50,65,81,83,84,87,100/160

28,90,91,95,112,11, 110, 93-94 /154

Introduction
to Banks
The bulk of all money transactions today involve the transfer of bank deposits. Depository institutions, which we normally call banks, are at the
very center of our monetary system. Thus a basic knowledge of the banking system is essential to an understanding of how money works.
Bank Deposits and Reserves
The monetary base is created by the Fed when it buys securities for its own portfolio. Bank deposits themselves are not base money, rather they
are claims on base money. A bank must hold reserves of base money in order to meet its depositors' cash withdrawals and to cover the checks
written against their accounts. Reserves comprise a bank's vault cash and what it holds on deposit at the Fed, known as Fed funds. The Fed
requires banks to maintain reserves of at least 10% of their demand deposits, averaged over successive 14-day periods.
The Movement of Bank Reserves
When a depositor writes a check against his account, his bank must surrender that amount in reserves to the payee’s bank for the check to clear.
Reserves are constantly moving from one bank to another as checks are written and cleared. At the end of the day, some banks will be short of
reserves and others long. Banks redistribute reserves among themselves by trading in the Fed funds market. Those long on reserves will
normally lend to those short. The annualized interest rate on interbank loans is known as the Fed funds rate, and varies with supply and demand.
The reserve requirement applies only to the bank's demand deposits, not its term or savings deposits. Thus when a bank depositor converts funds
in a demand deposit into a term or savings deposit, he frees up the reserves that were held against the demand deposit. The bank can then use
those reserves in several ways. For example, it can hold them to back further lending, buy interest-earning Treasury securities, or lend them to
other banks in the Fed funds market.
Controlling the Fed Funds Rate
The supply of reserves changes whenever base money enters or leaves the banking system. This occurs when the Fed buys or sells securities or
when the public deposits or withdraws cash from banks. The demand for reserves changes whenever total demand deposits change, which
occurs when banks increase or decrease aggregate lending. The Fed controls the Fed funds rate by adjusting the supply of reserves to meet the
demand at its target interest rate. It does so by adding or draining reserves through its open market operations.
The Fed funds rate effectively sets the upper limit on the cost of reserves to banks, and thus determines the interest rates that banks must charge
the public for loans. Bank interest rates influence the demand for loans, and thereby the net amount of bank lending. That in turn determines the
liquidity of the private sector, which is important in terms of aggregate demand and inflationary pressures. The selection and control of the Fed
funds rate is the key monetary policy instrument of the Fed.
The Effects of Government Spending
The Fed acts as a depository for the Treasury as well as member banks. All government spending is paid out of the Treasury's account at the
Fed. Whenever the government spends, the Fed debits the Treasury's account and credits the Fed account of the payee’s bank. The Treasury
replenishes its Fed account with transfers from its commercial bank accounts where it deposits the receipts from taxes, and the sale of its
securities.
In order to minimize variations in aggregate banking system reserves, the Treasury maintains a nearly constant balance in its Fed account. In
effect, Treasury payments are simply transfers from its commercial bank accounts to the bank accounts of the public. Funds move in the reverse
direction when the public pays taxes or buys securities from the Treasury. The Treasury must maintain a positive balance in its commercial bank
accounts to avoid having to borrow directly from the Fed. However it has no need for, and does not accumulate, balances in excess of its near-
term payment obligations.
On average, government spending does not affect the aggregate bank deposits of the private sector. The Treasury sells or redeems securities as
required to balance its inflows against outflows. However short-term variations occur because receipts cannot be synchronized with spending.
Banking system reserves remain essentially unaffected by government spending because the Treasury transfers funds from its commercial bank
accounts to replace the funds spent out of its Fed account.

Non performing asset

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.

Definition
A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial
loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is
not producing income.
 what are non performing assets in banks
Non-Performing Assets in Indian Banks
In liberalizing economy banking and financial sector get high priority. Indian banking sector of having a serious problem due non performing.
The financial reforms have helped largely to clean NPA was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability of
the bank are highly affected due to this
NPA is defined as an advance for which interest or repayment of principal or both remain out standing for a period of more than two quarters.
The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource.
Reasons:
Various studies have been conducted to analysis the reasons for NPA. What ever may be complete elimination of NPA is impossible. The
reasons may be widely classified in two:

(1) Over hang component

(2) Incremental component

Over hang component is due to the environment reasons, business cycle etc.

Incremental component may be due to internal bank management, credit policy, terms of credit etc.
Asset Classification :

The RBI has issued guidelines to banks for classification of assets into four categories.

1. Standard assets:
These are loans which do not have any problem are less risk.

2. Substandard assets:
These are assets which come under the category of NPA for a period of less then 12 months.

3. Doubtful assets:
These are NPA exceeding 12 months

4. Loss assets:
These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI.

The classification of assets of scheduled commercial bank.

