Non Performing Asset Means An Asset Or Account Of Borrower,

Non Performing Asset means an asset or account of 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 of India. Ninety days overdue With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where: 1. interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, 2. the account remains 'out of order' for a period of more than 90 days, inrespect of an overdraft/ cash Credit(OD/CC), 3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, 4. interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and 5. any amount to be received remains overdue for a period of more than 90 days in respect of other 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 case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order'.

FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors. EXTERNAL FACTORS: Ineffective recovery tribunal: The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity. Willful Defaults: There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans. Natural calamities: This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. Industrial sickness: Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. Lack of demand: Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it. Change on Govt. policies: With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Cooperative societies have become defunct largely due to withdrawal of state patronage. The

rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs. INTERNAL FACTORS: Defective Lending process: There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of profitability i. Principles of safety: By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a. Capacity to pay b. Willingness to pay Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully. He should be a person of integrity and good character. Inappropriate technology: Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized. Improper SWOT analysis: The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. · Banks should consider the borrowers own capital investment. · It should collect credit information of the borrowers from: A. From bankers.

B. Enquiry from market/segment of trade, industry, business. C. From external credit rating agencies. · Analyze the balance sheet. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. · Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the projectwhile financing. Poor credit appraisal system: Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies: The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the: 1. Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular industrial visit: The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits.

Re loaning process: Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

Impact of NPAs on Banking Operations The efficiency of a bank is not reflected only by the size of its balance sheet but also the level of return on its assets. The NPAs do not generate interest income for banks but at the same time banks are required to provide provisions for NPAs from their current profits. The NPAs have deleterious impact on the return on assets in the following ways. •

The interest income of banks will fall and it is to be accounted only on receipt basis.

•

Banks profitability is affected adversely because of the providing of doubtful debts and consequent to writing it off as bad debts.

•

Return on investments (ROI) is reduced.

•

The capital adequacy ratio is disturbed as NPAs are entering into its calculation.

•

The cost of capital will go up.

•

The assets and liability mismatch will widen.

•

The economic value addition (EVA) by banks gets upset because EVA is equal to the net operating profit minus cost of capital and C It limits recycling of the funds.

It is due to above factors the public sector banks are faced with bulging NPAs which results in lower income and higher provisioning for doubtful debts and it will make a dent in their profit margin. In this context of crippling effect on banks operation the slew asset quality is placed as one of the most important parameters in the measurement of banks performance under the Camel’s supervisory rating system of RBI. Credit Risks of NPAs: The most of the public sector banks are incapable of visualizing the risk they are going to face in the emerging global economic scenario. The risk management machinery adopted requires a comprehensive overhaul of the system by the banks in this changing condition. The second consultative document on the New Basle capital accord on banking supervision has given a stress on the risk management aspect of the banks by introducing a more risk sensitive standardized approach towards capital adequacy. In spite of the stringent recommendations and RBIs apprehensions of the adequate preparedness of the banking sector in adopting instructions, it is quite clear about the willingness of the banks to vigorously pursue effective credit risk management mechanism by visualizing the magnitude of credit risk management to curtail the growth of mounting NPAs. The concept of recovering debts through Debt Recovery Tribunals has become a grand failure. The concept of establishing Asset Reconstruction Company (ARC) has greatly benefited the banks in containing the NPAs at a

manageable level. The ARC is to take over the bad debts of the public sector banks. These banks have the option of either liquidating the assets of defaulting companies or writing off these bad debts altogether. The viable solution available to the public sector banks is to go for a better credit risk management scheme, which may be considered as difficult preposition. However a clear understanding of the concept of risk, availability of instruments to curtail risk and the strategies required to be adopted for implementing a risk management system are considered to be the call of the hour. Measures to Control NPAs Menace It is proved beyond doubt that NPAs in bank ought to be kept at the lowest level. Two pronged approaches viz., 1. Preventive management 2. Curative management Preventive Management: Credit Assessment and Risk Management Mechanism: A lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk management mechanism. The documentation of credit policy and credit audit immediately after the sanction is necessary to upgrade the quality of credit appraisal in banks. In a situation of liquidity overhang the enthusiasm of the banking system is to increase lending with compromise on asset quality, raising concern about adverse selection and potential danger of addition to the NPAs stock. It is necessary that the banking system is equipped with prudential norms to minimize if not completely avoid the problem of credit risk. Organisational Restructuring: With regard to internal factors leading to NPAs the onus for containing the same rest with the bank themselves. These will necessities organizational restructuring improvement in the managerial efficiency, skill up gradation for proper assessment of credit worthiness and a change in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the last resort. Reduce Dependence on Interest: The Indian banks are largely depending upon lending and investments. The banks in the developed countries do not depend upon this income whereas 86 percent of income of Indian banks is accounted from interest and the rest of the income is fee based. The banker can earn sufficient net margin by investing in safer securities though not

