CHAPTER IV LENDING OPERATIONS AND RECOVERY PERFORMANCE

Transcription

1 CHAPTER IV LENDING OPERATIONS AND RECOVERY PERFORMANCE The management of funds has emerged as an area of vital importance for banks. The success of banks depends on the efficient management of funds. The banks have to deploy their working funds into profitable lines whether it is into investment or into lending operations. The overall business performance of the bank constitutes both mobilizing sources of working funds and gainful employment of such funds. The cost incurred in the process of mobilization of working funds has to be taken into account while using the funds to do business. The banks have to keep a constant watch on the movement of funds to make sure not only that they are used to the best advantage, but also that no financial difficulty arises in due course. Present day banking atmosphere is full of competition and customers dictate terms both on deposits and on borrowings. In the deregulated market, banks do frequent exercises in fixing the rate of interest for deposits and loans. They have chosen to fix their PLR in two ways, one at fixed and the other at floating rate. The volatility of finance market and the aggressive competitive rates fixed by various players in the banking arena make the problem of funds management in banks more acute and complex. The cooperative banks are one among the players in the changing banking scenario. Their area of 131

2 operations does not alienate from that of commercial banks and hence compelled to adapt to the new environment. Though the cooperative banks have realized their critical urgency, their progress towards utilization of funds is at snail s speed. The KCCB falls in line with the cooperative banks in Tamil Nadu and its modernization process is yet to gain momentum. Working funds are used by banks to invest and to lend besides to meet the statutory obligations like CRR and SLR. The efforts of DCCBs till recently are confined to rural finance only. With the diversification of loan portfolio, the bank has got the opportunities to earn higher income. To analyse and examine the funds management of bank, the balance sheet approach is widely followed in India and this holds true to the cooperative banks also. Therefore it is convenient and relevant to discuss the management of funds with focus on the problems and functions of the KCCB in its investment and lending operations within the frame work of bank s balance sheet. The KCCB has employed its total funds under cash and bank balance, investment in shares of cooperative banks, investment with apex bank (TNSCB), loan and advances, fixed assets and other assets. Out of the above six categories, bank could earn interest or dividend from loans and advances, investment with TNSCB and investment in shares of 132

3 cooperative banks. A very meager income would come from cash, bank balance, fixed assets and others assets. Therefore while analysing the pattern of deployment of funds by the KCCB, more attention is given to those categories which give income. 133

4 TABLE : 4.1 Deployment of Working Funds (Rs.in lakhs) Particulars Year Cash & Bank Balance Investment in shares in Cooperatives Investment in Fixed Deposit Investment in Govt. Securities Investment in Other Trust Securities Investment in Apex Bank Loans and Advances Short term Medium Term Long Term Fixed Assets Other Assets Total Source : Compiled from annual reports and records of the KCCB 134

5 Table 4.1 brings out the details of application of funds under six different categories for the study period of to The cash in hand and bank balance increased from Rs lakhs in to Rs lakhs in In the subsequent years, it decreased upto Rs lakhs in The minimum cash in hand and bank and bank balance facilitates earning higher profit to the banking business. The investment in shares in co-operative bank gradually increased from Rs lakhs in to Rs lakhs in The investment in fixed deposit and in government securities shows fluctuating trend during the decade. But the figures shot up from Rs lakh and Rs lakhs in to Rs laksh and Rs lakhs respectively. The investment in other trust securities has a constant amount Rs. 20 thousand in the whole study period. The investment in apex bank showed an ups and down during the decade. But it gradually increased from Rs lakhs in to Rs lakhs in Under loans and advances, the short term loan has been given highest preference by the bank because of major agricultural production in the command area. The quantum of short term loan shows a fluctuating trend. It increased from Rs lakhs in to Rs lakhs in The growth rate is 167 percent. The medium and long term loan amount also shows the same trend as short term loan. The fixed assets increased from Rs lakhs in to Rs lakhs in The other 135