Table 1 (Amount Rs. crores)

Assets 2001 2002 2003 2004

494716 609972 709260 837130

Standard assets
(88.6) (89.6) (91.2) (92.8)

Sub standard 18206 21382 20078 21026

assets (3.3) (3.1) (2.6) (2.3)

37756 41201 39731 36247

Doubtful assets
(6.8) (6.1) (5.1) (4.36)

8001 8370 8971 7625

Loss assets
(1.4) (1.2) (1.2) (0.8)

63963 70953 68780 902027

Total NPA
(11.4) (10.4) (8.8) (100)

Income recognition and provisioning

Income from NPA is not recognized on accrued basic but is booked as income only when, it is actually received. RBI has also tightened red the
provisions norms against asset classification. It ranges from 0.25% to 100% from standard asset to loss asset respectively.

Gross and net NPA of different sector of bank

Table 2 (end of March 31) (in %)

Category Gross NPA/ Gross Advance

2001 2002 2003 2004

Public sector bank 12.37 11.09 9.36 7.79

Private sector 8.37 9.64 8.07 5.84

Foreign bank 6.84 5.38 5.25 4.62

Table 3 (end of March 31) (in %)

category Net NPA / Net Advance

2001 2002 2003 2004

Public sector bank 6.74 5.82 4.53 2.98

Private sector 2.27 2.49 2.32 1.32

Foreign bank 1.82 1.89 1.76 1.49

The table II and III shows that the percentage of gross NPA/ gross advance and net NPA/ net advance are in a decreasing trend. This shows the
sign of efficiency in public and private sector bamks.but still if compared to foreign banks Indian private sector and public sector banks have a
higher NPA.
Management of NPA
The table II&III shows that during initial sage the percentage of NPA was higher. This was due to show ineffective recovery of bank credit,
lacuna in credit recovery system, inadequate legal provision etc. Various steps have been taken by the government to recover and reduce NPAs.
Some of them are.
1. One time settlement / compromise scheme
2. Lok adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002.
5. Corporate Reconstruction Companies
6. credit information on defaulters and role of credit information bureaus

CONCLUSION

The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively higher in public sectors banks. (Table
II&III). To improve the efficiency and profitability, the NPA has to be scheduled. Various steps have been taken by government to reduce the
NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain
international standard.

Income Recognition and Asset Classification Norms-UCBs

RBI/2005-06/41
UBD (PCB).Cir.No.1/09.140.00/05-06
July 4, 2005
The Chief Executives of all Primary( Urban) Cooperative Banks
Dear Sir/Madam,
Income Recognition and Asset Classification Norms-UCBs
Please refer to Master Circular dated UBD.BSD.IP.MC.No.15/12.05.05/2004-05 dated December 2, 2004 on Prudential Norms on Income
Recognition, Asset Classification, Provisioning and Other Related Mattes as also the following circulars on the above subject:
i. UBD.BSD.I.PCB.No.12/12.05.05/2001-02 dated October 5, 2001
ii. UBD.BSD.I.15/12.05.05/2002-03 dated September 9, 2002
iii. UBD.PCB.Cir.17/13.04.00/2004-05 dated September 4, 2004
2. Taking into consideration requests received from the UCB Sector, it has been decided to permit the following categories of UCBs to classify
Loan Accounts as NPAs based on 180 days delinquency norm instead of the extant 90 days norm.
i.Unit banks i.e. banks having a single branch / HO with deposits upto Rs. 100 crore*
ii. Banks having multiple branches within a single district with deposits upto Rs. 100 crore*
* The deposit base of Rs. 100 crore will be determined on the basis of average of the fortnightly Net Demand and Time Liabilities in the
financial year concerned.
For the above category of banks, an account would be classified as Non Performing Asset if the
i. Interest and/or installment of principal remain overdue** for a period of more than 180 days in respect of a Term Loan.
ii. The account remains 'Out of order' for a period of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC).
iii. The bill remains overdue** for a period of more than 180 days, in the case of bills purchased and discounted.
iv. Any amount to be received remains overdue** for a period of more than 180 days in respect of other accounts.
**Any amount due to the bank under any credit facility, if not paid by the due date fixed by the bank becomes overdue.
3. All UCBs other than those referred to at para 2 above shall classify their loan accounts as NPA as per 90 day norm as hitherto. The
exemption given for classification of gold loans and small loans upto Rs.1 lakh based on 180 days norm will however continue till March 31,
2006.
4. The relaxation in classification of NPA accounts for the banks referred to at para 2 above will be in force for three financial years i.e.
financial years ended/ending March 31, 2005, 2006 and 2007. The details of the changes and the consequent impact on the existing instructions
with regard to asset classification and income recognition in respect of these banks are given in the Annexure.
5. The above modifications are subject to condition that the changes will take effect for classification of NPAs in the year ended March 31,
2005 and onwards upto March 31, 2007 and should not result in reclassification of accounts already classified as NPA in the year March 31,
2004 or earlier except through the normal process of up-gradation. The relaxations are given for the explicit purpose of enabling the UCBs
concerned to transit to the 90 day NPA norm in the year 2007-2008 by building up adequate provisions and strengthening their appraisal,
disbursement and post disbursement procedures.
Yours faithfully
(K.R. Ananda)
Chief General Manager-in-charge

