Banks are the true agents of development of any economy. They have played a vital role in the overall development of economies world over. Although overall development did happen but the spread of the same is not even all along, which has resulted in uneven income in different sectors and areas. The distribution of credit, therefore, needs to be rationalized in such a manner that the benefits of the same reach out to all across the areas as well as sectors and activities.

Banks have always shied away from lending in rural and undeveloped or underdeveloped areas and sectors despite a lot of directions from the regulators as well as from the state. This is due to the fear of losing money because of the nonviability of the proposed units and schemes in these areas. Lack of proper infrastructure in rural and underdeveloped areas is mainly responsible for the poor growth of the economy in these areas. The prime reason for poor lending in such areas is lack of infrastructure which makes the projects and schemes less viable and hence does not attract bank’s attention.

Now that lot of infrastructure has reached the rural and less developed areas. There are better power availability and better road connectivity, transport, and markets in the rural areas though not as better as in the cities but there is a great push to provide more and improve the existing facilities in these areas. Banks too have opened their units in these areas. The only problem is that banks are mobilizing resources from these areas and passing on the main part of the same for investment in other areas or to their controlling offices for deployment elsewhere. The required purpose of opening branches in such areas, therefore, gets defeated by siphoning out the resources from underprivileged areas to the better-privileged areas thereby further widening the gap of development in different areas. In order to ensure the equal level of development across all the regions, the norms for the calculation of credit-deposit (CD) ratio need to be redrawn/modified. Following suggestive measure may be of help to plug the loopholes in the system:

  1. To start with block should be considered as a unit.  For the calculation of CD ratio, all branches of different banks operating in a block be made to meet the mandatory CD ratio of 60% individually. Only that part of credit which has been utilized within the limits of the block should be taken for the calculation of CD ratio for the block. These ratios should be monitored at the Block level. The block-wise unit size may be carried over to Panchayat level after some time.
  2. Branches of a bank who in order to meet the requirements of CD ratio exceed the limits of the block and deploy funds in other blocks, or for the units in urban areas or industrial areas in other blocks. All such branches of banks should be imposed with a penalty of 1% on the interest earned on the amount of loan allowed in areas beyond their block and 2% on the interest of the part of finance in urban or an industrial area in other blocks.
  3. In order to encourage branches in the metro, urban, and semi-urban areas to fund units in rural and underdeveloped areas an incentive of 2% be offered provided 80% employment in such units is given to the locals of the block in which such financing is done.
  4. Foreign banks who have branches in metros only should also be made to contribute to the development of underdeveloped areas and sectors as per the rules of engagement with them. The Incentives proposed above may also be provided to such banks also.
  5. The amount of penalty and incentives stated above to be routed through a special fund which may be called ‘ Level Development Fund’ (LDF). This fund may be maintained by the coordinator of the State level bankers committee of the concerned state. Any shortfall at any time in this fund to be made good by the concerned state govt. The incentive to be provided or penalty to be imposed be calculated quarterly basis on the figures of 15th of the last month of each quarter in order to avoid artificial fluctuations on account of any window dressing to which the banks generally resort to in order to show better figures in the balance sheets on the  closing date of the respective quarter.
  6. In the case of consortium financing, the amount financed by the respective member banks of the consortium will be treated as financing in the block in which the unit so financed is located and not the block in which the financing branch is working and the penalty would accordingly be levied.  The location of the unit is to be considered and not the location of the controlling or administrative office of the unit.
  7. In case of income or commission earned out of nonfund based business such as a letter of credit or guarantees of any type, the penalty and incentive of 1 or 2% as the case may be, will be imposed under the similar circumstances of exceeding or entering in the jurisdiction of the block as discussed above.
  8. Penalty once charged is to be nonrefundable and no claim of any type to be entertained on any pretext such as the account becoming an NPA for any reasons.
  9. Any shortfall in the amount required to meet the mandatory requirement of meeting 60% CD ratio by any branch of a bank in a block to be kept in RIDF with NABARD at the prescribed rates.
  10. Branches of the banks in any block may divert funds after meeting the mandatory CD ratio of 60% in the block in which they are functioning for deployment anywhere as per their choice. However, in case they exceed CD ratio for financing within the block where they are functioning, they shall be given an incentive on the interest on the additional amount at 1%.