at high rate of interest. It facilitates for limiting of high level of NPAs gradually. It is possible that average yield on loans and advances net default provisions and services costs do not exceed the average yield on safety securities because of the absence of risk and service cost. Potential and Borderline NPAs under Check: The potential and borderline accounts require quick diagnosis and remedial measures so that they do not step into NPAs categories. The auditors of the banking companies must monitor all outstanding accounts in respect of accounts enjoying credit limits beyond cutoff points, so that new sub-standard assets can be kept under check. Curative Management: The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs are released for recycling. The Central government and RBI have taken steps for arresting incidence of fresh NPAs and creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. They are: Debt Recovery Tribunals (DRT): In order to expedite speedy disposal of high value claims of banks Debt Recovery Tribunals were setup. The Central Government has amended the recovery of debts due to banks and financial institutions Act in January 2000 for enhancing the effectiveness of DRTs. The provisions for placement of more than one recovery officer, power to attach dependents property before judgment, penal provision for disobedience of Tribunals order and appointment of receiver with powers of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in times to come. Lok Adalats: The Lok adalats institutions help banks to settle disputes involving accounts in doubtful and loss categories. These are proved to be an effective institution for settlement of dues in respect of smaller loans. The Lok adalats and Debt Recovery Tribunals have been empowered to organize Lok adalats to decide for NPAs of Rs. 10 lakhs and above. Asset Reconstruction Company (ARC): The Narasimham Committee on financial system (1991) has recommended for setting up of Asset Reconstruction Funds (ARF). The following concerns were expressed by the committee. It was felt that centralized all India fund will severely handicap in its recovery efforts by lack of widespread geographical reach which individual bank posses and given the large fiscal deficits, there will be a problem of financing the ARF. Subsequently, the Narasimham committee on banking sector reforms has recommended for transfer of sticky assets of banks to the ARC. Thereafter the Varma committee on restructuring weak public sector banks has also viewed the

separation of NPAs and its transfer thereafter to the ARF is an important element in a comprehensive restructuring strategy for weak banks. In recognition of the same ARC Bill was passed to regulate Securitization and Reconstruction of financial assets and enforcement of security interest. The ICICI BANK, State Bank of India and IDBI have promoted the country’s first Asset Reconstruction Company. The company is specialized in recovery and liquidation of assets. The NPAs can be assigned to ARC by banks at a discounted price. The objective of ARC is floating of bonds and making necessary steps for recovery of NPAs from the borrowers directly. This enables a one time clearing of balance sheet of banks by sticky loans. Corporate Debt Restructuring (CDR): The corporate debt restructuring is one of the methods suggested for the reduction of NPAs. Its objective is to ensure a timely and transparent mechanism for restructure of corporate debts of viable corporate entities affected by the contributing factors outside the purview of BIFR, DRT and other legal proceedings for the benefit of concerned. The CDR has three tier structure viz., a. CDR standing forum b. CDR empowered group and c. CDR cell. Circulation of Information of Defaulters: The RBI has put in place a system for periodical circulation of details of willful defaulters of banks and financial institutions. The RBI also publishes a list of borrowers (with outstanding aggregate rupees one crore and above) against whom banks and financial institutions in recovery of funds have filed suits as on 31 March every year. It will serve as a caution list while considering a request for new or additional credit limits from defaulting borrowing units and also from the directors, proprietors and partners of these entities. Recovery Action Against Large NPAs: The RBI has directed the PSBs to examine all cases of willful default of Rs. One crore and above and file criminal cases against willful defaulters. The board of directors are requested to review NPAs accounts of one crore and above with special reference to fix staff accountability in individually. It is observed from the above table that the gross NPAs of the banks is gradually declining from Rs. 68717 crores in 2002 - 03 to Rs. 50552 crores in 2006 – 07 whereas the net recovery of NPAs is increasing from Rs. 23183 crores in 2002 - 03 to Rs. 27176 crores in 2006 – 07. It shows that the banks have taken strenuous efforts to contain the NPAs. Moreover the percentage of recovery to gross NPAs is also in the increasing trend. Credit Information Bureau: The institutionalization of information sharing arrangement is now possible through the newly formed Credit Information Bureau of India Limited (CIBIL) It was

