MANAGEMENT OF CREDIT RISK AND NON PERFORMING ASSETS (NPAs) OF THE GDCCB

Transcription

1 CHAPTER VI MANAGEMENT OF CREDIT RISK AND NON PERFORMING ASSETS (NPAs) OF THE GDCCB

2 MANAGEMENT OF CREDIT RISK AND NON PERFORMING ASSETS (NPAs) OF THE GDCCB 6.1 Introduction: A highly distressing fact of the co-operative credit is the heavy overdues of these institutions. It is now estimated to be between 9,000 crores to 10,000 crores. According to the RBI Study Team on Overdues of Co-operative Credit Institutions, lack of will and discipline among the cultivators to repay loans was the principal factor responsible for the prevalence of overdues of the co-operatives. Defective lending policy pursued by co-operatives, apathy of management in taking quick action against recalcitrant members and absence of favorable climate were other contributory factors. Apart from these common factors normally responsible for a high level of overdues, intervention of external forces such as loan waivers, concessions in various forms towards repayment of principal and payment of interest had also affected the recovery performances of credit institutions to a significant extent. The problem is further accentuated on account of the State Governments inability to meet the financial commitments to co-operative banks emanating from waiver of loans, interest subsidy, etc. Loans overdue, it is disquieting to note represent 45 per cent of loans outstanding in all-india; the percentage ranges from 23 in the case of Tamil Nadu to 77 in the case of Bihar. 158

3 Credit risk is intrinsic to banking and it is as old as banking itself. Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk emanates from a bank s dealings with an individual, corporate, bank, financial institution or a sovereign. In recent years, financial sector failures and banking sector weaknesses have induced policy makers to devise prudent risk management mechanism. Against this backdrop, Basel Capital Adequacy norms, originally conceived during 1988, brought about broad agreement among G-10 central banks for applying Common Minimum Capital Standards to their banking industries. Such standards are aimed at putting all banks on an equal footing with respect to capital adequacy so as to promote safety and soundness in banking. Keeping in view the seriousness of credit risk and need to manage the same appropriately, RBI issued guidelines on Credit Risk Management on October 12, These guidelines focused that the banks should give credit risk prime attention and should put in place a loan policy to be cleared by their boards that covers the methodology for measurement, monitoring and control of credit risk. Basel Committee has proposed Standard Approaches, Foundation 159

4 Internal Rating Based Approach and Advanced Internal Rating Based Approach for credit risk capital charge calculations. Basel-I played a significant role in strengthening the financial system. It provided capital charge for credit risk only. It put strong and weak borrower at par and did not provide for difference between regulatory risk and bank s actual risk. This led to the evolution of Basel-II capital accord, which considers estimation of minimum capital requirements for credit, market and operational risk. In Basel-II, credit risk has been elaborately defined and risk weights have been scientifically determined for strong and weak borrowers. The major issue before the banks presently is the implementation of this new framework as per RBI and Basel directives Approaches of Credit Risk: Banks always face the risk that some of its borrowers may default on repayment of loans, or interest on loan. This risk is called credit risk. Basel-II norms require banks to accurately measure credit risk to hold sufficient capital to cover it. Basel-II framework prescribes 3 principal approaches for estimating capital charge to cover credit risk. a. Standardized Approach: Under this approach, risk weight would be applied to each asset based on its external credit rating assigned by a rating agency. In each country, the regulator would approve the rating agencies in the country and decide on the applicable risk weight for each rating category. The Framework proposes four risk 160

5 weights 20%, 50%, 100% and 150%. The framework provides the weights to be assigned for each of Standard & Poor rating categories. For rating agencies in other countries, the regulator would be required to map the domestic rating agencies ratings with those of S&P. In India, RBI has mapped Credit Rating Information Services of India Limited (CRISIL) and Internet Content Rating Agency (ICRA) ratings to those of Standard & Poor s (S&P) and has also prescribed risk weights for these ratings. The details of this mapping are set out in the following table: Table 6.1 Credit Risk - Standardized Approach CRISIL/ICRA S&A RATING RISK WEIGHT RATING AAA AAA TO AA- 20% AA A+ TO A- 50% A BBB+TO BB- 100% BBB and below Below BB- 150% Unrated Unrated 100% As may be observed from the table 6.1 as asset with an investment grade rating of BBB from CRISIL or ICRA would carry a risk weight of 150%, which could lead to conservative estimates of capital requirement, especially for project finance loans. For retail portfolios, the framework provides for lower risk weights to account for the higher granularity and diversification effects embedded in these portfolios. As per the framework, the risk weight would be 35% for retail mortgages and 75% for all retail portfolios including mortgages. A risk weight of 100% 161

