an old india private sector bank

Cash and balances maintained with other banks
The average cash to average deposit ratio was 1.22% with 25% branches holding more than double their cash holding limits despite presence of pooling centres. The norm for cash maintenance was 0.89% on average cash deposit ratio basis. The pooling centre mechanism has failed to contain the build up of idle cash. The opportunity cost of the idle average cash holding with branches standing at Rs.36.89 crore was [ at 5%] Rs.184.45 lakh for the year under review. The total of cash and bank balances with banks rose by 6.96% to Rs.299.19 crore in September 30,2005. The insurance was renewed on 31.3.2005 for one year. the bank was thus under insured by a factor of 10. The bank was not aware of average clause in insurance. The risk perception is thus high due to underinsurance. Amount held in term deposits with commercial banks stood at Rs.30.00 crore as on September 30,2005 up from Rs.1.15 crore September 30,2004. The balances with RBI were 196.41 crore as on sept 2004; 123.87 crore as on march 2005 and 183.39 crore as on sept 2005. The bank had CMS for bills agreement with --bank and ----bank for payment of at par cheques and DDs at up country stations where they do not have any branches. The bank has deposits of a few coop banks with it but does not place its deposits with any coop bank instead its deposits are placed with -----bank. The bank does not have any deposits with any NBFC. The bank had four accounts each for EURO and USD and two accounts for YEN which can be reduced to one each by way of rationalisation. The bank is deploying its FCNRB deposits in FCY deposits with overseas branches of Indian banks for as little as 1.3 to 1.7% instead of lending.. Though various limits were fixed all deposits were placed solely with -----Bank for the entire HY 9/05 which was not in accordance with risk dispersal norm. the bank has fixed NIL limit for grade D bank like ------bank for placing deposits while coop banks were placed below grade B and above grade C banks at 7 crore counter party limit which was not a prudent risk management practice. ------bank has been fixed inter bank exposure of 25 crore applicable to A grade banks, which was not a prudent risk management practice.

Loan assets
Size and composition and Growth in the advances portfolio
The advances of the bank increased by 32.58% to Rs.2269.60 crore as on September 30,2005. The term loans increased by 43.23% to Rs.642.50 crore as on September 30,2005.The cash credit, demand loans and overdrafts increased by 31.83% to Rs.1546.37 crore. Food credit remained static at Rs.50 crore. The bills purchased and discounted decreased by 10% to Rs.80.73 crore by Rs.9.62 crore. The finance to export sector decreased by 2.94% of net advances to Rs.144.12 crore as on September 30,2005 [6.56% of net advances of 2196.37 crore ] against 12% of net advances prescribed.
Priority sector advances increased by 42.49% to Rs.899.61 crore excluding investment in bonds of Rs.20.56 crore [ forming 40.03% of net bank credit at Rs.2247.42 crore ] as on September 30,2005. The bank did not achieve sub-targets in finance to agriculture and SSI, which was attributable to lack of delegated powers at the branch level in rural and semi-urban branches. The credit deposit ratio increased by 13.04% to 69.67% as on September 30,2005.
Credit concentration/ dispersal of risk
The bank exhibited credit concentration in textiles , NBFC and steel sector and credit concentration in 110 odd groups .The bank has stipulated 15% to gross advances as the prudential exposure limit for each industry. The maximum exposure to overall textile industry is 12.64%. There was a jump in exposure by 110% to 185.12 crore as on September 30,2005. Advances to indirect finance to agriculture excluding the bonds rose by 99%, those to real estate sector rose by 20%, those to commodities increased by 62.5% during the year under review. The loans to infrastructure stood at Rs.334.13 crore as on September 30,2005. The bank has fixed a limit of 10% of gross advances for unsecured guarantees and 20% of gross advances for unsecured advances . The bank has unsecured guarantees at 12.25 crore forming 0.54% and unsecured advances at Rs.48.90 crore forming 2.15% of gross advances as on September 30,2005.
Sub PLR lending increased by 56.5% in terms of amount and 145% in terms of accounts during the period under review due to finer rating policy model of the bank introduced in early 2005 and delinking rate of interest to credit risk rating. As a proportion to total advances , the Sub PLR advances increased by 5% to 43.69% as on September 30,2005.
The percentage exposure to other industries varies from 0.07% to 3.26%. The bank was financing groups as a preferred delivery vehicle for business growth as there were 110 odd groups with a total exposure of Rs.832 crore as on September 30,2005. The top 20 groups had an exposure of Rs.562.12 crore. ----group was the largest followed by -------group.
The calculation of group exposure was inaccurate as the bank was taking only associates with limits above one crore in to account and discarding all adhoc limits and seasonal limits and was calculating based on outstanding only and discarding the limit wherever it was not utilised.
The bank’s 138 branches were concentrated in --that too in urban areas. Of the 25% of advances that were rated the proportion of low, medium, watch-list and high risk advances were 41%,32%,20% and 7% were rated high risk. An amount of Rs.22.00 lakh [Later increased to 20 crore] was advanced to a state govt guaranteed unit viz: --housing board for weaker section housing finance. ECGC covered credits were of the order of 126.56 crore. Retail sector formed only 4.8% of the total advances as on September 30,2005. The bank did not engage the services of any DSA for retail loans portfolio.
Window dressing : No evidence of window dressing was noticed in the bank during the period under review.
Priority sector targets and achievement : The bank was able to achieve 40.03% target for priority sector on account investment in rural bonds for the year under review.[Net bank credit as on September 30,2005 2247.42 crore] . The bank failed to achieve any of the sub-targets under priority sector.
Exposure to sensitive sectors viz: real estate, capital market, sensitive commodities was low and within limits prescribed by the board.
Loan Policy
Assessment of loan policy document: A comprehensive loan policy was issued on 15.10 2004 with amendments upto 20-09-2004. An amendment circular was sent immediately afterwards on 6.12.2004 enhancing exposure limits to 40% based on the feed back from group borrowers. Another amendment was issued vide circular on 2.11.2005 which enhanced real estate exposure, enhanced exposure to capital market, sensitive sector and bills business and introduced early warning signal system, credit risk rating for Rs.75 lakh and above, listing out of relatives of directors ineligible for loans, stock audit and monitoring system for irregular advances. The policy included many features, which increased the risk profile of the bank like hike in group exposure limit, hike in exposure to real estate with relaxed norms, hike in exposure to sensitive sectors, and deletion of NBFC from sensitive sector list. The loan policy does not include making provision for sacrifice on NPV basis in restructured and rescheduled accounts. The appraisal notes indicated the deviations from loan policy and put up for the sanctioning authority to decide. The bank was selective about NFB business as a matter of policy.