set up in January 2001, by SBI, HDFC, and two foreign technology partners. This will prevent those who take advantage of lack of system of information sharing amongst leading institutions to borrow large amount against same assets and property, which has in no measures contributed to the incremental of NPAs of banks. Types of NPA A] Gross NPA Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs / Gross Advances B] Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following: Net NPAs Gross = NPAs – Provisions / Gross Advances - Provisions Asset Classification Categories of NPAs Standard Assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: ( 1 ) Sub-standard Assets:-With effect from 31 March 2005, a sub standard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by sub standard

assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. ( 2 ) Doubtful Assets:-A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. ( 3 ) Loss Assets:-A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted- although there may be some salvage or recovery value. Also, these assets would have been identified as ‘loss assets’ by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly.

ROLE OF ARCIL :This empowerment encouraged the three major players in Indian banking system, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come

together to set-up the first ARC. Arcil was incorporated as a public limited company on February 11, 2002 andobtained its certificate of commencement of business on May 7, 2003. In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registration dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under powers conferred under the Securitization Act, 2002. Arcil is also a "financial institution" within the meaning of Section 2(h)(ia) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (the "DRT Act"). Arcil is the first ARC in the country to commence business of resolution of non-performing assets (NPAs) upon acquisition from Indian banks and financial institutions. As the first ARC, Arcil has played a pioneering role in setting standards for the industry in India. Unlocking capital for the banking system and the economy The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by managing NPAs and help them concentrate on core banking activities thereby enhancing shareholders value. Creating a vibrant market for distressed debt assets / securities in India offering a trading platform for Lenders Arcil has made successful efforts in funneling investment from both from domestic and international players for funding these acquisitions of distressed assets, followed by showcasing them to prospective buyers. This has initiated creation of a secondary market of distressed assets in the country besides hastening their resolution. The efforts of Arcil would lead the country’s distressed debt market to international standards. To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimally With a view to achieving high delivery capabilities for resolution, Arcil has put in place a structure aimed at outsourcing the various sub-functions of resolution to specialized agencies, wherever applicable under the provision of the Securitisation Act, 2002. Arcil has also encourage, groomed and developed many such agencies to enhance its capacity in line with the growth of its activity. GLOBAL FINANCIAL CRISIS AND NON PERFORMING ASSETS MEASURES TAKEN BY RBI VIS-À-VIS BANK’S FINANCIAL HEALTH AND ITS INSULATION