The CD ratio should be ensured to be maintained at the mandatory level by each branch of a bank block-wise, and by the respective banks district-wise, region wise, and state-wise. Inter-region and inter-state financing to be excluded for the purpose of calculating respective CD ratios. Suitable penalty as proposed above to be imposed on such lending. This would discourage flight of resources from the concerned areas to the other areas and ensure a level development of all areas and sectors.

In the present as well as during the future times the lucrative market for financing is in the rural areas as there is a lot of money and market in that sector.

Management of NPAs -Some recovery techniques.

When a loan account becomes Non-performing it is a headache and signal of deteriorating health of a bank. Any addition to this portfolio raises anxiety for the institution so this needs to be kept at a minimum level by effective recovery techniques.

Although it is always better to avoid slippage of accounts to NPA category by proper follow-up because ‘PREVENTION IS ALWAYS BETTER THAN CURE‘ but still some accounts do slip to NPA category because of one or the other reasons as already discussed in the earlier blog.

RECOVERY METHODS: We should study the NPA portfolio carefully and plan a strategy in a scientific manner, categorizing the accounts in order of ease of recovery.

Following are some suggestions at operational levels:

  1. One should not lose sight of the renewal date of the DP notes and no such account be allowed to become time-barred by limitation. So necessary recovery proceedings are initiated within the limitation period of the particular loan account. Fresh DP note, acknowledgment of debt or a credit into the account by the loanee with a credit slip duly signed by him will extend his limitation period. If this is not possible despite all efforts and persuasions the lawsuit be filed in the court of law well before the date the limitation period expires.
  2. After categorizing the accounts in order of ease of recovery, first, handle the accounts which can be recovered easily or by comparatively fewer efforts than in case of other accounts.
  3. There may be some freshly slipped account to NPA category where only a few installments or some interest is pending for payment. A recovery of that small amount can result in the upgrading of the whole amount of NPA account. All such accounts are given top priority as less effort produces comparatively much better results.
  4. Some NPA accounts of persons of good repute and standing can be recovered by hot persuasions. Keep a regular contact with these persons and their guarantors and encourage them to pay bank’s dues and save heavy legal charges and embarrassment of the courts to which the bank may be forced to go in case of nonpayment of its dues.
  5. Regular contact with the defaulter and his guarantors is a must. The recovery team members should be polite, persuasive but firm in their pursuit of recovery. During any discussions with the concerned parties, space should always be kept for further discussion. Bank’s DEFAULT IS A BIG SOCIAL STIGMA and many people pay if properly approached to avoid this embarrassment in society due to the regular visits of the recovery team.
  6. As there is always a shortage of staff in branches and it is difficult to spare people to form a team so banks should build recovery teams on a CLUSTER MODE where staff from few branches in the cluster join and work for all associated branches. The leader of the team should be rotated depending upon the recovery of a loan of the concerned branch because leader from the concerned branch can better understand the customer and his default account. If possible, some Female Staff should also be associated with recovery teams as this will help in avoiding many embarrassing situations which the recovery teams face during their recovery drives.
  7. The defaulter should be given reasonable time and encouraged to repay the due amount.
  8. There are also some HARD NUTS TO CRACK i:e the WILFUL DEFAULTERS and habitual defaulters they are real sharks and deserve no leniency so need to be dealt ruthlessly.
  9. Wherever merits demand suitable settlements can be made after negotiations. The negotiating teams should be experienced and skilled in this field.
  10. Publication of photos of defaulters and their guarantors, reporting to CIBIL as per authority and consent already obtained during the execution of legal documents at the time of releasing loan be resorted to on the merits and demerits of each case.
  11. In case of Wilful and hard type defaulters, negotiations should not be held in the cozy chambers of the bank’s executives but in the chamber of recovery officer. These chambers should not have comfortable chairs and sofas but ordinary chairs. The walls of the chambers be painted with recovery slogans and pictorial mages showing the bad effects on the reputation and standing of a defaulter in the eyes of society and public(try to corner them psychologically).
  12. The recovery officer should not sit in the chamber to welcome the defaulter when the defaulter is expected to visit him. Someone else should guide him to the chamber and let him sit there for some time and get acclimatized with the environment of recovery chamber. Recovery officer should make the defaulter and his guarantors understand the ramifications of legal recovery proceedings and costs involved. They should be advised and encouraged to repay the loan to avoid legal embarrassment.
  13. Negotiations be held with defaulters on merits of each case and nothing less than the realizable value of security charged to bank be agreed to be accepted in settlement of the account as this creates problems in the long run and sets the wrong precedence. As already said in the foregoing paragraph that during negotiations the position of the defaulter is that of a SHARK and that of the bank as a TEDDY BEAR. By skilled negotiations, you should be able to reverse this position. Please note that negotiations should never end up in a deadlock and scope should be always kept to restart the same again after some time.
  14. There may be some cases where chances of recovery are dismal and the value of the security has diminished to worthless level. Do not waste your time and energy on such cases and let the management take a call on the fate of such accounts.
  15. Recovery camps/Recovery fortnights /special recovery drives can be arranged at different levels to settle accounts. Defaulters should be encouraged to avail the opportunity to settle the account at some concession which can be decided by banks during these programs.
  16. The recovery under SARFAESI Act, through debt recovery tribunals, bank courts, other legal methods are already well defined and should be resorted to wherever required under the guidance of legal cells of respective banks.
  17. Recovery of Rural area defaults of comparatively small amounts are handled with compassion. Village heads, Sarpanch, and Village level workers (VLWs) should be involved. They should be told that more default in a village or an area is a factor stopping the bank from more lending in the area. These people can have great influence on defaulters.