Adherence to delegated authority: The discretionary powers were revised as a part of the policy document with effect from July 1,2005. committee approach was introduced by way of credit grid which put up 224 proposals to the board of directors during the period under review. the chairman had adequate powers of sanction. the chairman used his extra ordinary powers of granting facilities on the plea of urgency to accounts falling under the board powers freely leading to situations which are akin to abuse of such powers in that many instances where the increases were allowed on the day the board was to meet and also within 1-3 days of the board meeting were noticed .
An analysis of the powers granted to various functionaries indicates that but for branches headed by AGM , DGM , there was no power delegated to sanction any advances indicating too much centralization and very little delegation of powers in the bank. Even where the delegation was done it was not in keeping with the mix of clientele served by the branch. very low and in appropriate powers as compared with the needs of the market segment served by the branch .
System of reporting credit sanctions by various functionaries: It was mandated to report all such transgressions to the controlling office on a weekly basis. It was noticed that the CO does not have regularly updated phone sanction registers in all its departments. Confirmations seen by the IO indicated that they were sent after the transgression was adjusted. No instance of adverse action taken in case of transgression had come to the notice of the IO. No staff accountability was fixed for regular transgressions. Some of the branches with AGM. DGM were found to resort to frequent transgression.
Credit appraisal
System of customer rating and pricing of loans: The bank, to comply with the Basel II requirements of two-dimensional rating, had introduced customer rating and customer risk rating system which was being implemented at the CO for all its sanctions. The pricing was only theoretically linked to the credit rating but it was determined based on market conditions, competition and borrower’s relation with the bank. The customer risk rating did not yield automatic exit plan for exit list accounts. As per the guidelines issued by RBI in May 2003, the bank had introduced the Fair Practices Code for Lenders duly approved by the Board. The bank was yet to frame policy guidelines to put in place a Borrowers’ Grievances Redressal system to settle the disputes arising out of the lending decisions of the bank.
Present inspection revealed the following appraisal deficiencies:
The appraisal notes did not cover borrowers’ status as director of banks/ FIs and relationship if any with them, inclusion in Defaulters List/ Caution List of RBI/ ECGC.
Although all group borrowers had associate/ sister concerns, the branch had not obtained the balance sheets of all of them on a common date and analysed them to ascertain interlocking/ diversion of funds, if any and factored the findings.
Many of the branches did not have the system of issuing acknowledgements for receipt of loan proposals. The bank was paying lip service to the nayak committee method of working capital calculation at 20% of the turn over for SSI units . Though calculation was made as per the turnover method the choice always fell on the MPBF second method of lending except in few cases, which had to be accommodated, and whose financials did not warrant the level of credit already availed by them. In such cases the nayak committee norm was applied to justify the level of finance extended. The bank had not specified and formulated different application forms for different level of borrowing so as to make it easier for the borrowers to submit their applications. There was also no reference to the number of days that was required to be availed by the branch to disposing a application of a SSI borrower. The bank was not linked to SIDBI for availing and offering various schemes of the bank for SME accounts .
The margins, the method of choice and the terms were all governed more by security cover available though there were many accounts with lower security cover, which were extended finance. The bank did not restrict the borrower from availing need based finance for lower security cover but all appraisals and notes always hinged on the security cover available for the bank if any particular credit decision of quantum of loan was to be made.
The working capital needs did not involve NFB calculations as a matter of course.
The bank was being forced by a combination of group borrower pressure and branch championing the cause of the borrower group into sanctioning facilities which were against its loan policy and best judgement.
The board was being reduced to a bystander in the game of cancelling and waiving even ‘good for bank’ conditions and sanction terms by a combination of branch pressure and borrower group pressure
The policy formulation of not extending limits above one crore to non corporate borrowers was being observed more in breach than in spirit.;
Overtrading was observed in various textile trading units financed by the bank. The bank was not found to be aware of its responsibility to discourage overtrading by its clients.
The branches were using the limits granted to one exit class client as a justification for asking for limits for other exit class clients. One branch manager had in fact attached a list of such accounts as justification for his demand for renewal of his clients limits despite the exit class rating received by the party:
The share holders were found to obtain favours in shape of official actions, which were not in the larger interest of the bank.
Some of the directors representing sizeable share holding were found to be consulted on all issues of monetary importance thus forming a clique and decisions taken by this clique were only put up to the board for final sanction . it is found that in case of waiver and write off this group wields more real power and actual decisions are taken by this group in the name of informal consultations with board and the actial board only comes in the end to rubber stamp the already accomplished act. I.e to make what is ‘de facto’ into ‘de juré’ action