RBI took a series of measures in addition to providing liquidity and special refinance. While the impact of global recession on India cannot be wished away, Indian Banks, encouraged by the government and RBI, rose to the occasion to implement various stimulus packages and restructured facilities to tide over the crisis. In the middle of the previous financial year, the volatility in the global financial markets and closure of many big Banks in the western world has given a shock to the Banking system in India. However, the strong fundamentals of Banks as well as support and guidance by regulators helped mitigate the severity of these trans-national developments. Having withstood the testing times, things are looking bright, as signs of recovery of Indian economy are visible. It gives us some hope that we can expect robust growth of the Indian Banking industry in the medium term. PRIVATE BANKS AND NPA- Keeping in view the financial year 2009 second quarterly results of the Indian Banking sector, the industry body, The Associated Chambers of Commerce and Industry (Assocham) holds that although the Indian Banking sector has remained insulated from the global financial crisis, the emerging trends do not give positive signals. This analysis of the Indian Banking sector is based on the quarterly results posted by 25 Indian Banks on Bombay Stock Exchange (BSE) from 20th - 29th October 2008. For a macro analysis, the total 25 Banks included an aggregation of 15 public sector Banks (PSBs) and 10 private sector Banks. Assocham has revealed that on an average 24% rise in net non performing assets (NPAs) have been registered by 25 public sector and commercial Banks during the second quarter of the FY’09 as against Q2-FY’08. However, the average capital adequacy ratio (CAR) of the Banks slipped to 12.68 per cent in Q2-FY ‘09 from 13.41% in the previous year. As per Assocham study, the aggregate net non-performing assets (NPA) of 25 Banks increased by 24.36% to Rs 17,522.82 crore in second quarter of 2008-09 from Rs 15,462.84 crore in the same period of FY’08. Karur Vysya Bank recorded maximum rise of 275.36 per cent in net NPAs in Q2-FY’09 with Rs. 50.03 crore as against Rs 13.33 crore in Q2-07. It was followed by HDFC bank with an increase by 139%, Vijaya Bank (132%), State Bank of Hyderabad (81.42%) and IDBI (57%). Among the private Banks, Yes Bank has shown highest growth in NNPA, followed by South Ind Bank. The NNPA of ICICI Bank has increased to Rs 4554 crore during FY2008-09. This trend suggests that the NNPA and such contagion have started creeping in, though in low intensity with less magnitude due the reasons explained above. NPA AND PUBLIC SECTOR BANKS- On the contrast, seven major PSBs recorded a significant decrease in net NPAs, including Central Bank of India (-87.39%), Oriental bank of

Commerce (-82.18%), Union Bank of India (-73.38%), Dena Bank (-17.24%), Bank of India (14.80 crore), Bank of Maharashtra (-7.75 crore) and Indian Bank (-1.54%) have shown improvement in net NPA levels. Whereas, among the private sector Banks only South Indian Bank registered an improvement in net NPAs by -29.82%.

The trend of improvement in the asset quality of banks continued during the year. Indian banks recovered a higher amount of NPAs during 2007-08 than that during the previous year. Though the total amount recovered and written-off at Rs.28,283 crore in 2007-08 was higher than Rs.26,243 crore in the previous year, it was lower than fresh addition of NPAs (Rs.34,420 crore) during the year. As a result, the gross NPAs of SCBs increased by Rs.6,136 crore in 2007-08. This is the first time since 2001-02 that gross NPAs increased in absolute terms (Table III.26). In this context, it may be noted that banks had registered rapid credit growth during the previous three years. Some slippage in NPAs, therefore, could be expected. Besides, some other developments such as hardening of interest rates might have also resulted in increased NPAs. Banks had extended housing loans at floating interest rates. The hardening of interest rates might have made the repayment of loans difficult for some borrowers, resulting in some increase in NPAs in this sector. It may be noted that the increase in gross NPAs was more noticeable in

respect of new private sector and foreign banks, which have been more active in the real estate and housing loans segments. Gross NPAs (in absolute terms) of nationalised banks and old private sector banks continued to decline during the year. Gross NPAs of State Bank group showed an increase. Notwithstanding increase in gross NPAs of the banking sector, gross NPAs as percentage of gross advances declined further to 2.3 per cent at end-March 2008 from 2.5 per cent a year ago. The NPAs ratio (gross NPAs to gross advances) of new private sector banks increased significantly during the year, while that of foreign banks increased marginally. The NPAs ratio of all other bank groups declined.

Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI Act and the debt recovery tribunals (DRTs) have been the most effective in terms of amount recovered. The amount recovered as percentage of amount involved was the highest under the SARFAESI Act, followed by DRTs.

The sector-wise analysis of NPAs of public and private sector banks indicates that the NPAs in the priority sector increased by 11.1 per cent during 2007-08 (4.8 per cent in the previous year) mainly due to increase in NPAs in the agriculture sector (32.1 per cent) and in the non-priority sector (10.3 per cent). At the aggregate level, the share of priority sector NPAs in total NPAs at 54.4 per cent was broadly same as in the previous year (54.0 per cent).

The net NPAs to net advances ratio at end-March 2008 of 75 banks (76 last year) out of 79 (82 last year) was less than 2 per cent. The net NPAs ratio of only one foreign bank was higher than 5 per cent (Table III.32). During 2007-08, the net NPA ratio of six banks each in the public sector and private sector improved.