6 means that an exposure is included in the calculation of risk weighted assets value, which translates into a capital charge equal to 9% of that value. GDCCB follows standardized approach to assess its credit risk. b. Foundation Internal Rating Based Approach (Foundation IRB) In the foundation IRB approach, banks would internally estimate the Probability of Default (PD) for each rating category. The estimate of Loss Given Default (LGD) would be provided by the regulator. The framework provides a risk weight curve, which gives the risk weight for each combination of PD and LGD. A bank estimates each borrower s creditworthiness and the results are translated into estimates of a future potential loss amount, which form the basis of minimum capital requirements. c. Advanced Internal Rating Based Approach (Advanced IRB): Under the advanced IRB approach, a bank with a sufficiently developed internal capital allocation process would be permitted to use its own inputs for estimation of potential future loss. Banks seeking to use this approach would need to have LGD and Exposure at Default (EAD) data history for at least seven years, in addition to meeting all the criteria stipulated for foundation IRB Approach Credit Risk Management Policies: Credit risk is the most common cause of bank failures, causing virtually all regulatory environments to prescribe minimum standards for credit risk management. The basis of 162

7 sound credit risk management is the identification of the existing and potential risks inherent in lending activities. Measures to counteract these risks normally comprise clearly defined policies that express the bank s credit risk management philosophy and the parameters within which credit risk is to be controlled. Specific credit risk management measures typically include three kinds of policies. One set of policies includes those aimed to limit or reduce credit risk, such as policies on concentration and large exposures, adequate diversification, lending to connected parties, or over-exposures. The second set includes policies of asset classification. These mandate periodic evaluation of the collectibles of the portfolio of loans and other credit instruments, including any accrued and unpaid interest, which expose a bank to credit risk. The third set includes policies of loss provisioning or the making of allowances at a level adequate to absorb anticipated loss not only on the loan portfolio, but also on all other assets that are subject to losses. The assessment of a credit risk management function should consider loans and all other extensions of credit (on- and off-balance-sheet) to ensure that the following factors are considered: The level, distribution, and severity of classified assets; The level and composition of nonaccruing, nonperforming, renegotiated, rolled-over, and reduced-rate assets; The adequacy of valuation reserves; Management s ability to administer and collect problem assets; Undue concentrations of credit; 163

8 The adequacy and effectiveness of and adherence to, lending policies and credit administration procedures; The adequacy and effectiveness of a bank s process for identifying and monitoring initial and changing levels of risk or risk associated with approved credit exposure. Clearly defined levels of authority for credit approval help to ensure that decisions are prudent and are made within defined parameters. Institutions should have procedures in place to govern the collection of principal, interest and other charges in accordance with established terms of repayment. Some king of mechanism to address the issue of non performing loans should also exist, as well as mechanisms for enforcing a creditor s rights in the case of loss loans. A bank reporting system should generate accurate and timely reports on its credit exposure, while the maintenance of detailed, up-to-date information on borrowers is a prerequisite for ongoing risk assessment. a. Workout Procedures: Workout procedures are an important aspect of credit risk management. If timely action is not taken to address problem loans, opportunities to strengthen or collect on these poor-quality assets may be missed and losses may accumulate to a point where they threaten a bank s solvency. An assessment of work-out procedures should consider the organization of this function, including departments and responsible staff and assess what the performance of the work-out units has been by reviewing attempted and successful recoveries (in terms of both number and volume) and the average time for recovery. The 164

9 workout methods utilized and the involvement of senior management should also be evaluated. b. Public-Disclosure Requirements: The differences in loan classification rules, providing requirements and the treatment of problem loans in various countries, as well as the degree of judgment that bank management exercises, means that it is particularly important that banks make adequate disclosures to allow supervisions and other interested third parties to properly evaluate the financial condition of a bank. Disclosure principles related to sound credit risk should be mandated by regulatory authorities, as recommended by the Basel Committee on Bank Supervision Non Performing Assets (NPAs) Norms: The prudential norms were introduced to SCBs and DCCBs by RBI from June As per the norms, advances on which interest/installment of principal remained past due, for four quarters from the year ending , for the three quarters for the year ended , the two quarters for the year ending onwards, was treated as NPA. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan. The account remains out of order for a period of more than 90 days in respect of an overdraft/cash credit. 165

10 Interest and/or installment of principal remains overdue for two harvest seasons or for a period not exceeding two half years in the case of advances granted for agricultural purpose, and in respect of agricultural loans, identification of NPAs would be done as on the basis of non-agricultural advances. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. The international practice in banking is that a loan account is treated as Non-Performing Asset (NPA) if either the interest or an installment is overdue for a specific period of time. All income that accrues in such accounts is not recognized as income. Simultaneously, all loan accounts which are classified as NPA are required to be provided for in anticipation of possible losses. These loans are classified into three categories: I. Sub Standard Assets II. Doubtful Assets III. Loss Assets As per the existing norms, the DCCBs are required to provide 20%, 30% and 60% of the outstanding amount respectively for the above three sub-classifications. The provisions shall be increased to 100% by 31 st March 2010 for the third category of doubtful assets. 166