Branches were acting on their own and in the interest of the borrower groups often going against the expressed wishes of the CO and the board all in the name of customer service and at times misreporting or not reporting vital pieces of information which may go against the borrower :
branches were taking the law into their own hands in granting excesses and adhoc limits with post facto or many times without any information to the CO . this behaviour is to a large extent contributed to by the phoney delegation of powers which does not delegate any powers in reality but centralizes all power in the central office. The branch manager is asked to get business in competitors, whose branch manager enjoy enormous powers
IBD is functioning like a de facto controlling office in allowing / sanctioning excesses, adhoc limits and in extending validity of lapsed sanctions . the board sanctions have also begun to allocate limits within which the IBD was authorised to allow unauthorised excesses and regularly sanction irregular and adhoc limits for each account which deals in exports. The policy and the organisation structure are silent on the rights and responsibilities of the IBD which should be codified if the situation is not go out of hand and the IBD replaces the CO advances department as the de facto controller of advances and even worse de facto board. It is a kind of empire building which is not good for the bank in the long run. No management audit, systems audit and no credit audit prescribed for the IBD to regulate and control its controller role
branch managers were found to be ignorant of minimum legal implications of their actions and in their over enthusiasm were committing silly mistakes which would endanger the security of funds lent by the bank esp in relation to EM formalities and ROC charge creation:
in exit class accounts the CO was not contemplating minimum exit strategies as listed out in the report even when the party requests for it and the branch manager recommends it and the company is exiting the business, as is clear from all the financial indicators submitted by it , with a view on the nature of collateral security available with them:
there is an obvious lack of established rule bound cost benefit analysis , risk based and credit risk rating based analysis that goes into granting ROI concessions to demanding group borrowers:
the bank does not get help from industry journals and industry experts in obliging a client with loans to take buy or sell in case of import of raw material and export of finished goods and all the borrower is his hunch and the bank goes with the unscientific hunch which many a time results in changed international scenario which endangers the loan given by the bank: ------iron and steel wherein he bought imported scrap in large quantity in a rising market right at the top of the price cycle just before the crash of prices internationally and the stock , finished goods and the FLC , buyers credit in foreign currency, LOU given by the bank for obtaining buyers credit and the PCL have all been endangered by just one hunch of a client. The bank would be losing heavily unless it develops domain expertise in at least the textiles, hosiery, iron and steel, real estate, NBFC and others where it has sizeable exposure.
there is no sanctity attached in the bank to infusement of own capital by borrower for improving net worth and the bank accepts poor substitutes as unsecured loans with higher than bank interest which may prove to be too costly and a burden, or by revaluation of assets which may generate accounting net worth but does not increase the funds availability. The bank does not object to withdrawal or repayment of unsecured loans treated as net worth by the bank and does not consider it as diversion of funds and it is not disturbed by the resultant TOL/TNW ratios, which are disturbingly high. The bank is also willing to release properties mortgaged to it without ensuring that the owner’s stake in the business is not diluted the bank is found to be reluctant to ask the borrower to bring in additional capital as long its collaterals are considered adequate:
bank is not ensuring viability of project during the currency of loan even when there are signs to the contrary available aplenty in the financials submitted and the running of the account:
among individual accounts which need to be commented is that of ---textiles ltd with OD 800 lakh; TL 500 lakh; TL 1500 lakh and BG 18.48 lakh .This was a case of naïve banking as the bank believed the borrower beyond reasonableness. It was also a example of board placing sanction conditions which it cannot implement and has no will to implement. The ---group had taken over sri bhagavati textile ltd SBTL , a NPA of --Bank on lease, four years back. The bank sanctioned new working capital and term loan to finance completion of the acquisition and payment of OTS to --bnak and --Bank under the guise of financing a new unit in the name of ---textiles ltd. on 4.6.2004 the bank sanctioned 500 lakh as start up expenses for a mill working for the last four years and 800 lakh as working capital finance for a firm running for last four years with group finances sanctioned by the bank. No effort was made to reduce the limits elsewhere in other group accounts. It sanctioned a term loan of 1500 lakh for repayment of OTS of --bank approved at 2000 lakh. while sanctioning the bank placed very innocuous conditions which it was forced to withdraw one after the other though their compliance was a child’s play for the borrower like: to create charge over four old vehicles; insuring land property on which wind mill was financed; to postpone obtention of charge over the properties from PNB by allowing ---dues of OTS to be settled in ten months virtually making the limits clean without creating any ROC charge in its favour. The other conditions, which it had