In absolute terms, net NPAs of EXIM Bank and NABARD declined during 2007-08, while that of SIDBI increased sharply (Table VI.10). In terms of net NPA to net loans ratio, the asset quality of EXIM Bank improved sharply, while that of NABARD improved marginally. Although the net NPAs to net loans ratio increased in respect of SIDBI at end-March 2008 as compared with end- March 2007, the ratio was quite low otherwise. Significantly, in continuation of the trend witnessed during last few years, NHB did not have any NPAs.

Apart from decline in the NPA ratios, the improvement in asset quality of SCBs during 2007-08 was also reflected in the different loan asset categories. The share of ‘sub-standard’ loans showed a marginal increase to 1.1 per cent from 1.0 per cent in the previous year. However, the shares of loans in ‘doubtful’ and ‘loss’ categories, which represent lower quality of assets than sub-standard assets, continued to decline during 2007-08. Among these two categories (‘loss’ and ‘doubtful’), while NPAs in ‘loss’ category continued to show decline in absolute terms, NPAs in ‘doubtful’ category showed a marginal increase in 2007-08. More or less a similar trend was observed across all bank groups, barring new private sector banks in whose case the NPAs in all the three categories, viz., sub-standard, doubtful and loss increased during the year (Table III.33).

AgriBanking Role of Banking in Agriculture In a changing environment, banks are diversifying their role in the agriculture sector in order to get revenue from their significant contribution to agriculture. Some of the new roles that banks have adopted are: Marketing, training and consultancy, insurance and financing for infrastructure via private-public participation. The Credit requirements of agriculture are of three types viz. 1. Short –Term (<15 months) 2. Medium – Term (15 months to 5 yrs) 3. Long- Term (LT) (>5 yrs) Long Term Credit: The period of long-term credit is generally 5 to 20 years or even more in some special cases. In any industry, long-term investment is necessary, to create permanent assets which give returns over a period of time. The permanent investment is not only necessary for a particular industry but even for the country. Because for continuity of production and progress of the country. This applies to agriculture also. In Agriculture, long-term investment comprises of sinking well, land levelling, fencing and permanent improvements on land purchase of big machinery like tractor with its attachments including trolleys, establishment of fruit orchard of mango, cashew, coconut, sapota (chiku), orange, pomogranate, fig, guava, etc. There are many other items of long-term capital investment. Investment once made in the beginning continuous to give returns over a long period. Fruit orchards particularly do not give any income in the first 4 - 5 years as in case of other seasonal crops. So the expenditure incurred in the first 4-5 years becomes a capital cost. All the long-term investments mentioned above require large amounts of funds. Although they have good potential to give returns in future, individual farmers have no financial capacity to make such costly investments from their own funds because they have no savings or very little savings. Therefore, they have to resort to bank borrowing to meet such needs. The financial criteria terms and conditions procedures of granting L.T. loans are altogether different from short-term loans. Even the bank or agency providing LT loans is separate due to its particular mode or system of raising capital.

Land Development Banks: The special banks providing LT Loans are called Land Development Banks (LDA). The history of LDB’s is quite old. The first LDB was started at Jhang in Punjab in 1920. But the real impetus to these banks was received after passing the Land Mortgage Banks Act in 1930’s (LDB’s were originally called Land Mortgage Banks). After passing this Act LDB’s were started in different states of India. Crop loan is a short term credit and is generally obtained from primary credit co-op. Society of a village or also from commercial bank. The period of loan is about one year except for sugarcane for which the period is 18 months. There are two criteria for granting crop loan. 1. One third of gross value 2. Cost of cultivation. 1. One third of gross value approach takes into account the yield and price of the crop, its cost of cultivation and family expenditure. If the gross value is more, more amount of loan becomes available. For e.g. Rice. I

II

Yield (Q.)

20

25

Price (Rs/Q)

400

400

Gross value (Rs.)

8000 10,000

One third (Rs.)

