (18.76%). Recovery of short-term agricultural loans increased from lakh to lakh from to , while medium-term non-agricultural loans recovery increased from 304 lakh to 2134 lakh during the same period. Though there was an overall increase in recovery of short-term non-agricultural loans and medium-term agricultural loans, but the increase appeared to be non-significant. Recovery in relation to Demand A perusal of Table 6.2 provides that on the average the proportionate share of total recovery out of demand came to be per cent in high profitability DCCBs of Punjab. It was per cent of the demand in short-term agricultural loans. It exceeded 100 per cent in the case of short-term agricultural loans, i.e., per cent recovery of demand during the year Normally, it may not be more than 100 per cent as recovery cannot be more than demand. But it was due to advance recovery received in that year. Recovery as percentage of demand for loan came to be percent in the case of short-term non-agricultural loan, per cent in medium-term agricultural loan and per cent in medium-term non-agricultural loan. The recovery of other loans could not be studied due to the absence of demand as well as demand for other loans in 5 out of 9 years under study. There was a significant decline in recovery of medium-term non-agricultural loans at the rate of per cent compounded annually. 139

5 Table 6.2 : Recovery in relation to Demand for Loan in High Profitability DCCBs in Punjab to (Percentage) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value ** 1.02 Trend Equation Constant Beta t-value * 1.05 Note : ** Significant at 5 % level *Significant at 10 % level On an average, medium-term non-agricultural loans were only per cent of total loan outstandings (Table 5.2), hence, their declining recovery per centage would affect the per centage of total recovery only to a marginal extent. The overall recovery position in high profitability DCCBs in Punjab seems to be good. High per centage of recovery may be the reason for stagnation in recovery. 140

6 Trend Analysis AVERAGE PROFITABILITY DCCBs IN PUNJAB Table 6.3 : Trends in Loans Recovery in Average Profitability DCCBs in Punjab: to ( in lakh) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 9.70*** 10.84*** *** *** Trend Equation Constant Beta t-value 7.20*** 11.74*** *** *** Note : *** Significant at 1% level Table 6.3 depicts that recovery increased significantly from lakh in to lakh in in average profitability DCCBs in Punjab. It is encouraging to note that the recovery of short-term agricultural loan, short-term nonagricultural loans and medium-term non-agricultural loans registered a significant 141

7 increase during the same period. It increased from lakh in to lakh in in short-term agricultural loans. The increase was from 1016 lakh to 3897 lakh and from 981 lakh to 5820 lakh from to respectively in short-term non- agricultural loans and medium-term non agricultural loans. Recovery in relation to Demand Table 6.4 : Recovery in relation to Demand for Loan in Average Profitability DCCBs in Punjab: to (Percentage) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value *** Trend Equation Constant Beta t-value *** Note : *** Significant at 1% level 142

8 A glance at Table 6.4 provides that the proportionate share of total recovery out of total demand for loans worked out to be per cent on the average of 9 years under study. The average proportion of recovery out of demand was the highest to the tune of per cent in the case of short-term agricultural loans, followed by per cent in short-term non-agricultural loans, per cent against other loans and per cent in the case of medium-term non-agricultural loans. The recovery as a proportion of demand was found to be the lowest to the tune of per cent in the case of medium-term agricultural loans. The proportionate recovery of medium-term non-agricultural loans showed a significant decline at the rate of per cent compounded annually. The recovery as percentage of demand of all types of loans except medium-term non- agricultural loans has shown a stagnant trend. LOW PROFITABILITY DCCBs IN PUNJAB Trend Analysis It can be observed from Table 6.5 that total recovery of loans increased significantly from lakh in to lakh in at the compound growth rate of per cent per annum. It is pertinent to note that recovery of all types of loans, except other loans, increased significantly. The Compound Growth Rate of recovery was the highest to the order of per cent in the case of medium-term agricultural loans, followed by per cent in short-term non-agricultural loans. Thus, in general terms, recovery of every type of loan registered a significant increase during the period of study. 143