to rescind, are nominee director on the board, ---dues settlement before release of this land and creation of charges with ROC in favour of this bank. It was notable that all the conditions of the board were shot down by the advances department and the branch acting in concert and on behalf of the party and never by the party directly. At the same time the bank disbursed its loan of 1500 lakh by credit to the current account on 5.12.05 without bothering about the end use of funds. The branch financed 300 lakh on 21.8.2004 for the unit to implement VRS on the plea that the cost of employees would come down and the unit would become viable. A CA certificate was furnished to prove that VRS was indeed implemented and an amount of 581.50 lakh dated 4.8.2005. the bank discovered on a branch visit on June 30,2005 that production achieved by the unit was 1/3 of the projection as there was shortage of working capital, power cost was 15% vs. the break even cost of 5%, the labour cost continued to be 16% compared to the post VRS prediction of 4.5%. thus the unit was neither producing enough for the limits utilised not did its cost of production come down . it was then disclosed that the VRS actually was not fully implemented and that further bank loans were required for implementing the second round of VRS. The bank thus was fixed in a bind with no exit route in sight. An examination of utilisation of funds revealed that OD of 800 lakh was used to finance purchases+ salaries+ wages+ manufacturing expenses totalling only 250 lakh and the rest was diverted. The two --Ls of 2000 lakh were fully unproductive expenses as they were diverted with consent of the bank. Thus only 250 lakh out of 2818 lakh was utilised in income generating activity by the company. The capability of the company to generate adequate revenue to service the bank loans was doubtful. Machinery being old and of NPA vintage they have been overvalued for security sake. The bank was thus left with no option but to reduce the interest burden which it did by reducing the ROI to 10% from 14%. There were still dues payable to sundaram finance at 443 lakh and cholamandalam finance at 100 lakh . the land and building of the company was shown at a bloated value of 1455 lakh as the firm being NPA did not provide for depreciation for the last six years. The present value was thought to be near 390 lakh. the bank had while sanctioning stipulated that the ---bring in its own margin money to the extent of 300 lakh to which it gave a solemn assurance and certificate. On enquiry it was declared by the company that the margin money was brought in by diverting machinery from Sakthi sugar ltd. ----sugars on the other hand submitted voucher on 31.3.2005 that it had paid 310.25 lakh to --- towards interest dues payable by it to --- and not OTS as claimed or as machinery to improve productive capacity as claimed. The payment to --- was also doubtful as claimed as the --- had already furnished a no dues certificate on December 15,2004 to the bank and to the company. The bank failed to ask the question “If --- was paid in December all its dues then to whom did the ---- sugars pay the interest dues?” . the other question the bank did not ask as a creditor to ---sugars is was this expenditure revealed in the accounts of ---sugars since 2001 or was it a simple case of diversion of funds without the knowledge of the bank and the shareholders. The unit was now paying interest to --bank from the bank loans availed for what should come from equity. It was also reported by the company that some machineries were removed from the factory which were originally financed by NBFC and were offered to NBFC to reduce their dues and make then agree to instalment payment. No independent confirmation of the effect of such removal was available with the bank. The company further declared that it was increasing it equity from 1 lakh to 10 crore by diverting some machineries from ----sugars and other group companies worth 6.52 crore. The bank as financier to all the group companies failed to insist on it being taken into confidence on this transfer of assets. A examination of disbursal of Rs.1500 lakh TL revealed that only Rs.876 lakh was paid to OBC and the rest of Rs.623 lakh was diverted to parent company ---ltd without the knowledge of the bank and while giving an undertaking that endues of funds was ensured by paying the full amount to ---. Statutory auditor revealed several irregularities in the accounts which were suppressed without any satisfactory explanation. To add to the current woes it was revealed that --IDC is a major share holder in the SBTL and it was not yet approached for the merger of ----with ------ and the merger of the two was going to be long drawn out affair with two ROC and Two states and Two high courts involved who have to clear the merger before the bank gets any comfort from assets of ---- while financing to ------. The bank was accepting the value of ooty land at Rs.18 crore in all its appraisals based solely on the declaration by the party when its own valuer had valued it at 52.66 lakh on July 26,2005. the bank even agreed to send another acceptable valuer to obtain a fresh and hopefully acceptable valuation. The other properties which are overvalued are : plant and machinery of ---- of 1521 lakh which has to be depreciated for 6 years and to the fact that ---- was not yet legally a part of ------ to which land were given. Land in palghat valued at 800 lakh which was a overvalued agricultural and waste land for which no valuation report exists. Plant and machinery of ------ brought reportedly from sister concerns totalling on declaration to 1297.98 lakh but regarding whose title there was not clarity as no sister concern has in its balance sheet reported such reduction in plant and machinery nor its value. Land for wind mills at ------ valued at 152.19 lakh without valuation report which was overvalued barren land. Land and building at ooty valued at 240.48 lakh as per declaration of party while the valuation certificate exists for 52.66 lakh only.