2700

3330

2. Thus in second situation farmer is entitled for Rs.3330 per hectare which is higher than in the first situation. Thus this method takes into account the productive aspect of a crop. 3. In cost of cultivation, direct paid-out costs are only considered. They include items, like seeds, manures, fertilizers, pesticides, diesel/electricity, hired labour etc. In this approach, it is expected that all direct costs to be incurred by the farmer should be covered and accordingly he should get adequate credit. If the cost of all these items of input is Rs.3500/-. If the loan is granted according to first approach, then the amount which is short, is spent by the farmer from his own funds. Since crop loan is for one season, its recovery is made in one installment after the harvest of the crop. Crop loan is an annual requirement and farmer has to borrow fresh loan for new crop season every time. Therefore, he has to repay the earlier loan with interest within stipulated time. Since this loan is required every season/every year, the procedure of getting this loan is simple and convenient and it is made available by the District Central Co-op.Banks through the village Co-op. Credit Society. So the farmer gets his loan in the village itself. If the loan is to be taken

from commercial bank, it is available from the nearby branch of the commercial bank. As for security, the farmer has to offer his land as a security. There is a three tier structure providing crop-loans through co-operative institutions. Agricultural loans Agricultural loans are available for a multitude of farming purposes. Farmers may apply for loans to buy inputs for the cultivation of food grain crops as well as for horticulture, aquaculture, animal husbandry, floriculture and sericulture businesses. There are also special loans to finance the purchase of agricultural machinery such as tractors, harvesters and trucks. Construction of biogas plants and irrigation systems as well as the purchase of agricultural land may also be financed through special types of agricultural finance. Schemes for Agri Finance 1. Kisan credit card sheme 2. Homestead farming 3. Financing farmers for purchase of land for agri purposes 4. Scheme for cultivation of medicinal plants 5. Scheme for cultivation of vanilla 6. Rain water harvesting scheme 7. Produce marketing loans 8. Agri loans to NRI 9. Minor irrigation 10. Farm mechanization 11. Construction renovation and expansion of godowns. Agricultural Banks National Bank for Agriculture and Rural Development or NABARD – is responsible for refinance disbursement to commercial banks, State cooperative banks, State cooperatives, rural development banks, Regional Rural Banks (RRBs) and other eligible financial institutions. It also sanctions money through its Rural Infrastructure Development Fund for projects covering irrigation, rural roads and bridges, health and education, soil conservation and drinking water schemes. NABARD also offers a Kisan Credit Card Scheme and crop loans under the Rashtriya Krishi Bima Yojana. Banks and RRB's introduced the Kisan Credit Card Scheme of NABARD in their areas of operation. In this scheme eligible farmers are provided with a Kisan Credit Card

and a passbook or card-cum-pass book. The revolving cash credit facility allows any number of withdrawals and repayments within the limit. This limit is fixed on the basis of operational land holding, cropping pattern and the scale of finance. Sub-limits may be fixed at the discretion of banks. This Kisan Credit Card is valid for 3 years subject to annual review. As incentive for good performance, credit limits may be enhanced to take care of increase in costs, change in cropping pattern, etc. Each drawl should be repaid within a maximum period of 12 months. Conversion or rescheduling of loans is allowed in case of damage to crops due to natural calamities. Security, margin, rate of interest and other details are fixed according to RBI norms. Flow of Credit: A comprehensive credit policy was announced by the Government of India on 18 June 2004, containing measures for doubling agriculture credit flow in the next three years and providing debt relief to farmers affected by natural calamities. The following are the highlights of this announcement: •

Credit flow to agriculture sector to increase at the rate of 30 per cent per year.

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Debt restructuring in respect of farmers in distress and farmers in arrears providing for rescheduling of outstanding loans over a period of five years including moratorium of two years, thereby making all farmers eligible for fresh credit.

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Special One-Time Settlement scheme for old and chronic loan accounts of small and marginal farmers.

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Banks allowed to extend financial assistance for redeeming the loans taken by farmers from private moneylenders.

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Commercial Banks (CBs) to finance at the rate of 100 farmers/ branch; 50 lakh new farmers to be financed by the banks in a year.

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New investments in agriculture and allied activities at the rate of two to three projects per branch.

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Refinements in Kisan Credit Cards (KCCs) and fixation of scale of finance.