6 assets decreased from Rs. 250 lakhs in to Rs lakhs in The bank should come out with innovative loan schemes for income generation by deploying more funds in its credit portfolio. For a detailed analysis of the investment and loaning pattern of the KCCB, the following aspects are studied: i. Loanable funds and actual loaning position. ii. iii. iv. Investable funds and actual investment position Credit deposits and credit borrowing ratio Disbursement and recovery of loans and advances. Disbursement of loans Disbursement of loans and advances is an important function of banking. Every year annual action plan is drafted in every branch of commercial banks as well as cooperative banks to meet the credit demands of the command area of the branch. This exercise is done under the lead bank scheme of the RBI. The KCCB also draws annual action plan and the disbursement of loans and advances are made in accordance with the projections made in the annual action plan. The success of the KCCB lies on the effective deployment of funds in the form of loans and advances in a judicious manner to generate sufficient financial margin for the conduct of the business smoothly. Since different loans attract 136

7 different interest rates and risk level, the composition of the loan mix is very important. The performance of loans disbursement shall be studied on the basis of term wise lending. Loans are issued by the KCCB for short term, medium term and long term periods mainly for agricultural operations. Short term loans are disbursed for a period of one year, medium term loans for two or five years and long term are disbursed for a period of more than five years. 137

8 TABLE : 4.2 Year Short term Disbursement of Loans Medium term Long term (Rs in lakhs) Total (92.57) (7.30) (0.13) (96.84) (3.00) (0.16) (97.68) (2.30) 5.19 (0.01) (96.50) (3.44) (0.07) (92.16) (7.78) (0.06) (88.95) (10.99) (0.06) (70.59) (29.41) 1.4 (0.00) (92.21) (7.79) 0.12 (0.00) (69.92) (3.83) (26.25) (92.14) (7.86) 1.01 (0.00) Average Source: Compiled from annual reports and records of the KCCB Figures in brackets common size percentage to the total disbursement of loans. 138

9 Diagram

10 Table 4.2 provides the amount of loan disbursed by the KCCB and their common size percentages during each financial year from to The table indicates that the KCCB had disbursed mainly loans for short term requirements at an average of per cent of its total annual disbursement of loans. Towards medium term loans, the average disbursement accounted for about 8.37 percent and for long term loans the average disbursement was only 2.67 per cent of the total annual loan disbursement by the KCCB. Under short term loan disbursement, it was Rs lakhs in the year registering the highest during the study period. The disbursement under short term lending increased from Rs lakhs in to Rs lakhs in In case of medium term loans, the highest disbursement in quantum was registered in the year i.e., Rs lakhs; the lowest disbursement was in the year i.e., Rs lakhs. In the case of long term loans, the quantum disbursed was least in the year i.e., Rs.0.12 lakhs and highest disbursement registered in the year i.e., Rs lakhs. From the table it is inferred that there is no regular increase or decrease in the year wise disbursement of loan. However clarity is observed that the KCCB disbursed loans mainly for short term production 140

11 purposes. On an average disbursement under medium and long term categories together forms only per cent of its total loan disbursement. The performance of the KCCB in disbursement of loans annually confirms the fact that the command area of the KCCB lies in the cauvery delta where paddy and sugarcane are the main crops. Therefore, the demand for short term loan requirements is on the higher side. The KCCB concentrates on agricultural lending, especially on short term agricultural loans. Apart from short term lending, bank must lend under non farm sector to augment profitability. The bank, therefore, must diversify its lending and expand advances towards non farm sector also. The NABARD also issued instructions to the KCCBs to bring about diversification from traditional agricultural lending to non farm sector lending. As a result, the bank has made great efforts in increasing high income yielding non-agricultural loans by introducing new loan schemes. 141

12 Loans outstanding The loans outstanding position of the KCCB provides an insight into the performance of the KCCB, in credit management. The outstanding position is arrived at as The outstanding position as on the previous year plus(+) disbursement during the current year minus (-) recovery made during the current year. For healthy operations of a bank, the turnover of loans and advances must be on the increase. In other words the disbursement and recovery of loans must be increased every year. 142

13 TABLE : 4.3 Position of Loans Outstanding (Rs. In lakhs) Year Short term Medium term Long term Total (78.93) (20.89) (0.18) (81.39) (18.21) (0.40) (85.59) (14.01) (0.40) (84.54) (14.18) (1.28) (81.91) (17.08) (1.02) (78.79) (20.29) (0.92) (55.55) (43.91) (0.54) (58.89) (77.34) (78.04) (40.75) (22.40) (21.84) (0.36) (0.26) (0.12) Average Source: Compiled from annual reports and records of the KCCB Figures in brackets common size percentage to the total outstanding of loans. 143