Takeover of accounts , extension of facilities to defaulters, conversion of NFB to FB due to devolvement / invocation
The bank and the board were not discharging their duties expected of them in case of takeover of accounts from other banks as laid down in their policy. The minimum expected of the taking over entity is to ensure that the account is standard in the books of the transferor bank before permitting takeover. It was observed all the items which have any thing to do with establishing the standard and performing nature of the accounts were delegated by means of the sanction conditions and the branch manager is sought to be made responsible for the credit decision taken mainly by the board and the CO which is not fair. The branches on their part do not hesitate to release the loan and wait for the conditions to complied with in leisure including the establishing of the fact that the account was standard in the books of the transferor bank which is putting the cart before the horse.
There were 11 quick mortality accounts worth Rs.3.73 crore which turned NPA within one year of take over and 8 accounts worth Rs.13.88 crore ,which have turned NPA within two years of sanction indicating poor


Restructured accounts
The bank had restructured 7 accounts for an amount of Rs.8.89 crore during the year under review but had not provided for sacrifice on an NPV basis as the NPV calculation yielded no loss to the bank on account of such restructuring. The restructuring was sparsely attempted by the bank.

Bills portfolio
Bills business was not only reducing in size over the period but also was very small in proportion to the total advances portfolio. The bills purchased and discounted decreased from Rs.90.35 crore as on September 30,2004 to Rs.80.73 crore by Rs.9.62 crore which was in line with fall in export finance. The bank was not found to maintain D&B reports for all counter parties whose bills are regularly offered for purchase by the clients. The bank was not insisting on registering of power of attorney in case of finance being extended for supply bills purchased.
Credit supervision : Quality of credit supervision at branches and the effectiveness of control exercised over such supervision by controlling office / head office: The credit supervision at the branches as gleaned from the RBI branch reports is satisfactory with some deficiencies. The branches were submitting credit supervision monthly return and irregularity monthly return to the bank byway of which the regular and irregular accounts were being monitored by the CO. the unit inspections were being done though the register was not being maintained properly

Some of the deficiencies observed in the system of credit supervision are furnished below:
a) The bank’s Loan Policy had prescribed that all the borrowal accounts with credit limits above Rs.25.00 lakh from the banking system should get their accounts audited by Chartered Accountants. But there was no system of monitoring the compliance to this by the branches. In most of the delayed renewal cases the reason for delay was on account of non-submission of the audited financials.
b) There was no system of watching for the timely submission of the audited financials of the borrowers and verifying the same with reference to the projections made earlier. This follow-up defect affected the appraisal process as most of the loan appraisals were content with old data and estimates in the absence of audited financials. Most of the projections thus were higher and the profit projections were without accounting for even statutory payments like taxes.
c) Stock statements were accepted without any scrutiny. Age wise break up of sundry debtors was not furnished in the Book Debt statements submitted by some of the borrowers. Delay/ irregular submission of stock statement was observed in many cases. Book Debt certified by the Auditor was not submitted on a quarterly basis by some of the borrowers
d) under Insurance was widely prevalent with risk of average clause being applied to the policy and no system existed for detection and correction of the same and no system existed for diarising and getting the policies renewed. No insurance for Burglary etc was being obtained .
e) The irregularity statements submitted by the branches do not count the irregularity from the first instance till the date of reporting but count the no of instalments or interest debits which have not been serviced as at the time of reporting: eg: an account can have 2 months instalment dues in June , July , August and yet be not NPA as indicated in the irregularity reports.
f) DP calculation is defective as in most of the accounts the paid stock is not shown separately, LC stock is not shown separately, the book debts are not segregated into below three months and above three months, book debt confirmation is not obtained from a CA at least periodically, confirmation of debtors is not obtained even when it is feasible like from a single govt entity with whom the party deals.
g) Stock audit is not conducted regularly in all the eligible accounts and wherever it is conduced it is entrusted to the concurrent auditor whose action may be similar to unit visit in other banks but does not amount to stock audit. the stock audit report where submitted is not acted upon. The stock auditor is not entrusted the task of certifying the book debts though most of the time the dues are built up against the book debts only, whose number amount and age for eligibility are a unknown factor. Stock audit is not used as a strong measure of verifying the veracity of the statements made by the party in the stock statements.
h) D&B reports are not being procured in case of all major buyers of the exporters before the bills are purchased. The report is essential in case of change of buyer or acceptance of a new buyer by the party and bank and especially in case of ECGC does not grant a buyer- wise limit for the buyer and yet the party wants to deal with the same buyer.
i) Branches were not obtaining EM extension for adhoc or clean limits being given to the party in other branches than the main branch where the EM was created: epoch entrepots;
j) In almost all OTS, Compromise, write off cases the valuation of properties was shown as a fraction of the value accepted at the time of sanction of the limits. If the present value was correct then the original valuation was wrong and motivated and a case lay against the branch manager who accepted it and the valuer who gave it. But no such action was being initiated nor contemplated.
k) Wilful defaulters/fraudsters were not being identified and reported by the bank even in cases where the bank loses on account of their fraudulent activities and those exporters who do not carry out exports despite utilising PCL to the full but divert the money.
l) Bank was found to lose out on the control of assets when it delays taking action till the control over assets passes over to other authorities like courts.
m) The bank was not registering P/A in case of supply bills purchased accounts and in case of contractor accounts with the govt agency or supplier.
n) The party is not tracking the use of advances received for exports and is not insisting on the same being credited to PCL account as is required by ECGC regulations for its cover to be valid.
o) The bank is not insisting on and not carrying out book debt audit and confirmation in case of NBFC and other accounts financed by it at least once a year.
p) The bank is not tracking diversion of funds to sister concerns and not objecting to it nor is it objecting to unsecured loans being repaid or capital being withdrawn without its concurrence.