9 Table 6.5 : Trends in Loans Recovery in Low Profitability DCCBs in Punjab : to ( in lakh) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 10.02*** 9.93*** 3.11** 4.53*** *** Trend Equation Constant Beta t-value 8.71*** 7.93*** 5.13*** 15.94*** *** Note : *** Significant at 1% level ** Significant at 5 % level Recovery in relation to Demand Table 6.6 reveals that on an average, proportionate share of recovery out of demand for loan appeared to be per cent. The proportion of recovery out of demand appeared to be the highest to the order of per cent in the case of shortterm agricultural loans, followed by per cent in medium-term non-agricultural loans. The proportion of recovery out of demand was found to be the lowest to the 144

10 tune of per cent in the case of other loans. The total recovery as a proportion of total demand remained constant at about 83 per cent, while it increased significantly in the case of short-term agricultural loans at the rate of 0.59 per cent and per cent compounded annually in medium-term loans. Table 6.6 : Recovery in relation to Demand for Loan in Low Profitability DCCBs in Punjab: to (Percentage) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 3.99*** * 8.36*** Trend Equation Constant Beta t-value 4.04*** ** 7.78*** Note : *** Significant at 1% level ** Significant at 5 % level *Significant at 10 % level 145

11 On the other hand, the proportion of recovery out of demand declined significantly at the rate of per cent per annum in the case of medium-term nonagricultural loans. The proportion of recovery of other loans remained fluctuating from 4.51 per cent to per cent during the period of study. It shows that vast fluctuations exist in the recovery of other loans in relation to the demand which hamper the growth of these banks. Total recovery had registered a significant growth rate in all the categories of selected DCCBs during the period of study. Average recovery per centage to demand in total loans during the period of study was 96.23, and per cent respectively in the high, average and low profitability DCCBs. It may be inferred that recovery position of the DCCBs had directly affected with the profitability of the banks. Short-term agricultural loans had recorded the highest per centage of recovery in all types of selected DCCBs in Punjab. Expertise of DCCBs staff in handling agricultural customers and immediate reavailability of the loan may be the important factor for this. ALL SELECTED DCCBs IN PUNJAB Trend Analysis Table 6.7 describes that total recovery of loans increased significantly at the CGR of per cent per annum from lakh in to lakh in in all the selected DCCBs in Punjab. It is encouraging to observe that recovery of all types of loans, except medium-term agricultural loan, increased significantly during the period under study. 146

12 Table 6.7 : Trends in Loans Recovery in the Selected DCCBs in Punjab : to ( in lakh) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 11.95*** 3.82*** *** 3.54*** 16.78*** Trend Equation Constant Beta t-value 8.23*** 5.08*** *** 5.62*** 9.90 Note : *** Significant at 1% level Recovery in relation to Total Demand A perusal of Table 6.8 provides that on an average, the proportion of recovery out of total demand worked at per cent. It was highest to the order of per cent in the case of short- term agricultural loan, followed by per cent and per cent in short-term non-agricultural loan and other loans respectively. The average proportion of recovery out of demand came to per cent in the case of medium- 147

13 term non- agricultural loan and per cent in medium-term agricultural loan in all the selected DCCBs in Punjab. The recovery as a per cent of demand was stagnant in all types of loans except a significant decline at the rate of per cent in the case of medium-term non-agricultural loan. Table 6.8 : Recovery in relation to Demand for Loan in All the Selected DCCBs in Punjab : to (Percentage) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value * *** Trend Equation Constant Beta t-value * *** Note : *** Significant at 1% level *Significant at 10 % level 148

14 HARYANA DCCBs HIGH PROFITABILITY DCCBs IN HARYANA Trend Analysis The data presented in Table 6.9 reveals that total recovery of loans increased significantly from lakh in to lakh in at the compound growth rate of per cent per annum. Table 6.9 : Trends in Loans Recovery in High Profitability DCCBs in Haryana: to ( in lakh) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 9.97*** ** *** Trend Equation Constant Beta t-value 11.81*** *** *** Note : *** Significant at 1% level ** Significant at 5 % level 149