Annexure
Annexure to Circular UBD.(PCB).Cir. No.1 /09.140.00/2005-06 dated July 4, 2005 Relaxed Prudential Norms on income recognition,
asset classification and provisioning for UCBs referred to in paragraph 2 of the Circular.

Sl.No. Circulars referred to: Existing New Norms

Norms

1 Asset Classification norm: (i) W.e.f (i) These banks will be required to identify
(i) UBD.No.BSD.1.PCB.12/ 31.03.2004 the NPAs on the basis of 180 day delinquency
12.05.05/2001-2002 dated norm for norm for three more years commencing
05.10.2001 classification of
March 31 2005, i.e. upto March31, 2007.
an asset as non However, these banks should build up
(ii) UBD.PCB.Cir performing has adequate provisions in the BDDR over the
17/13.04.00/2004-05 dated been reduced to next three years such that they would be
04.09.2004. 90 days from able to transit to 90 day NPA norm by
(iii) UBD.No.BSD.I.15 / 180 days. March 31 2008. Since the 90 day norm for
12.05.05/2002-03 dated (ii) Gold loans asset classification came into force w.e.f.
11.09.2002. and small loans March 31 2004, revised asset
up to Rs 1 lakh classification norm should not result in
will be any write back of provisions. Moreover,
governed by the accounts classified as NPA as on March
90 days norm 31, 2004 or earlier should not be
with effect reclassified as standard merely on the
from the year basis of 180 days norm, but should be
ending upgraded through the normal process of
31.03.2007. upgradation.
(iii) W.e.f (ii) In view of (i) above, gold loans and
31.03.2005 an small loan upto Rs 1 lakh will also be
asset would be governed by 180 days norm upto March
classified as 31, 2007
doubtful if it (iii) A Sub standard account will continue
remained in the to be classified as doubtful after 18
 sub-standard months instead of 12 months upto March
category for 12 31, 2007.
months.

2 Provisioning Norms: (i) Sub The provisioning norms will be as under

(i) UBD.PCB.Cir21/ standard- 10% from year ended31.03.2005 upto year
12.05.05/2004-05 dated (ii) Doubtful ending 31.03.2007:
27.09.2004 (up to one (i) Sub standard- 10%
(ii) year):100% of (ii) Doubtful (up to one year):100% of
UBD.BSD.IP.MC.No.15/ unsecured unsecured portion plus 20% of secured
12.05.05/2004-05 dated portion plus portion
02.12.2004 20% of secured
portion (iii) Doubtful (one to three years) : 100%
of unsecured portion plus 30% of secured
(iii) Doubtful portion
(one to three
years) : 100% (iv) Doubtful for more than 3 years: 100%
of unsecured of unsecured portion plus 50% of secured
portion plus portion
30% of secured (v) Loss: 100%.
portion
Note:
(iv) Doubtful
Implementation of the instructions
for more than 3
requiring classification of substandard
years: 100% of
account into doubtful category after 12
unsecured
months and 100 % provisioning for
portion. For
secured portion of doubtful assets of over
secured portion
3 years would be deferred by three years.
the provision
As such the banks should build up
are as under:
adequate provisions over this period to
Outstanding facilitate smooth transition.
stock of NPAs
as on March 31,
2006
• 50
percent
upto
March
2006.
• 60 per
cent as
on
March
31,
2007
• 75 per
cent as
on
March
31,
2008
• 100 per
cent as
on
March
31,
2009
Advances
classified as
'doubtful more
than three
years' on or
 after April 1,
2006-100 %.
-
(v) Loss: 100%.

1. www.trustgroup.co.in/State%20bank%20of%20Mysore- Draft%20Letter%20of%20Offer.pdf
2. www.sebi.gov.in/dp/sbmlof.pdf

3. http://www.moneycontrol.com/financials/statebankmysore/balance-sheet/SBM

4. http://www.statebankofmysore.co.in/fin_position.htm

5. http://money.rediff.com/companies/state-bank-of-mysore/14030005/profit-and-loss