RECOVERY NEEDS A MISSIONARY APPROACH. A casual approach is just a formality and brings no results.

THE TOP MANAGEMENT must provide all guidance and support to recovery departments because they are the people who are front warriors without them the mission cannot be accomplished. Only they can help them to sweep out the Junk from the system…….


Bank’s NPAs. Causes and Remedies.

NPAs are a challenge for the survival of banking industry across the globe, and especially for the banks in the developing countries. The cause of concern for these nations is the rising trend in NPAs which is spreading like an epidemic. Unless this trend is contained and curtailed, the fear is, failing or slowing down of economies of the affected nations.

NPAs adversely affect the health of banks and the economy in many ways.

  1. They stop creating any income for the banks, that is why such assets are called non-performing assets.
  2. They eat away a portion of income the good advances i.e. from performing assets and other sources of income because of the provisioning to be made against the NPAs, thus reducing the overall profits of the banks.
  3. They tell upon the reputation of the bank. The value of stocks comes down thus adversely affecting the investors which ultimately is a cause of discouragement for the public to contribute to such a bank’s  deposits and resources.
  4. It badly affects the morale of the employees because any reduction in profits deprives the staff of expecting any incentives and career growth.This trend if sets, is a very serious matter and a big cause for losing a battle.
  5. The economy of the nation suffers because the banks cant support the economic activity due to the shortage of loanable funds as the resources get blocked in the NPAs.
  6. The capital adequacy ratio falls below the required standards and in order to meet this shortfall, the banks go for capital raising through the public issue which in such depressed condition and loss of reputation becomes difficult to be fully subscribed because of poor response from the market. This forces banks to manage capital at discounts rather than premium. The cost on account of managing public issue is huge, and another cut in the profits of the bank. However, in case of public sector banks, the central govt inducts capital out of its own sources to bail out banks. The recent case is the induction of more than two lac crores of rupees by Indian govt in the capital of public sector banks to bail them out of the crisis.