15 Similarly, the recovery of short-term agricultural loans increased significantly from lakh to lakh during the same period, while recovery of mediumterm agricultural loans increased significantly from 109 lakh in to 611 lakh in Though an increase was recorded in recovery of all other types of loans but the wide fluctuations turned the increase non-significant in high profitability DCCBs in Haryana. Recovery in relation to Demand Table 6.10 : Recovery in relation to Demand for Loan in High Profitability DCCBs in Haryana : to (Percentage) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value Trend Equation Constant Beta t-value

16 The analysis of data presented in Table 6.10 highlights that the proportion of recovery out of total demand for loan emerged to be per cent at the average level in high profitability DCCBs in Haryana. The highest proportion of recovery out of demand was found to be per cent in the case of other loans, while it was lowest to the tune of per cent in medium-term non-agricultural loans. Shortterm and medium-term agricultural loans recorded and per cent as average recovery. The proportion of recovery out of demand remained almost stagnant in all types of loans. This indicated that level of recovery was stagnant in high profitability DCCBs in Haryana. Thus, there is need to increase the proportion of recovery, particularly in the case of medium-term agricultural and non-agricultural loans. AVERAGE PROFITABILITY DCCBs IN HARYANA Trend Analysis It is obvious from Table 6.11 that total recovery increased significantly at a compound growth rate of per cent per annum from lakh in to lakh in in average profitability DCCBs in Haryana. It is encouraging to note a significant increase in recovery of all types of loans. The compound growth rate was the highest to the order of per cent in the case of other loans, followed by per cent in medium-term agricultural loan. The rate of increase was found to be the lowest to the tune of 3.27 per cent in the case of medium-term non-agricultural loan, followed by per cent in the case of short-term agricultural loan and per cent in recovery of short-term non-agricultural loan in average profitability DCCBs in Haryana. 151

17 Table 6.11 : Trends in Loans Recovery in Average Profitability DCCBs in Haryana: to ( in lakh) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 6.75*** 2.39** 5.22*** 4.30*** 2.44** 7.94*** Trend Equation Constant Beta t-value 8.11*** 2.15* 6.64*** 3.99*** 3.34*** 6.92*** Note : *** Significant at 1% level ** Significant at 5 % level *Significant at 10 % level Recovery in relation to Demand Table 6.12 brings out that on the average the proportionate share of recovery out of total demand for loan appeared to be per cent. It was highest to the order of per cent in the case of short-term non-agricultural loan and lowest to the tune of per cent in other loans. Average recovery performance in shortterm agricultural loans was per cent and it was per cent in medium-term 152

18 agricultural loans. The increase in proportion of recovery out of demand was found to be significant in the case of short-term non-agricultural loan. The proportion of recovery of all other types of loans registered almost stagnation in average profitability DCCBs in Haryana. Table 6.12 : Recovery in relation to Demand for Loan in Average Profitability DCCBs in Haryana: to (Percentage) Year Short-term Medium-term Other Total Agrl. Non-Agrl Agrl. Non- Agrl. Loans Loans Average C.V C.G.R t-value *** Trend Equation Constant Beta t-value *** Note : *** Significant at 1% level LOW PROFITABILITY DCCBs IN HARYANA Trend Analysis Table 6.13 shows that total recovery of loans increased significantly at the growth rate of 7.82 per cent compounded annually from lakh in to 153

19 67531 lakh in in low profitability DCCBs in Haryana. Similarly, the recovery of short-term agricultural loans increased significantly from lakh to lakh during the same period. Table 6.13: Trends in Loans Recovery in Low Profitability DCCBs in Haryana : to ( in lakh) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 7.36*** * 1.89* *** Trend Equation Constant Beta t-value 7.05*** ** 2.33* *** Note : *** Significant at 1% level ** Significant at 5 % level *Significant at 10 % level A slightly significant increase in the recovery of medium-term agricultural loan (from 577 lakh to 985 lakh) during the same period was also observed. There 154