11 The last category is the loss assets which are loan accounts identified by the banks, or its auditors or supervisors (NABARD/RBI) as unrecoverable for any reason. 100% of such loans shall have to be provided for certain relaxations, however, have been allowed for loans for agricultural purposes. In this case, loan is considered as NPA only if it is overdue for two seasons and the 90 days norm is not applicable. Apart form the provisions for the delinquent loan assets, the banks are required to provide 0.25% of all outstanding standard loan assets to provide cover for any normal business losses that may arise in future Loan Loss Provisioning Policy: Asset classification provides a basis for determining an adequate level of provisions for possible loan losses. Such provisions, together with general loss reserves that are normally counted as tier 2 capital and are not assigned to specific assets, form the basis for establishing a bank s capacity to absorb losses. In determining an adequate reserve, all significant factors that affect the collectibility of the loan portfolio should be considered. These factors include the quality of credit policies and procedures, prior loss experiences, loan growth, quality of management in the lending area, loan collection and recovery practices, changes in national and local economic and business conditions and general economic trends. Assessments of asset value should be performed systematically, consistently over time and in conformity with objective criteria. They should also be supported by adequate documentation. 167

12 6.2 Risk Weighted Assets Position of the GDCCB: It is shown in the table 6.2 that the net capital funds of GDCCB has steadily increased to a considerable extent from 5,590 lakh ( ) to 5,770 lakh ( ) and further to 6,025 lakh by , showing the growth rates of 3.22% ( ) and 4.42% ( ). It can be noticed that this gradual increase in net capital funds occurs as a result of steady increase in net profit. This increase in net profit has afforded to increase in allotment to statutory reserves. With regard to risk weighted current assets, cash balance has got decreased from 1,893 lakh ( ) to 306 lakh ( ). Though it appeared to have increased to 964 lakh in , it is less than that of in The amount of bank balance has got increased to 3,635 lakh in from 1,718 lakh in , but decreased to 898 lakh by Finally, it can be noticed that the total value of risk weighted current assets has increased by % ( 727 lakh) in from 344 lakh in , but declined to 180 lakh by or by %. With regard to the total value of risk weighted investments, it is clearly observed that it has got increased by 75.52% ( 2,789 lakh) in from 1,589 lakh in and further to 77.23% ( 4,943 lakh) by Further, it is evidently noticed that the value of fixed deposits with banks occupies major position. The total value of risk weighted loans and advances has shown a declining trend. It was 50,405 lakh in , which declined to 48,466 lakh with a negative 168

13 growth rate of -3.85% in and further declined by amounting to 26,229 lakh in Thus, it can be observed from the table 6.2 that the volume of the total risk weighted assets has got reduced to considerable extent showing -0.68% ( 51,982 lakh) in from 52,338 lakh during , which further steeply reduced to 31,352 lakh showing % during This considerable decline in the value of risk weighted assets indicates that the GDCCB has acquired a good solvency position. The researcher logically draws the inference that complying with the CRAR is not very difficult to the bank since the share capital component of the bank is linked with the loans and advances which varies from 5% to 10% of the total loans outstanding. In respect of societies only share capital linked with the loans and advances. In proportionate share of the share capital the co-operative societies contribute maximum percentage, while the shares of others are almost negligible. Hence the fulfilling of the CRAR is not at all a problem for the bank for ever. 169

14 Table 6.2 Risk Weighted Assets Position of the GDCCB ( in Lakhs) Sl.No Particulars % of Risk Amount Risk Amount Amount Risk Amount Amount Risk Amount Net Capital Funds 1. Paid up Capital 3,995 4,117 4, Statutory Reserves 1,359 1,509 1, Other Reserves P&L (Cr) Total Capital Funds 5,590 5,770 6, Accumulated Losses Short Fall in Net Capital Funds 5,590 5,770 (3.22) 6,025 (4.42) Risk Weighted Current Assets 9. Cash & Bank Balance with Apex Bank & Money at Call and Short Notice 0% 1, Bank Balance (C. A/c) with other Banks a). Actual Value 1,718 3, b). Adjusted Value 20% Total Risk Weighted Current Assets (111.34) 180 (-75.24) Risk Weighted Investments 12. Central & state Govt. Securities 0% Other Trustee Securities 0% 14. Investments on Bonds Issued by Bank & Other PF a). Actual Value 0% 170