This amount could have been used for the uplifting the economy but instead, it has affected the growth of it.  How long this can be allowed to go on. Can any economy afford to have such a state of affairs where the institutions meant for its development become a burden on it? They have to stand on their own legs and support the economy instead. This serious issue needs the focused attention of the management of respective banks as well as of the govt.


Bank’s assets turn NPA for genuine as well as for bad reasons. These need to be timely identified and remedial steps taken to avoid them. Once an asset becomes NPA it becomes difficult to upgrade or recover it. This puts an additional burden on the resources of the bank as well as on the workload on the employees whose maximum energy and attention get consumed on such cumbersome work rather than on the development of the main business. The genuine and unavoidable causes for NPAs are (A) change in govt. policy. For example ban on plastic bags affected the plastic bag industry and loans in such industries went bad. (B)change in the lifestyle of consumers effects the industry whose products go out of fashion. (C)Fall of natural calamities. (D)Wars and prolonged public disturbances. These cant be avoided, and assets becoming NPA because of such circumstances need to be dealt with by the concerned Govt. and banks with compassion.  The BAD CAUSES are:

(A) Defective and poor appraisals of loan proposals.

(B) Political pressure/other considerations for sanctioning of loans.

(C) A mad rush/run to meet the loan targets unreasonably set by the management.

(D) Handling the proposals both at appraisal, sanction as well as at disbursement level by inexperienced and untrained staff.

(E) Diversion of funds to projects other than the ones for whom the loan actually sanctioned.

(F) Poor pre and post disbursement followup.

(G) Compromising with the quality of security and its realizable value in white money.

(H) Avoiding actionable steps at the early stages of indication of slippage to NPA category.

(I) Lack of proper accountability of staff at different levels associated with the appraisal, sanction, and disbursal and follow up of loan cases.

(J) AND above all is the wilful default by the loanee especially in case of big advances.

(K) It has been observed that proposals, especially large ones having multiple banking arrangements or consortium financing, are not appraised at individual bank’s level with much care as should have been applied. Generally, member banks copy paste the proposal of the leader bank. Something suiting a certain bank may not fit well into the systems of any other bank. Every shoe does not fit every foot and may pinch at the end causing a trouble, So banks should individually make their own assessments about the suitability of proposal. An account in such an arrangement going NPA in one of the member banks infects all banks. Every tier in the sanctioning process from branch to the board level must add value to the proposal.


  • Political interference can be neutralized by effective appraisal without compromising the quality of proposal and security. The only weight-age to be given to such pressures should be limited to early and smooth sanctioning of the loan.
  • Targets for advances be set in a scientific manner and properly trained staff need to be put on appraisals. Creation of specially trained staff requires proper planning and sustained efforts need to be made to upgrade their skills. There should not be square pegs in the round holes or otherwise things will end up in failures.
  • Proper legal documentation and creation of legal charge be got done before releasing even a single paisa of the sanctioned loan. Disbursal should be need-based and in phases. Post disbursement inspection must be conducted on and after every phase of disbursement in order to check any diversion of funds.
  • All assets charged to banks must be got properly insured and diarised to be renewed on due dates. Value of securities be got assessed at suitable intervals of time. Disbursing authorities necessarily need to follow installation and the timely start of a project as any delay may result in cost overruns thus making the project unviable. This may result in a loan into going to NPA in the beginning itself.
  •  All statutory/necessary permissions, clearances, licenses must be in place before disbursal of loan.
  • THE CONTROLLING AUTHORITIES MUST KEEP AN EAGLE’S EYE over the big loans and LARGE PORTFOLIOS and guide the operating levels at every stage. Pre and post inspection and controlling authority’s guidance should not be only on paper but on the ground. These are not the only safeguards as there may be many others depending on each case.