20 was almost stagnation in recovery of short- term non-agricultural loan as indicated by the non-significant t-value, while abrupt changes in recovery of other loans (these fluctuated between 12 lakh in and 2206 lakh in ) turned the growth rate non-significant. A significant decline in the recovery of medium-term non-agricultural loan could be observed in low profitability DCCBs in Haryana. Recovery in relation to Demand Table 6.14 : Recovery in relation to Demand for Loan in Low Profitability DCCBs in Haryana: to (Percentage) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value *** 0.20 Trend Equation Constant Beta t-value *** 0.18 Note : *** Significant at 1% level 155

21 Table 6.14 presents that the proportion of recovery out of total demand for loan came to be per cent on the average of 9 years under study. The proportion of recovery out of demand was the highest to the order of per cent in the case of short- term non-agricultural loan while it was lowest to the tune of and per cent in the case of medium-term non-agricultural loan and other loans. There was a significant decline in proportion of recovery out of demand in the case of other loans. It came down from per cent in to only per cent in The proportion of recovery out of demand in all other types of loans remained almost stagnant in low profitability DCCBs in Haryana. On the basis of above analysis it can be inferred that absolute recovery had registered a significant growth in all the selected DCCBs in Haryana during the period of study. Average per centage of total recovery to demand during the period of study was 80.64, and respectively in high, average and low profitability DCCBs. Hence, it may be deduced that profitability had direct correlation with recovery position of DCCBs. Proportionate recovery of shortterm agricultural loan was 79.96, and per cent respectively in high, average and low profitability DCCBs. ALL SELECTED DCCBs IN HARYANA Trend Analysis A glance at Table 6.15 provides that total recovery of loans increased significantly from lakh in to lakh in in all the selected DCCBs in Haryana at the compound growth rate of per cent per 156

22 annum. Similarly, there was a significant increase in recovery of short-term agricultural loans from lakh to during the same period. Table 6.15: Trends in Loans Recovery in the Selected DCCBs in Haryana: to ( in lakh) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value 11.31*** 2.97** 4.09*** *** Trend Equation Constant Beta t-value 11.45*** 3.18** 6.34*** * 11.57*** Note : *** Significant at 1% level ** Significant at 5 % level *Significant at 10 % level The increase was also found to be significant in recovery of short-term nonagricultural loans and medium-term agricultural loans. The recovery of short-term non-agricultural loans increased from lakh in to lakh in 157

23 while the recovery of medium-term agricultural loans increased from 796 lakh in to 3051 lakh in The abrupt increase in recovery of other loans in turned the increasing trend non-significant. Recovery in relation to Demand Table 6.16 : Recovery in Relation to Demand for Loan in all the Selected DCCBs in Haryana: to (Percentage) Year Short-term Medium-term Other Agrl. Non-Agrl Agrl. Non- Agrl. Loans Total Loans Average C.V C.G.R t-value *** *** 0.71 Trend Equation Constant Beta t-value *** *** 0.72 Note : *** Significant at 1% level The analysis given in Table 6.16 shows that on the average of 9 years under study, the proportion of recovery out of total demand for loans came to be per 158

24 cent. It ranged from as low as per cent in the case of medium-term nonagricultural loan to as high as per cent in other loans. There was a significant increase in the proportion of recovery out of demand for short-term non-agricultural loan, while in spite of the highest average recovery, the proportion of recovery out of demand for other loans declined significantly at the rate of per cent per annum. The overall recovery position of loans demands special attention in certain areas of loans, particularly in the case of other loans where there has been a declining trend. The stagnation in the proportion of recovery out of demand for other types of loans is also a cause of concern for the selected DCCBs in Haryana. Comparison of Loans Recovery in Punjab and Haryana Table 6.17: Comparison of Loans Recovery in DCCBs in Punjab and Haryana during to ( in lakh) Recovery Punjab Haryana Mean SD Mean SD t-value ST-Agrl ST-Non Agrl *** MT-Agrl ** MT-Non Agrl *** Others Total Note : *** Significant at 1% level ** Significant at 5 % level Table 6.17 presents the comparison of average recovery of different types of loans in DCCBs in Punjab and Haryana. The total mean recovery came to be