4.5.7. Review/ renewal – system of review / renewal of credit limits and compliance thereof- prevalence of limited technical review in a large number of accounts / repeatedly in some accounts
4.5.7.1. In terms of Loan Policy prescriptions the accounts with working capital limits together with other types of facilities were to be renewed once a year .The renewal was invariably delayed in all cases on the plea of non submission of financial statement on the due date or non submission of filled in application with CMA data . The branch managers were themselves found to allow operations in the accounts for the lapsed sanctions or were found to obtain permission from IBD for export accounts. The CO invariably was found to approve of such action at the time of regular renewal. No instance of censure had come to light for such operations in lapsed sanctions. There were no accounts which were repeatedly subjected to technical limited review for extending the validity without regular sanction. 24 forex related accounts with outstanding of 90 crore were pending renewal as on September 30,2005 as IBD had allowed extension of validity on its own while 535 domestic limit accounts with outstanding of 36.13 crore were pending renewal as on September 30,2005. the position of timely renewal was thus poor. Central Office monitors the compliance status on this and apprises Board at quarterly intervals.

System and control for off balance sheet business: The bank was having a practice of placing a note to the board on a quarterly basis detailing the non fund based business undertaken by it along with details of devolved and invoked items with the present status regarding payment by the party. The branches were still found to adopt the practice of debiting advanced bills purchased account of the branch for all invocations and devolvement thus transforming the liability of the party to that of the branch. The review also included data on BG expired but not reversed. There were only 9 branches which were active in non fund based business in the bank with above 10 crore business in LC or BG business. No errors were detected in the sample data examined by IO with regard to data on credit and default reported to CIBIL

NPA management: Profile of non performing advances is furnished in annexure 4 and Summary of evaluation of NPA s above a cut off point is furnished in annexure 5
The bank did not maintain any floating provision of any kind to be taken into account either for NPA or for capital adequacy calculation.

Movement of NPAs as per bank
NPAs as on date of
last date [*188.59crore]
as per bank 166.09 crore
Additions [fresh NPA]
during the year 51.58
Upgradation
Recoveries [excluding
recoveries made from
upgraded accounts] 48.17
Write-offs / Compromise
settlements recovered 34.61
Sale of assets NPA s
to asset reconstruction
companies 0
NPAs as on date [*157.39 crore ]
134.89 crore per bank
[*If we add interest suspense[5.54 crore] and ECGC claim received (2.41 crore) and NPA provision held [66.79 crore] to the bank figures we get the ---figures]

the bank has thus achieved a net reduction in gross NPA during the year under review with a very good performance in recovery both by way of regular recovery, recovery by way of OTS and compromise settlements .

NPAs as per bank and as per --- non performing advances [ gross and net] as per bank and as identified by the --- and the reasons for divergence
As per bank as per ---Standard 2134.71 [%] [%]
Impaired
comprising
Substandard 35.14 [%] [%]
Doubtful 91.88 [%] [%]
Loss 7.87 [%] [%]
Total impaired loans 134.89 [%] [%]
Total advances 2269.60[100%] [100%]
[%shown in brackets are on gross loans and advances]

The gross and net NPAs as on the present and the previous dates of inspection
The gross NPA as on September 30,2004 was Rs.134.89 crore as per bank figures which formed 5.92% of gross advances. If we deduct interest suspense[5.54 crore] and ECGC claim received (2.41 crore) and NPA provision held [66.79 crore] we get net NPA of 60.15 crore as per bank figures and net advances work out to Rs.2202.79 crore as per bank figures. The net NPA then works out to 2.73% of net advances for the bank as on September 30,2005 which was a reduction by about half .

There has been an improvement in the loan portfolio quality as seen from the above and the net NPA has come down by about half in percentage terms.

Comparison with peer group ratio for impaired loan portfolio: the bank compared favourably with its peer group in its ratio of impaired loan portfolio as the PG IV to which this bank belongs has gross NPA percentage of 7.69% while net NPA % is 3.5%.[ OSMOS for March 31,2005 ]


Comments on the trends in the position of NPAs and its categories and the steps taken or not taken by the bank
The trend of NPA was a downward trend on account of proactive recovery measures and the emphasis placed on OTS, compromise and regular cash recovery in NPA accounts. Sectoral NPAs and their position indicates the following:

While analysing the industry wise NPAs textiles and food processing sector industry share the major portion 0.50%[0.55% as on March 31,2005] and 0.53%[ 0.55% as on March 31,2005] of the total advances respectively. This was mainly attributable to recessionary trend in the respective industries since 1997 till 2004. Under priority sector, there were 2.93% NPAs in agriculture sector as on September 30,2005 , 5.47% NPAs in SSI sector as on September 30,2005 , 5.33% NPAs in OPS sector as on September 30,2005 . 30% of branches had more than 10% NPA ratio, while 20% of branches contributed 91.35 crore of NPA of the bank.
The bank has in general adhered to IRAC norms. The bank has sufficient reserves and P&L surplus after dividend to provide for the additional provision indicated .