15 b). Adjusted Value 20% 15. Fixed Deposits with Banks a). Actual Value 0% 4,386 5,979 16,573 b). Adjusted Value 20% 877 1,196 3, Other Investments 100% Total Risk Weighted Investments 1,589 2,789 (75.52) 4,943 (77.23) Risk Weighted Loans & Advances % of Loans & Advances (Counting towards to Staff, Advances against Deposits & Advances against LIC Policies etc.) 0% 5,225 5,135 2, % of Loans & Advances 100% 47,028 47,028 46,211 46,211 24,615 24, Land & Building (Net of Depreciation) 100% Furniture & Fixtures (Net of Depreciation) 100% Interest Receivable (Net of Depreciation) 100% 1,362 1, Other Assets (Excluding Accumulated Losses) 100% 1,805 1,805 1,859 1,859 1,341 1, Total Risk Weighted Loans & Advances 50,405 48,466 (-3.85) 26,229 (-45.88) 25. Total Risk Weighted Assets 52,338 51,982 31, Capital to Risk Weighted Assets Ratio (CRAR) (Col.8 as % to Col.25) Source: Audit Reports of the GDCCB Note: Figures in brackets show the Annual Growth Rates (-0.68) (-39.69)

16 6.3 Provisioning Position of the GDCCB: It is shown in the table 6.3 that the outstanding amount of standard assets with GDCCB was 46,372 lakh in which was reduced to 38,411 lakh in and further reduced to 22,768 lakh in showing negative growth rates of % and % in the respective years. During these three years period the actual provision showed a fluctuated trend. It was 87 lakh in , increased to 93 lakh with the growth rate of 6.90% in but came down again to 87 lakh in showing negative growth rate of -6.45%. Similarly, as regards to sub-standard assets, the amount outstanding was 3,453 lakh in , which had tremendously increased to 9,636 lakh marking a growth rate of % in But by the very next year, i.e. in it was tremendously got reduced to 3,343 lakh, showing a negative growth rate of %. The actual provision of sub-standard assets in recorded to be 799 lakh which showed a great increase in with a growth rate of 33.17% amounting to 1,064 lakh, but steeply declined with a negative growth rate of % to 112 lakh in Regards to doubtful assets, the outstanding amount of unsecured overdues left for above 3 years and upto 4 years was 33 lakh in , increased to 43 lakh by and decreased to 7 lakh in showing a fluctuating growth rate. There is no actual provision of unsecured overdues. The outstanding amount of secured overdues for above 3 years and upto 4 years was 760 lakh in increased tremendously 172

17 to 1,383 lakh in but drastically decreased to 129 lakh in There observed an interesting trend in growth rates. A tremendous peak stage of trend was there in (81.97%) and very steep declining trend had occurred in (-90.67%). The actual provision of secured overdues was recorded as 463 lakh in and 319 lakh in , showing a negative growth rate of %, while it was not allotted in the year Of the overdues left for 4 years but not exceeding 6 years, the outstanding amount of unsecured overdues, there was a fluctuating trend. The outstanding amount of unsecured overdues was 70 lakh in , increased by 35.71% to 95 lakh in but drastically declined to 25 lakh showing a negative growth rate of %. There is no actual provision of unsecured overdues. The outstanding amount of secured overdues showed a declining trend. It was 620 lakh in , declined to 194 lakh (-68.71%) in and further deeply to 97 lakh in Regarding the actual provision of this overdues, it was recorded as 692 lakh in , which got drastical decline with % to 153 lakh in There was no allotment of actual provision in Regarding overdues exceeded 6 years, the outstanding amount of unsecured overdues shows a declining trend. It was 135 lakh in , got reduced to 129 lakh (-4.44%) in and further deeply to 86 lakh (-33.33%) in There is no actual provision of unsecured overdues. The outstanding amount of secured overdues in was 173

18 166 lakh, which increased tremendously by % to 811 lakh in had drastically declined to 158 lakh showing % of negative growth rate. The actual provision of this secured overdues was 530 lakh in showed a slight increased by 0.94% amounting to 535 lakh in No actual provision was allotted in The provisioning position of loss assets of GDCCB shows interesting trend. The outstanding amount of loss assets which was same during and with 644 lakh, slightly increased to 737 lakh by 14.44% of growth rate. But there was a greatly tremendous increase of actual provision of the loss assets. The actual provision of loss assets which was recorded as 301 lakh achieved a greatly tremendous growth of % which amounted 1,235 lakh in This further greatly increased by % of growth rate amounting to 3,080 lakh in The total outstanding amount of loans and advances showed a declining trend. It was 52,253 lakh in , got reduced to 51,346 lakh showing a negative growth rate of -1.74% and further steeply to reduced to 27,350 lakh showing % of negative growth rate. The main reason for decreasing loans and advances is due to Government of India taken debt relief measures. Regarding Gross NPAs there was a fluctuating trend. The outstanding amount of Gross NPAs in was 5,881 lakh in , got increased by a growth rate of % to 12,935 lakh in , but decreased to 4,582 lakh in showing a negative growth rate of %. The percentage of Gross NPAs in total loans and advances were 174