25 lakh in Punjab which was statistically at par with lakh in Haryana as indicated by the non-significant t-value. However, the mean recovery of short-term non-agricultural loan and medium-term agricultural loan was significantly higher in Haryana as compared to that in Punjab. On the other hand, the recovery of mediumterm non-agricultural loan was significantly higher in DCCBs in Punjab as compared to that in DCCBs in Haryana. Table 6.18 explains that proportion of recovery out of demand for loan appeared to be per cent in DCCBs in Punjab, which was significantly higher than that in DCCBs in Haryana, i.e., per cent. The proportion of recovery out of demand for short-term agricultural loan and mediumterm non-agricultural loan was also significantly higher in DCCBs in Punjab as compared to those in DCCBs in Haryana. Table 6.18 : Comparison of Proportion of Recovery in Demand for Loan in DCCBs in Punjab and Haryana during to Recovery/Demand Punjab Haryana Mean SD Mean SD ST-Agrl ST-Non Agrl MT-Agrl MT-Non Agrl Others Total t-value Note : *** Significant at 1% level ** Significant at 5 % level *Significant at 10 % level 160

26 On the basis of whole analysis, it can be said that the proportion of recovery out of demand for loan was more encouraging in Punjab as compared to the fluctuating and unstable trends in DCCBs in Haryana. Therefore, the recovery management of loans ought to be made efficient in Haryana. NON - PERFORMING ASSETS IN CO-OPERATIVE BANKS The Narasimham Committee (1991) on financial system made several recommendations with regard to reforms in the financial sector. One of the most important recommendations made by the committee relates to the reflection of actual financial health of the banks in their Profit & Loss Accounts and Balance-sheets. The committee recommended that 1. The prudential norms for income recognition should be objective and based on actual record of recovery rather than on any subjective consideration. 2. The classification of assets should be done on the basis of objective criteria which would ensure a uniform and consistent application of norms. 3. The provisioning should be made on the basis of classification of assets into four categories, viz. standard, substandard, doubtful and loss assets. While accepting the above recommendations, RBI issued guidelines to Commercial Banks and the Urban Co-operative Banks to adopt the above system from the year Regional Rural Banks were advised to implement the norms of income recognition and asset classification from the year ending 31 st March, 1996 (Provisioning to be made from the year ending 31 st March, 1997). Further, it was decided by RBI that the prudential norms of income recognition, asset classification and provisioning be extended to the State Co-Operative Banks and the Central Co- 161

27 operative Banks from the year ending 31 st March, 1997 (PSCB, 2001). RBI (1996) guidelines on the subject are summarised below: (i) INCOME RECOGNITION a) The State Co-operative Banks and Central Co-operative Banks (SCBs/CCBs) should not take the unrealised income to Profit and Loss Account. In States where the SCBs/CCBs are required to take such unrealised income to P and L A/c as per the relative provisions of the State Act/Rules, those banks will have to make full provisions for equivalent amount by charging interest to overdue loans and if such interest remains unrealised, the same may not be taken to income account and matching provision be made. Accrued interest taken into account in the previous year should also be provided in full in cases where the same has become overdue. b) Fees, commission and other income may be treated as income only if the account is classified as Standard. Besides, a matching provision should be created in the extent such items were treated as income in the previous year but not realised in the subsequent year. c) Fees and commission earned as a result of renegotiation or rescheduling of outstanding debit should be recognised on an accrual basis over the period of time covering the renegotiated or rescheduling of credit. d) In the case of credit facilities guaranteed by government overdue interest can be taken to profit and loss account only if matching provision is made. e) The bills purchased /discounted should be treated as overdue if the same remain unpaid. Interest may be charged to search bills and taken to profit and loss account only if matching provision is made. 162