14 Table 4.3 gives the loans outstanding position of KCCB. The short term loan outstanding has fluctuated during the decade of the study period. But it showed an upward trend from Rs. 19, lakhs in to Rs. 31, lakhs in Similar trend is noticed in the other medium term and long term loans outstanding. The short term loans outstanding increased from Rs lakhs in to Rs lakhs in The long term loans outstanding also increased from Rs lakhs in to Rs lakhs in It registered the highest outstanding amount of Rs lakhs in The same trend is reflected in the total loans outstanding of the KCCB. The percentage of loans outstanding under short term category to the total loans outstanding is the highest i.e. at an average of per cent. The average medium term category outstanding is at percent. Similar analysis leaves an information that the long term loan outstanding is at an average of 0.56 per cent only. Thus, the average loan outstanding of proportions of short term, medium term and long term loans are arrived at : : 0.56 respectively. 144

15 Loanable funds and actual Loaning Generally the banks mobilise deposits from the public for the purpose of lending and investments. The purpose of investment mainly here is to maintain the liquidity of the bank. It is the loans and advances portfolio of the bank which generates its profitability and helps it to grow. As per the RBI suggestions, a bank should have an ideal loan portfolio as follows: percent of borrowings percent of owned funds, and percent of deposits According to the suggested norms of the RBI, an exercise is made for the KCCB to arrive at the loanable funds. In order to find out whether the KCCB deviates from or closely follows the RBI norms, a comparative analysis has been made between actual loaning patterns of the KCCB and the loanable funds. 145

16 TABLE Loanable Funds and Actual Loaning (Rupees in lakhs) Types of resources Loaning percentage Source: Compiled from annual reports and records of the KCCB Year Owned Funds Loanable 75% Deposits Loanable70% Borrowings Loanable 100% Total Loanable Actual Loaning

17 Table 4.4 is the outcome of such exercise made for ten years of lending performance of the KCCB. The loanable quantum was arrived at as per the RBI s suggested norms. The table indicates that the KCCB follows balanced norms in lending, i.e., the actual loans position never touched or crossed the loanable funds during the entire study period of ten years. However, the highest utilisation of the loanable funds for actual lending was noticed in the year (96.56 percent), (96.44 percent), (92.44 percent), (93 percent), (92.68 percent), (98.09 percent), and (99.64 percent). Among these years, in was the highest lending period. The lowest utilisation of the loanable funds for lending was noticed in the year (89.99 percent), (88.60) and (88.64 percent). The average utility of the loanable funds for actual lending by the KCCB during the period of ten years of study was arrived at percent. The parity in actual lending and loanable funds may be considered a non-utilisation of available funds. This is an important factor which results in lower profitability or loss. So a clear information derived from the analysis is that the unused loanable portion is either directed to investments or kept idle as cash and bank balances. The KCCB must review its lending performance every 147

18 quarter, if not for each month, and fully utilize the loanable funds for lending. To increase the interest income, without preferring investments, the KCCB must take calculated risk and strengthen the credit portfolio. The personnel in the credit department must be empowered with the techniques of credit management taking into account the aspects of risk management. Yield is associated with risk. Therefore the KCCB must take calculated risk besides taking all precautionary measures in lending. Investments The main purpose of investment for any bank is to maintain the liquidity of the bank though it gives a lesser interest income to the bank. The investment portfolio of the KCCB is under two broad categories: 1. Under CRR and i.e., statutory investments 2. Investments in shares of cooperative banks and as deposits with State Apex cooperative Bank. Basically the returns of keeping funds under investments cannot be equivalent to the rate of interest on loans and advances. The investments gain importance in the present day banking because of the necessacity to maintain prescribed capital adequacy ratio, which is calculated based on the risk weighted assets. 148

19 Year TABLE Position of Investments Investments (Rs. in lakhs) Trend (Percent) Source : Compiled from annual reports of the KCCB. Table 4.5 exhibits the position of investments of KCCB. The investment amount slowly increased from Rs lakhs in