Quick mortality accounts: two instance of quick mortality was noticed by the PIO in addition to those indicated in takeover para given above. No camouflaging or swapping of NPA was noticed. Loan review department was monitoring the irregularity in accounts with establishing IRAC norm centred delinquency in the accounts.

Recovery policy- Recovery policy was enunciated along with the loan policy referred to above . the emphasis was on prevention by constant supervision and close follow-up . loan review mechanism under loan review department has been set up. A recovery cell has been set up under a AGM in metro branch and a DGM has been assigned the job in CO. the recovery was the responsibility of the branches. the emphasis was on using all persuasive methods including SARFAESI act and DRT to bring the person to the negotiating table for OTS/ compromise even in case of suit filed accounts. It is reiterated that compromise is to be preferred over legal action. Waiver and write off was made contingent upon the borrower not being a wilful defaulter. OTS was preferred in case of suit filed accounts also. Waiver was made subject to the realisable value of the security. Clear exit policy was enunciated but it was observed that the same was not automatically made applicable once the rating of an account comes down to --9 /---10 but to allow renewal/ enhancement. A committee of executives and committee of directors was formed for monitoring the SMA accounts , suit filed accounts and NPAs. The bank was successful in implementing the strategy as the total gross NPA have come down and the net recovery was more that the new additions to the category. The bank has achieved all the targets placed before it in recovery . The Loan review has been of much use to the management in identifying early warning signs of sickness and it was pointing out the defective credits and stressed credits to the branch staff with instruction to follow-up. Write off was being attempted where the process of DRT was likely to take long time or where the security was not available or where it was not enforceable. In directed credit write-off was attempted wherever the unit does not exist or the borrower was not traceable. No accounts were sold/ transferred to ARCIL during the year under review as the offer price of ARCIL was too low.
Migration analysis: The bank had carried out a migration analysis covering the migration of accounts from 2002-03 to 2003-04. it revealed that 38% of accounts and 37% of amount were down graded from out of 200 accounts with 558.26 crore being rated. The distribution of low, medium or high risk were 40%, 31% and 29%. 14 accounts were downgraded to CUB 8 to 10 category with 47% being downgraded in textile industry 42% in trading accounts and 41% in constructions industry.
The suit filed accounts totalled 404 accounts with suit filed amount of 79.32 crore and an outstanding of 46.07 crore. Out of which 78 cases were decreed accounts with decreed amount of 7.21 crore and outstanding balance of 3.25 crore. Of the above the bank had filed EP in 36 cases, which are in various stages of implementation and it was yet to file EP in 42 decreed cases till date. The performance can be termed satisfactory. The bank was correct in engaging the borrowers even after suit was filed to close the case out of court and closing the NPA faster by way of OTS & compromise.
The bank had issued sarfeasi notices in 99 cases with an outstanding amount of 25.57 crore during the year under review and achieved recovery of 7.91 crore and taken possession in cases with outstanding of 8.75 crore. Sarfeasi act was seen as yielding faster and surer returns when simultaneously the parties are followed up for OTS.

the following wilful defaulters, though prohibited by the loan policy, were allowed the facility of OTS and writeoff involving waiver and writeoff of substantial amounts.
Staff accountability- The bank was yet to formulate a policy on the “Staff Accountability for NPAs, quick mortality accounts” duly approved by the Board . Staff accountability however, was being examined by the vigilance department, CO in all the NPA accounts . Staff accountability was not properly assessed in a few cases of OTS/writeoff:
Measures to improve asset quality: Follow-up resulting in cash recovery and OTS compromise along with write-off of bad debts are the measure used by the bank for NPA management.
Special mention accounts. There were 32 accounts with outstanding of Rs.2429.39 lakh problem accounts as gleaned from the monthly irregularity reports submitted by the branches to the CO.

SMA accounts noticed :15 accounts 76.98 crore out of 78 accounts examined .
Accounts guaranteed by government : --housing board has been sanctioned limits of 20 crore for weaker section housing based on the strength of --State Govt guarantee. The disbursal was by way of single transfer of half the amount to ---which will transfer the fund to its branches at the site of construction and the rest would be kept as deposit with the bank for use at the appropriate time of project completion. The board has not defaulted so far. There was a discrepancy in the rate of interest charged to the account. The rate mentioned in the quotation given by the bank for bagging the loan was different from the one quoted by other bankers which was against different from the rate of interest mentioned in the term loan agreement signed with the board which against differs from the rate of interest mentioned in the sanction letter of the bank. It would be difficult at any future date to reconcile so many different versions and arrive at correct rate of interest to be charged. The board was known to be have stipulated such rates of interest in the past with other banks which had resulted in long periods of frosty relations with other banks. The bank would be well advised to get the issue clarified at the earliest and charge the correct interest at the agreed rests and not to change the same along with the rates of interests in general along with change in the same at a future date.
Securitisation of assets: The bank did not undertake any Securitisation of asset or other similar deals during the year under review. The bank did not undertake any Portfolio buy out / purchase of loan assets during the period under review. The bank did not undertake any sale of impaired assets to ARC during the year under review.