19 respectively 11.26%; 25.19%; and 16.75% in the years , and in respectively. The main reason for increased NPAs in was poor recoveries made in that year. Finally, the total required provision made by GDCCB against NPAs showed a fluctuating trend. It was 1,764 lakh in , increased by 53.74% to 2,712 lakh in , but decreased to 1,573 lakh showing a negative growth rate of %. The same fluctuating trend is observed with the actual provision. It was 2,995 lakh in , increased to 3,522 lakh with 17.60% of growth rate in but showing negative growth of -3.41% reduced to 3,402 lakh in Provision made by the GDCCB against NPAs was more than the required provision. It indicates healthy performance of the bank. 175

20 Table 6.3 Provisioning Position of the GDCCB ( in Lakhs) Sl. Particulars No. Amount Outstanding Required Provision Actual provision Amount Out- Required Provision Actual provision Amount Out- Required Provision Actual provision % Amount standing % Amount standing % Amount 1. Standard Assets 46, ,411 (-17.17) (6.90) 22,768 (-40.73) (-6.45) 2. Sub-Standard Assets 3, ,636 (179.06) ,064 (33.17) 3,343 (-65.31) (-89.47) 3. Doubtful Assets A). Overdues above 3 years and upto 4 years a. Un Secured (30.30) (-83.72) b. Secured , (81.97) (-31.10) (-90.67) B). Overdues over 4 years but not exceeding 6 years a. Un Secured (35.71) (-73.68) b. Secured (-68.71) (-77.89) (-50.00) C). Overdues exceeding 6 years a. Un Secured (-4.44) (-33.33) b. Secured (388.55) (0.94) (-80.52) 4. Loss Assets (0.00) ,235 (310.30) 737 (14.44) ,080 (149.39) 5. Other Provisioning Amount 6. Total Loans & Advances ( ) 52,253 51,346 (-1.74) 27,350 (-46.73) 7. Gross NPAs (2+3+4) 5,881 12,935 (119.95) 4,582 (-64.58) 8. % of Gross NPAs in Total Loans & Advances 9. Total Required Provision 1,764 2,712 (53.74) 1,573 (-41.99) 10. Total Actual Provision 2,995 3,522 (17.60) 3,402 (-3.41) Source: Audit Reports of the GDCCB. Note: Figures in brackets show the Annual Growth Rates 176

21 6.4 Simple Regression Analysis - Impact of Gross NPAs on Financial Variables in GDCCB: Regression analysis is used when two or more variables are thought to be systematically connected by a linear relationship. In simple regression, the variables are designated as x and y and they are related by an expression of the form y = b0 + b1 x + e. It leaves aside for a moment the nature of the variable e and focus on the x - y relationship. y = b0 + b1 x is the equation of a straight line; b0 is the intercept (or constant) and b1 is the x coefficient, which represents the slope of the straight line as the equation describes. Linear regression, assume that the relationship between the independent variables and the dependent variable is a linear one. Regression analysis is used to assess the relationship between one dependent variable (DV) and several independent variables (IVs). This is the most commonly used technique in much of the social sciences research. The simple regression model is y=a+bx+e Where as y=dependent variable. X=independent variable. b=regression coefficient. a=intersect. e=error term. The resulted regression coefficient among the variables Gross NPAs, Net Profit, Investments and Spread are presented. 177

22 Table 6.4 Impact of Gross NPAs on Financial Variables in GDCCB ( in Lacks) S.No Particulars Gross NPAs 3,433 10,265 4,582 2 Net Profit Investments 6,515 6,079 19,886 4 Spread 854 1,066 1,344 Source: Annual reports of the GDCCB Impact of Gross NPAs on Net Profit in GDCCB: In this regression model y-a+bx+e where as y=net Profit (dependent variable). X=Gross NPAs (independent variable). b=regression coefficient. a=intersect. e=error term. There is a negative relationship between Gross NPAs and Net Profit. While Gross NPAs is increasing the Net Profit is substantially decreasing. So in this model the regression analysis may not fully reflect the position. So the resulted regression coefficient values are presented in table

23 Table 6.5 Impact of Gross NPAs on Net Profit in GDCCB Model Summary b Regression(1) Adjusted R Std. Error of the Model R R Square Square Estimate Durbin-Watson a a. Predictors: (Constant), Gross NPAs b. Dependent Variable: Net Profit ANOVA b Model Sum of Squares df Mean Square F Sig. 1 Regression a Residual Total a. Predictors: (Constant), Gross NPAs b. Dependent Variable: Net Profit Coefficients a Unstandardized Coefficients Standardized Coefficients Model B Std. Error Beta t Sig. 1 (Constant) Gross NPAs -.021* *Significant at 5 percent level a. Dependent Variable: Net Profit Table 6.5 reveals that the Gross NPAs have negative relationship with net profit. The magnitude of relationship is statistically significant. Thus the R square value is 62% of the variation of net profit is explained by Gross NPAs. 179