28 (ii) CLASSIFICATION OF ASSETS As per guidelines of RBI (1996), classification of agricultural and nonagricultural loans is required to be done into two broad categories: Performing Assets (Standard Assets) The borrower accounts which do not disclose any problem and do not carry more than normal risk attached to business qualify for classification as standard assets. In other words, all current loans, short-term agriculture loans and nonagriculture loans which have not become NPAs may be treated as standard assets. Non-Performing Assets The Securitization Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 defined non- performing assets (NPAs) as an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful, or loss assets in accordance with the direction or guidelines relating to assets classification issued by the RBI. NPA is defined generally as a credit facility in respect of which interest and/ or principal in arrears have not been received for one quarter or more. NORMS FOR ASSET CLASSIFICATION Criteria for Classification of Assets On the basis of age of overdues, classification of agricultural and nonagricultural loans is required to be done into the following four categories: (1) Good/Standard Assets Standard asset is one which does not disclose any problem and which does not carry more than normal risk attached to business. Thus, in general, all the current 163

29 loans, short-term agricultural and non-agricultural loans which have not become NPAs may be treated as standard assets. (2) Sub-standard Assets A non-performing asset may be classified as sub-standard on the basis of the following criteria: a) An asset, which has remained overdue for a period not exceeding 3 years in respect of both agricultural and non-agricultural loans should be treated as sub-standard. b) In the case of all types of term loans, where instalments are overdue for a period not exceeding 3 years, the entire outstanding term loan should be treated as sub-standard. c) An asset, where the terms and conditions of the loan regarding the payment of interest and repayment of principal have been renegotiated or rescheduled after commencement of production, should be classified as sub-standard and should remain so in such category for at least two years of satisfactory performance under renegotiated 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 the above conditions. 3. Doubtful Asset A non-performing asset may be classified as doubtful on the basis of following criteria: a) An asset which has remained overdue for a period exceeding three years in respect of both agricultural and non-agricultural loans should be treated as doubtful. 164

30 b) In the case of all types of term loans, where instalments are overdue for more than three years, the entire outstandings in term loans should be treated as doubtful. 4. Loss Assets Loss assets are those where loss is identified by the bank/auditors/rbi/ NABARD inspectors but the amount has not been written off wholly or partly. In other words an asset,which is considered unrealisable and/or of such little value that its continuance as a doubtful asset is not worthwhile, should be treated as loss asset. Such loss assets will include overdue loans in which cases (a) decree or execution petitions have been time barred or documents are lost or no other legal proof is available to claim the debt, (b) where the members and their sureties are declared insolvent or have died leaving no tangible assets, (c) where the members have left the areas of operation of the society leaving no property, their sureties have also no means to pay the dues, (d) where the loan is fictitious or when gross misutilisation is noticed, and (e) amounts, which cannot be recovered in case of liquidated societies. (iii) PROVISIONING NORMS ON THE BASIS OF ASSETS CLASSIFICATION Provisioning is necessary, considering the erosion in the value of security charged to the banks over a period of time. Therefore, after the assets of DCCBs/SCBs are classified into various categories (standard, sub-standard, doubtful and loss assets) necessary provision has to be made for the same. The details of provisioning requirements in respect of various categories of assets are mentioned below (RBI, 1996). 165

31 1. Standard Asset Provision is required to be made as follows: (a) On direct advances to agriculture and SME sectors : 0.25% (b) On all other types of advances : 0.40% 2. Sub-standard Asset A general provision of 10% of the total outstandings in this category may be made. 3. Doubtful Assets (a) 100% is to be made of the extent to which the advance is not covered by realisable value of securities to which the bank has a valid recourse and the realisable value is estimated on a realisation basis (b) Over and above item (a), provision is to be made depending upon the period for which an asset has remained overdue/npa, 20% to 100% of the secured portion (i.e., estimated realisable value of the outstandings on the following basis: Criteria % Provision Overdues above 3 years and up to 4 years 20% Overdues over 4 years, but not exceeding 6 years 30% Overdues exceeding 6 years 100% IV. Loss Asset 1. The entire loss asset should be written off. If the assets are permitted to retain in the books for any reason, 100% of the outstanding thereof should be fully provided for. 166