20 to Rs lakhs in The growth percentage also showed an upward trend and it increased to percentage in the study period. Investible funds and Actual Investments In the introduction to the table 4.4, it is stated that as per the RBI s suggested norms, an ideal bank should have its loading portfolio as 75 per cent, 70 per cent and 100 per cent of owned funds, deposits and borrowings respectively. The RBI norms provide the complementary suggestion of 25 percent of investable funds, while 25 per cent of deposits may be taken as investable funds. While 25 per cent owned funds can be taken as investable funds, in the case of deposit; only 25 per cent ( 30 per cent 5 per cent for CRR) can be taken as investable funds because of the necessity to fulfill CRR requirements. Table 4.6 provides the year wise investable quantum of funds for the selected CCB and its actual investment. 150

21 Types of resources Owned Funds Investible 25% TABLE Investible Funds and Actual Investment Year (Rs. in lakhs) Deposits Investible 30% Borrowings Investible 0% Total Investible Actual Investment Investing percentage Source : Compiled from annual reports of the KCCB. 151

22 Table 4.6 shows the investible funds and actual investment of the KCCB. During the study period, had the highest portfolio investment of percent. The low profile investment portfolio was percent in The bank shifted its investment pattern and more or less fully utilized the investable funds for ideal investment pattern from The table gives an average of per cent of the total from Credit deposits and Credit Borrowings Ratio. Credit deposit ratio is important for an analysis of the banking system as whole and credit is the principal avenue for the deployment thereof. The relationship between these two magnitudes therefore indicates whether the operating funds of a bank are under deployed and over deployed. For a bank, subject to day to day liquidly requirements, higher the credit deposit ratio, the better is the deployment position and consequently the earnings position improves. The credit deposit ratio varies between the busy season and the slack season and central banking policy has of late been seeking to pay the credit deposit ratio at a little over 70 percent. Broadly speaking a sustained credit deposit ratio of less than 60 percent is likely to adversely 152

23 attack banks viability under current condition. Credit management is an important function of funds TABLE 4.7 Ratio of Credit to Deposits and Credit to Borrowings (Rs. in lakhs) Year Credit Deposit borrowings Credit Deposits ratio (in times) Credit Borrowings ratio (in times) Source : Compiled from annual reports of the KCCB. Management of any bank. The above statement holds good for the KCCB also. The parameters, credit deposits ratio and credit borrowings 153

24 ratio help to ascertain the credit explosure of the bank applying the source from funds raised by deposits and borrowings respectively. If a bank is a viable one, then the credit deposit ratio should be at least 60 per cent. The Madhava Das Committee (1978) has recommended an optimum credit deposit ratio of 70 per cent. But in case of KCCB also, the situation is different. The commercial banks highly depend on deposits for its working fund and hence the above ratio per cent is an accepted level for commercial banks. In KCCB, the deposits and borrowings are almost equal and here the CD ratio alone cannot be taken for an appropriate analysis. Hence, credit deposit as well as credit borrowings ratios are arrived at for the detailed study. Table 4.7 provides the credit deposit as well as credit borrowings for the KCCB. From the table a notable fact derived is that the credit borrowings ratio was higher than that of credit deposits ratio during the study period Borrowing and deposits together provide the basic fund for credit portfolio of the bank. Therefore the figures under deposits and borrowings are substituted to each other in providing total comfortable position of funds to carry on credit management by the bank. 154

25 The bank can lend only if sufficient resources are available in the form of deposits or borrowings.kccb has deposits as one of its main sources of funds. Unless and otherwise these deposits are properly deployed, banks will face revenue crunch. Hence, banks have to locate profitable areas of investment and one such area is extending loans and advances. Lending is full of risk and the quantum depends upon the deposits mobilised, though borrowings also provide funds for credit operations. Recovery Performance The recovery of loan is very important from the point of view of recycling of funds, safe-guarding the trust and confidence of depositors and also for drawing refinance from NABARD. Non-performing assets in the form of overdue loans affect the profitability and viability of the DCCBs. The poor recovery of loans in the agricultural sector, for obvious reasons, is an area of anxiety and serious concern for the banks. As regards the health of the credit institutions which is an important factor in sustaining the projected levels of credit supply, the level of overdues matters very much. While in banking, lending is a fine art requiring sharp commercial acumen. Efficient and effective recovery of advances is perhaps a still finer art requiring a high degree of specialization. 155