24 The regression coefficient of Gross NPAs reveals that a unit increase in Gross NPAs results in decrease in net profit by one unit. The highest constant value indicates that high profit of the bank even when effect of Gross NPAs is low. It indicates the impact of several other causes on the net profit on the bankers Impact of Gross NPAs on Investments in GDCCB: In this regression model y=a+bx+e where as y=investments (dependent variable). X= Gross NPAs. As the level of Gross NPAs goes on increasing, the banks are inclined take a safe root of reducing advances and increasing investments. There is a negative relationship between Gross NPAs and Investments. These results are displayed in table

25 Table 6.6 Impact of Gross NPAs on Investments in GDCCB Regression(2) Model Summary b Adjusted R Std. Error of the Model R R Square Square Estimate Durbin-Watson a a. Predictors: (Constant), Gross NPAs b. Dependent Variable: Investment ANOVA b Model Sum of Squares df Mean Square F Sig. 1 Regression 1.813E E a Residual 1.051E E8 Total 1.232E8 2 a. Predictors: (Constant), Gross NPAs b. Dependent Variable: Investment Coefficients a Unstandardized Coefficients Standardized Coefficients Model B Std. Error Beta t Sig. 1 (Constant) Gross NPAs -.823* a. Dependent Variable: Investment Significant at 1 per cent level The result shows that the Gross NPAs have negative relationship with investments. The R square value of 14% of variability in Investments could be attributed to Gross NPAs. The only significant variable is constant. It indicates the influence of other variables except Gross NPAs on the investments of the bank. The regression coefficient is significant at 1 percent it 181

26 shows that the investment has significant impact on Gross NPAs Impact of Gross NPAs on Spread in GDCCB: In this regression model y=a+bx+e where as y=spread (dependent variable). X= Gross NPAs.(independent variable) Spread means the difference between investment earned and interest expended. There is a positive relationship between Gross NPAs and Spread as the income is received from performing assets and the Gross NPAs contribute to the Spread at all. It means while when the Gross NPAs are increasing the Spread is also increasing. These results are shown table

27 Table 6.7 Impact of Gross NPAs on Spread in GDCCB Regression(3) Adjusted R Std. Error of the Model R R Square Square Estimate Durbin-Watson a a. Predictors: (Constant), Gross NPAs b. Dependent Variable: SPREAD ANOVA b Model Sum of Squares df Mean Square F Sig. 1 Regression a Residual Total a. Predictors: (Constant), Gross NPAs b. Dependent Variable: SPREAD Coefficients a Unstandardized Coefficients Standardized Coefficients Model B Std. Error Beta t Sig. 1 (Constant) Gross NPAs a. Dependent Variable: SPREAD It reveals that the Gross NPAs have positive relationship with the Spread. The R square value is 6% Variation in Spread is explained by Gross NPAs. The regression coefficient is in significant. It shows that the Spread has in significant impact on Gross NPAs. 183

28 The regression model strongly concludes that there is impact of Gross NPAs on selected performance variables like Net Profit, Investments and Spread of bank. The results show that the impact of Gross NPAs on Net Profit is negative and insignificant and the impact of Gross NPAs on Investments is of negative relationship and significant at 1 % level and the impact of Gross NPAs on Spread is positive relationship and it is significant level. Thus it has concentrated effects to increase the net profit of the bank which is required at GDCCB level and to control the mounting of the Gross NPAs to make the GDCCB effective in the management of Gross NPAs and performance. 6.5 Perceptions and Opinions of the GDCCB Officials: Data Base: For the analysis of the demographic features and the perceptions of the bank officials about causes of NPAs, primary data was collected from sample bank officers through a structural survey schedule. Some information was gathered through personal observation and interaction with the officials of the GDCCB. Twenty officials are selected at random for study purpose in GDCCB Causes of NPAs: The bank officials were asked to assign the extent of their agreement over different causes of NPAs. Mean extent of agreements was worked out by taking average of the scores and per cent mean agreement was worked out of 5, the maximum score. The results are presented in table

29 Table 6.8 Extent of Agreement Among Bank Officials Over Different Causes of NPAs in GDCCB (in Percentage) Causes of NPAs Extent of Agreement Mean S.D % Ineffective Management and Supervision In Adequate Returns Natural Calamities Political Interference Socio Economic Conditions Misutilization/Diversion of Loans Defective Lending Policy Inadequate Backward & Forward Linkages Redemption of Past Debts Wilful Defaults Non Wilful Defaults Inadequate Recovery Staff Exorbitant Rates of Interest Improper Infrastructure Facilities F-Ratio 6.94*** C.D 0.49 *** Significance at 1%. 185