32 2. The following aspects, however, may be kept in view while making provisions (RBI, 1996). (i) All agricultural loans may be treated as fully secured as the same are disbursed against charge on land as provided in the respective State Co-operative Societies Acts/Rules. (ii) Liability towards Provident Fund and gratuity should be estimated on actuarial basis and full provided for (iii) Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies are exempted from provisioning. Therefore, the above accounts may not be classified as NPAs/Overdue. (iv) Advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements. (v) The investment portfolio of a bank would normally consist of both approved securities (Predominately Government Securities) and Other (shares, debentures and bonds of co-operative and other institutions). Investments in approved securities should be bifurcated into permanent and current investments. Permanent investments are those which banks intend to hold till maturity and current investments are those which banks intend to deal in, i.e., buy and sell on a day-to-day basis. Banks should keep not more than 50% of their investments in permanent category. While the depreciation in respect of permanent investments is not likely to affect their realisable value on maturity, depreciation need not be provided for investments in the permanent category. Investments under current category should be carried at lower of cost value 167

33 of market value, on a consistent basis. Depreciation in the current investments, if any, should thereof be fully provided for. Banks following a more prudent method of valuation (e.g., all the investments marked to market) should continue to do so and there should not be slip back in their case. Investments should be shown in the balance-sheet net of depreciation. It is, however, open to banks to show the book value of investments, the depreciation there against and net amount of investments separately. As regards valuation of securities other than approved securities these should be valued at lower of cost price or market value. Investment in the shares of cooperative institutions, however, may be valued at carrying cost price. NON-PERFORMING ASSETS IN DCCBs Non-performing assets are a very serious problem in financial institutions. NPAs have been the single most vexing problem faced by the banks. It resulted in deteriorating the process of resources mobilization in terms of non-recovery of loans, loss of interest thereof and the provisions made to accommodate these non-recovered loans. This affects business activity very badly, particularly in terms of re-advancing the loans and hence, earning interest. Banks that have been identified as weak are mainly so because of loss of their income, high carrying cost of NPAs, both in terms of their funding as well as provisioning and general stagnation of operations caused by NPAs in their books. In DCCBs, this problem is more acute due to political interference and subsidized finance (Sabina, 2008). Therefore, it is very much relevant here to study the trends in non-performing assets. PUNJAB DCCBs 168

34 HIGH PROFITABILITY DCCBs IN PUNJAB Table 6.19: Trends in NPAs in High Profitability DCCBs in Punjab : to ( in lakh) Year Total NPAs Provisions Made Loans Outstanding Average C.V C.G.R t-value 5.64*** 11.03*** 0.62 Trend Equation Constant Beta t-value 8.05*** Projections % Change Over % of NPAs to Loans Outstanding Note : *** Significant at 1% level 169

35 A cursory look at Table 6.19 reveals that NPAs increased from lakh in to lakh in , registering a significant growth at the rate of per cent compounded annually. The provisions made also depict a significantly increasing trend from lakh to lakh during the same period in high profit DCCBs in Punjab. The rate of increase was higher in provisions (21.65%) as compared to NPAs (14.25%). It shows that these DCCBs had failed to recover their old NPAs and due to ageing of the NPAs provisions had to be made as a higher rate. Hence, recovery of old NPAs is essential for these banks. Trend equation shows that NPAs would increase by per cent in and further to per cent in over those during , if this trend is not checked. The further trend is similar in the case of provisions made against NPAs. The proportion of NPAs in outstanding loans fluctuated between a minimum of 5.65 per cent in to a maximum of 9.71 per cent in with an overall average of 7.65 per cent during the period of study. Compound growth rate of percentage of NPAs to loans outstanding was recorded at 2.06 per annum. AVERAGE PROFITABILITY DCCBs IN PUNJAB The analysis given in Table 6.20 indicates that the NPAs increased from lakh in to lakh in registering a significant compound growth rate of per cent per annum. The provisions made against NPAs also showed significant increase during this period. This shows that average profitability DCCBs in Punjab used to make proportionate provisions to accommodate NPAs. It can be said that the NPAs would increase by per cent in and per cent in over in the average profitability DCCBs in 170