26 The recovery is a complex sphere in the cooperative banking. The mounting overdues of a bank reflects its operational inefficiency and ineffective machinery for supervision over the utilization of loans by members. Unless the loans are repaid punctually, cooperation is an illusion both financially and educationally. Recovery keeps the business running with uninterrupted flow of trends. Thus, the efficiency of operations of a bank depends upon its performance on the recovery front. The special cooperative institutions like land mortgage bank and land development bank concentrate on medium and long term lending. Therefore KCCB disburses mainly short term loans and disbursement under medium and long term loan is given less importance. A comparative study of the recovery performance with reference to the disbursement in case of short term loans will throw light on the performance of the bank both in the area of disbursement and recovery. Similar study is done for medium term and long term lendings put together. Table 4.8 brings out the ratio of recovery to the disbursement of short term loans of the KCCB. The recovery is arrived at as follows; Recovery = previous year outstanding + Current year disbursement Current year outstanding 156

27 Year TABLE 4.8 Ratio of Recovery to Disbursement in Short-term Loans Outstanding (previous year) Disbursement (current year) Outstanding (current year) Recovery (Rs. in lakhs) Ratio (percent) Source : Compiled from annual reports of the KCCB. 157

28 From the table 4.8, it is observed that the average recovery performance of the KCCB is arrived at per cent for the study period of ten years. The recovery in the year was the highest and the percentage was The recovery percentage is more than the average (97.64) in the years , and It was less than the average in the years to and to The recovery was poor in the year (The percentage was 84.56), but in the year , the quantum of disbursement was the highest i.e., Rs lakhs. To improve the recovery position, the bank should open a separate cell of recovery and should arrange training in recovery management for the staff attached to it. Recovery linked promotion plan as an also be adopted to tone up the recovery function. Proper supervision for the utilization of loans should be done in different stages frequently. Proper utilization of loans also will improve the recovery position of the bank. 158

29 Year TABLE 4.9 Ratio of Recovery to Disbursement in Medium and Long-term Loans Outstanding (previous year) Disbursement (current year) Outstanding (current year) Recovery (Rs. in lakhs) Ratio (percent) Source : Compiled from annual reports of the KCCB. 159

30 Table 4.9 provides the ratio of recovery to disbursement in medium and long term loans. Analysis of this table shows that the recovery in medium and long term lending ranges from 37 per cent to 272 per cent during the ten years of study. The disbursement figures for the ten years give the information that the KCCB has no uniform lending policy for medium and long term loans. In disbursement of loans registered the highest of Rs.9, lakhs (104 per cent). The second highest recovery in quantum was in the year (Rs lakhs) but the recovery percentage shoot up to 272 per cent due to less disbursement that year i.e., Rs lakhs only. The overall picture in the table indicates that the KCCB resorts to need based medium and long term lending and not on regular basis. The lending is also not uniform and hence the heterogeneous figures are exhibited in the table, so also the ratios are heterogeneous. It is suggested that better strategies must be evolved by the KCCB for effective recovery. Recovery machinery should be strengthened and the recovery procedures tightened. Recovery strategies may include recovery planning, area approach, compulsory preparation of profile of each account, strict compliance with the filing of suits and recalling the advances by registered notice followed by issue of legal notice, obtaining additional securities to safeguard bank s interest, enforcement of security 160

31 and preferring claims from deposit insurance or credit guarantee corporation whenever possible. For recovery, support from the government is essential. The bank may punish heavily the willful defaulters and those who prevent others from remitting dues. References 1. Amardeep walia (2003), Funds Managements in Central Cooperative Banks A case study of the Jalandhar Central Cooperative Bank Ltd., Cooperative Perspective, January March, P Ibid 3. Rohilla, B.S. (2000), Functioning of Radhasoami Urban Cooperative Bank Ltd., Agra A case study, Indian Cooperative Review, July, P Ibid 5. Ibid 6. Puyalvannan, P (1997), A study of Overdues, Recovery Performance And Erosion of Funds in Central Cooperative Banks, Cooperative Perspective, July September, P Debabrata Das (2000), Cooperative Banking in Arunachal Pradesh; A Case study, Indian cooperative Review, July, P