30 a. Wilful Defaults: Highest extent of agreement of per cent among officials is over wilful defaults indicates that majority of defaults occurred not because of inability of the borrowers to repay due to circumstances beyond their control but due to the lack of will and initiative of the defaulters to repay. It is observed that one of the main reasons for non-repayment or less repayment of loans was the unwillingness of the borrowers to repay rather than their inability to pay and that wilful defaults were responsible for the pathetic state of Indian banking system. b. Inadequate Returns: The mean extent of agreement on inadequate returns is per cent. The bank managers have opined that the fall in income generation, whether on account of external causes like natural calamities or government policies or due to internal factors like mismanagement or the cumulative effect of various factors taken together constrains the ability of the borrowers to repay the loan, resulting in NPAs. The main reasons for nonrepayment or less repayment of loans identified by them are business going sick and low earnings from the projects financed. c. Ineffective Management and Supervision: Another aspect that raises inefficiencies in the Guntur District Co-operative bank is the lack of professional management and involvement of family in the running of bank. Absence of supervision over utilization of loans results in misutlilization of loans and consequently excessive NPAs. The 186

31 extent of agreement over ineffective management and supervision for sanctioning and recovering the debt is found to be per cent in GDCCB. It is observed the same stating that inability to gauge the importance of transparency, accountability and prudential norms in the operations of the banking system resulted in an increasing burden of non performing advances (NPAs). d. Misutilizaion of Loans: The respondents have indicated misutilization of funds as an important factor contributing to the high incidence of NPAs with an extent of agreement of per cent. Nevertheless, if bank s monitoring and post follow up is strong, then it can immediately sight the diversion and mismanagement of funds. It is found that re-lending, diversion and misutilization of loans as the major factors responsible for willful defaults in the co-operative banks. e. Political Interference: Political interference has been stated by per cent of respondents which is in the form of pressure for not recovering the loans, to be responsible for non performing advances in the co-operative bank. The bank officials are of the opinion that if the project selected for finance is technically non-feasible and economically non-viable or the person going to handle the project is skill-wise not competent, the account becomes non performing. Such loans are advanced mainly due to 187

32 pressures put by government agencies and politicians on the bankers, leading to NPAs. It is observed that dismal performance of co-operative banks was due to excessive political interference and the after effects of loan waiver scheme of the government, resulting in an alarming proportion of NPAs. It is observed that recovery drive as well as disbursal of fresh loans have received a setback in rural areas following the Union Finance Minister s Budget announcement on waiver of loans to farmers as a result of which the borrowers in rural areas have stopped paying their dues and some of them, who made repayments a few days before the budget announcement, are now insisting on return of their money. Worst hit are the co-operative credit institutions whose exposure in rural credit is the maximum. f. Redemption of Past Debts: Among bank officials per cent have agreed that credit has been utilized for redemption of past debts, thereby resulting in NPAs. Short-term and medium-term loans and found that one of the major factors influencing the nonrepayment of loans, was settlement of old debts. 188

33 g. Socio Economic Conditions: There was an agreement of upto per cent over socio economic conditions of borrowers being responsible for non-payment of debts. It is observed that the size of holdings of the defaulters, their caste, amount of borrowings, educational status, age, sex, religion, community and size of landholding had a direct bearing on the repayment of dues. It observed that low repayment capacity, cropping intensity, consumption expenditure and income from dairy farming etc. significantly influenced the repayment performance of the borrowers. h. Inadequate Backward and Forward Linkages: There was per cent agreement over lack of adequate forward and backward linkages resulting in non-receipt of remunerative prices for produce, which caused bad repayment performance. It is observed that absence of lining of credit with marketing led to lesser income, resulting in higher incidence of NPAs. Major non-wilful causes are low market prices for the produce due to lack of linkages and insufficient income resulting in mounting NPAs. i. Natural Calamities: An extent of agreement of per cent was observed over natural calamities as a factor responsible for NPAs. It is observed that the failure of crops and natural calamities were the major factors responsible for high incidence of defaults. 189

34 Adverse agro climatic conditions and floods were the factors contributing to excessive NPAs. j. Defective Lending Policies: The extent of agreement over defective lending policies was per cent as the bank officials opined that even a properly selected activity, through economically viable, would suffer from non-availability of adequate and timely finance. If adequate finance is not available, the borrowers have to compromise with the quality of inputs and services or restrict the scope of operations and under these circumstances, an account becomes non performing. It is observed that in many cases defaults occurred because of inadequate amount of loans to generate surplus income and delay in disbursement of loans. k. Other Causes: Among other causes responsible for NPAs, the bank officials agreed upto per cent over improper infrastructure facilities like computers for maintaining upto date accounts of borrowers and per cent over non-wilful defaults (i.e. the defaulters who are willing but unable to repay). The lowest extent of agreement of per cent was found over exorbitant rates of interest as the cause of NPAs. An agreement of per cent over inadequate field staff for recoveries indicates the vital contribution of this factor to NPAs. 190