Off Balance Sheet Business
The bank guarantees given on behalf of constituents increased by 118.74%. to Rs.279.23 crore on September 30,2005. The LCs , acceptances and endorsements and other obligations like letters of comfort issued fell by 26.92% to Rs.143.33 crore as on September 30,2005. The liability on account of outstanding forward exchange contracts fell drastically by 71.52% to Rs.178.05 crore as on September 30,2005 in line with the bank’s revised policy which makes such cover optional. Other items for which the bank was contingently liable increased from Rs.0.01 crore in September 30,2004 to 11.02 crore in September 30,2005. The branches continued to debit ---account to park the LC devolvement or BG invoked , whenever the party was unable to arrange for funds despite instructions to the contrary issued by the CO from time to time. 40 BGs issued for an amount of 0.92 crore had expired and were kept pending as on September 30,2005 .

Claims not acknowledged as debt
Claims not acknowledged as debt remained at 0.52 crore during the period under review consisting mainly of the same items.


Risk Assessment – Credit Risk
Credit risk management architecture: The board was handicapped in it having to reverse and waive all the sanction terms which are acceptable to the advances department and the branches and thus was weak and not risk focussed in its deliberations and decisions. The chairman was found to sanction many adhoc limits in the board power accounts even when it could have been placed before the board for a comprehensive review and considered decision making. Thus the authority of the board has been compromised . the situation is especially bad in case of big groups being financed by the bank. Concentration risk in credit risk is thus medium to high. Informal clearance from a small group within the board was being substituted for a full board clearance in case of all OTS compromise and write off cases as well as big credit decisions. Urgency has never been established and thus the practice leads to undermining the authority of the board. The board review of NPA credit function was other wise improving and fairly comprehensive in coverage which would improve if it increases its willing ness to assert it self.

Credit risk identification: The risk rating models are functioning well except that they were not able to pinpoint the effect of diversion of funds from the company to sister concerns or by way repayment of unsecured loans . The use of models was limited as the exit classification does not automatically lead the bank to initiated exit operations. The bank observes the risk rating only as a indicative measure and is more guided by the collateral cover available to it. The pricing has been delinked from rating for all group accounts and accounts above one crore where it is more a factor of demand and strength of the group making the demand for reduction in interest than the credit risk rating. 75% of the credit exposure is unrated. The bank is not enforcing its norm of not granting huge limits to non corporate borrowers. Of the rated borrowers the distribution was found to be as per normal curve and acceptable. The bank had made obtaining forward cover for forex loan optional with the result the uncovered forex exposure of corporates formed around 80% of its corporate forex exposure.

Credit risk measurement: The rating distribution was as per normal curve and hence acceptable.

Credit risk control: There has been welcome reduction in NPA by 50% in percentage terms with the effort to concentrate on OTS as the main means of recovery bearing fruit for the bank. It is now at low risk level. The bank however did not build up provision as suggested to 50% of its gross NPA or more. No floating provision was being made for NPA present and future.

Adequacy of review and audit of credit risk function: The loan review department had been active and effective but was in the process of establishing its authority. The irregularity reports being received by it were defective in that they did not view the irregularity from IRAC norm view point. Eg. Same account could be 2m irregular for June July and august continuously in the present dispensation.

Credit risk in off balance sheet exposure: The bank was still unable to stop the practice of debiting the ---account of the branch for the BG and LC devolvement and invocations with the result that such action by a few branches increases the credit risk in this area. The bank was freely extending LOU for buyers credit or suppliers credit availed by the corporates to honour it FLCs but is not weighing the same from risk angle. The counter party limits were extended to Indian bank on par with A grade bank though it is eligible for the same . the counter party limits for deposits for coop banks were placed above B grade banks which was incorrect and risky.

Basel II prepared ness: The bank had in place a 10 grade risk rating model which was serving it well. But it was being put to limited use as exit class did not automatically initiate exit policy procedures with collateral playing a major role in the decision. The pricing is also not a factor of the rating obtained by the entity. The bank was not propagating corporatisation in its non-corporate borrowers with sizeable limits though the same was included in its policy. The bank was not monitoring diversion of funds by the corporates to their sister concerns or group concerns and was found to release collateral just based on revaluation of existing assets . the net worth was being accepted as increased even when it is a result of only accounting increase by way of revaluation and no cash inflow takes place and does not alter the availability of funds for operations and NWC. The bank is on one hand accepting unsecured loans as equivalent of capital but on the other hand was not objecting to withdrawal or repayment of the same without prior clearance form it. Its MIS is very poor as many risk related functions in investment and credit being manual and the branches being not networked. It is not yet ready for Basel II unless it solves the problem of networking and reliable MIS . The bank had begun calculating PD, LGC, EAD on an experimental basis but the same was not being put to general use in all credit decisions or investment decisions.
The credit risk was medium with stable direction.
Exposure ceilings: The group exposure ceilings was breached in case of mani group of accounts whose exposure in the month of July 2005 was of the order of 133 crore compared to 120 crore exposure ceiling. The explanation given by the bank was not satisfactory.