Increasing the Credit Flow to farmers Multiple financing: In majority of the cases, the landowners are availing the crop production finance from the Banks showing the land records as if they are cultivating lands. In such cases, financing tenant farmers for cultivation of same piece of land amounts to multiple financing. Some remedy is required to tackle such situation and help tenant farmers. The suggested remedies are: • Record the name of the actual cultivator in the land records. Noting the name of the Tenant in the Record of Rights along with the name of the cultivator would provide comfort level to the Branch Manager besides avoiding cases of double financing. • In cases where landlords already availed crop production limits and are providing inputs to the tenants, a provision may be made to extend a limit to cover remaining cost of production and consumption needs. Financial literacy : The lack of financial advise is one of the barriers for economic independence through appropriate savings / credit / other financial services and investment decisions. The high illiteracy of the disadvantaged is one reason for low-level transfer of farm technology. The Bank’s voluntarism can focus on opening Knowledge/Credit counselling centers for education on financial services of the Bank, credit and repayment planning and facilitate interface between the poorer sections of the farmers and the Research /Agricultural Institutes. In short, Credit intervention alone would not bring about a change in growth of Tenant farmers but access to all logistical linkages and market and treatment on par with big farmers is critical. It is recommended that the following specific areas need to be explored in greater degree: • Training Centers for Tenant farmers, Oral lessees etc. • Financial Literacy vehicles–Publicity vans of the Bank that can visit interior areas with literature on financial services available and Audio Visual Equipments. Suitable visuals and messages can be prepared in the vernacular and packaged as an appealing programme (like a short movie) IT Kiosks/Choupals–Private sector partnership • Involving sanchalaks in financial literacy • Financial literacy centers at Block level

Extending finance to corporates / companies for onward financing to farmers under agriculture : Financing corporate involved in procurement of agricultural produce either for processing or processing and exports so that the financial requirements of the companies for supplying inputs like seeds, fertilizers, extension services, etc., can be met by the companies effectively. Similarly, there is scope for financing well run sugar mills for similar activities for onward lending to farmers. The Banks will be encouraged in meeting these requirements if such loans extended to companies can be included under Direct agricultural credit. In the backdrop of manifold increase required under inclusive finance and the successful supply chain model of the Corporate engaged in contract farming, such of those corporates can also effectively play the role as Business Correspondents. Income generating activity : Banks can expand the flow of farm credit significantly if they were to consider total credit needs of cultivators. There is, therefore, a need to integrate investment and production credit. In addition to crop production activity, the tenant farmers are to be encouraged to take up alternative income generating activities like allied activities and non-farm activities. Family approach to meet credit requirement of all family members will facilitate them to earn additional income to meet day-to-day family expenses and improve financial status. Targeting small & marginal farmers and agricultural labourers : The focus should be on group Collateral loans and Joint liability groups for all small and marginal farmers on the lines of Tenant farmer groups needs to be encouraged. The flow of credit to these segments should be more in terms of numbers assisted. Identifying Areas of focus : Private investment in linkage provider avenues like quality seeds, micronutrients. Cold chains and establishment of large and sophisticated controlled atmosphere cold storages in strategic locations for long storage of fruits and vegetables. Construction of market yards, platforms for loading, assembling and auctioning, weighing and mechanical handling equipments etc. Mobile infrastructure for post harvest operations such as grading, packaging, quality testing, etc. Encouraging Agro/food processing units and financing end to end activities of Agriculture production under Agriculture finance. Ready to operate Green houses and other latest technology

for floriculture and vegetable cultivation projects suiting to small holdings Development of Commercial Horticulture through production and post- Harvest management Coordination and Participation in all Venture Capital Schemes : The Agri Business development ventures promoted by various development organizations like National Horticultural Board, Small Farmers Agri business Consortium, APEDA and other departments promoting various Central / State sector plans - wherein projects that provide the linkages need to be encouraged. Coordinated efforts of the above development agencies along with those of NABARD and Banks would facilitate enhanced Credit Flow to areas of high and inclusive growth potential. Extension Services and Technology Transfer : The network of Agri Clinics and Agri-Business Centres / KVKs /Farmers Clubs to provide better services related to technology transfer, setting up information kiosks in villages for providing latest information relating to prices of agriculture inputs, outputs, markets etc, encouraging corporate houses to provide extension services to the farmers and educating the farmers regarding suitability of land, water and soil conditions for high yielding and high value crops, etc. Enhancing the limit under General Credit Card Scheme(GCC): The present cap of Rs. 25,000/- may be increased to Rs. 50,000/- which can facilitate financial deepening without collateral. To assess the higher requirement based to classify the entire balance outstanding under GCC as Indirect Finance to Agriculture.