35 The critical difference (CD) of 0.49 indicates that the differences between the extent of agreement among bank officials over different causes of NPAs are significant. Highest mean extent of agreement i.e. 4.05(81.05%) is found over wilful defaults as a factor responsible for alarmingly high NPAs while lowest extent agreement (56.05%) is witnessed over the contribution of exorbitant rates of interest to NPAs. The satisfaction level over ineffective management and supervision, inadequate returns, political interference, misutilization/diversion of loans, inadequate recovery staff, socio economic conditions and redemption of past debts is equally important i.e. statistically at par. The GDCCB is suffering from burgeoning amount of NPAs especially, in non farm sector loans. In the opinion of the selected bank officials, the main factor responsible for NPAs was wilful defaults i.e. able but not willing to pay followed by inadequacy of loans, ineffective management and supervision, utilization of loans for unproductive purposes, political support, redemption of past debts, inadequate infrastructure facilities and field staff for recoveries and poor socio economic conditions. Majority of respondents were of the view that NPA norms had a positive effect on the recovery climate, operational efficiency, legal framework and head office support. On the other hand, these norms have resulted in tremendous increase in the paper work of the banks. 191

36 6.6 Findings: The volume of the total risk weighted assets has got reduced to considerable extent showing -0.68% ( 51,982 lakh) in from 52,338 lakh ( ) which further steeply reduced to 31,352 lakh showing %. This considerable decline in the value of risk weighted assets indicates that the GDCCB has acquired a good solvency position. The total value of risk weighted current assets has increased by % ( 727 lakh) in from 344 lakh in , but declined to 180 lakh by or by %. With regard to the total value of risk weighted investments, it is clearly observed that it has got increased by 75.52% ( 2,789 lakh) in from 1,589 lakh in and further to 77.23% ( 4,943 lakh) by Further, it is evidently noticed that the value of fixed deposits with banks occupies major position. The total value of risk weighted loans and advances have shown a declining trend. It was 50,405 lakh in , which declined to 48,466 lakh with a negative growth rate of -3.85% in and further declined by amounting to 26,229 lakh in

37 The percentage of Gross NPAs in total loans and advances were respectively 11.26%; 25.19%; and 16.75% in the years , and in The main reason for increased NPAs in was poor recoveries made in that year. The total outstanding amount of loans and advances showed a declining trend. It was 52,253 lakh in , got reduced to 51,346 lakh showing a negative growth rate of -1.74% and further steeply to reduced to 27,350 lakh showing % of negative growth rate. The main reason for decreasing loans and advances is due to Government of India taken dept relief measures. It is clearly observed that the total required provision made by GDCCB against NPAs showed a fluctuating trend. It was 1,764 lakh in , increased by 53.74% to 2,712 lakh in , but decreased to 1,573 lakh showing a negative growth rate of %. The same fluctuating trend is observed with the actual provision. It was 2,995 lakh in , increased to 3,522 lakh with 17.60% of growth rate in but showing negative growth of -3.41% reduced to 3,402 lakh in Provision made by the GDCCB against NPAs was more than the required provision. It indicates healthy performance of the bank. Gross NPAs have negative relationship with net profit. The magnitude of relationship is statistically significant. Thus the R square value is 62% of the variation of net profit is 193

38 explained by Gross NPAs. The regression coefficient of Gross NPAs reveals that a unit increase in Gross NPAs results in decrease in Net Profit by one Unit. The highest constant value indicates that high profit of the bank even when effect of Gross NPAs is low. It indicates the impact of several other causes on the net profit on the bankers. Gross NPAs have negative relationship with investments. The R square value of 14% of variability in investments could be attributed to Gross NPAs. The only significant variable is constant. It indicates the influence of other variables except Gross NPAs on the investments of the bank. The regression coefficient is significant at 1 percent it shows that the investment has significant impact on Gross NPAs. Gross NPAs have positive relationship with the Spread. The R square value is 6% Variation in Spread is explained by Gross NPAs. The regression coefficient is in significant. It shows that the Spread has in significant impact on Gross NPAs. Highest extent of agreement of per cent among officials is over wilful defaults indicates that majority of defaults occurred not because of inability of the borrowers to repay due to circumstances beyond their control but due to the lack of will and initiative of the defaulters to repay. 194

39 The extent of agreement over ineffective management and supervision for sanctioning and recovering the debt is found to be per cent in Guntur DCCB. Political interference has been stated by per cent of respondents which is in the form of pressure for not recovering the loans, to be responsible for non performing advances in the co-operative bank. There was an agreement of upto per cent over socio economic conditions of borrowers being responsible for non-payment of debts. It is observed that the size of holdings of the defaulters, their caste, amount of borrowings, educational status, age, sex, religion, community and size of landholding had a direct bearing on the repayment of dues. The extent of agreement over defective lending policies was per cent as the bank officials opined that even a properly selected activity, through economically viable, would suffer from non-availability of adequate and timely finance. 195