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Concept of NPA
Concept of NPA
Concept of NPA
Executive Summary:
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Chapter 2
Introduction
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It's a known fact that the banks and financial institutions in India face
the problem of swelling non-performing assets (N.P.As) and the issue is
becoming more and more unmanageable. In order to bring the
situation under control, some steps have been taken recently. The
Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 was passed by Parliament, which is an
important step towards elimination or reduction of N.P.As.
Meaning of N.P.As:
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reveals the fact that the biggest banking failures were due to credit
risk.
Due to this, banks are restricting their lending operations to secured
avenues only with adequate collateral on which to fall back upon in a
situation of default.
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7. Decreed Debts:
Where decrees have been obtained.
8. Bad and Doubtful Debts:
Where the recoverability of the banks’ dues has become doubtful on
account of shortfall in value of security, difficulty in enforcing and
realizing the securities, or inability/unwillingness of the borrowers to
repay the banks’ dues partly or wholly.
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Chapter 3
Provisional Norms:
Banks will be required to make provisions for bad and doubtful debts
on a uniform and consistent basis so that the balance sheets reflect a
true picture of the financial status of the bank. The Narsimham
Committee has recommended the following provisioning norms
(i) 100 per cent of loss assets or 100 per cent of out standings for loss
assets;
(ii) 100 per cent of security shortfall for doubtful assets and 20 per
cent to 50 per cent of the secured portion; and
(iii) 10 per cent of the total out standings for substandard assets.
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Disclosure Norms:
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Chapter 4
Classification Of Assets
Classification of Assets:
While new private banks are careful about their asset quality and
consequently have low non-performing assets (N.P.As), public sector
banks have large N.P.As due to wrong lending policies followed earlier
and also due to government regulations that require them to lend to
sectors where potential of default is high. Allaying the fears that bulk
of the Non-Performing Assets (N.P.As) was from priority sector, NPA
from priority sector constituted was lower at 46 per cent than that of
the corporate sector at 48 per cent.
Loans and advances account for around 40 per cent of the assets of
SCBs. However, delay/default in payment of interest and/or repayment
of principal has rendered a significant proportion of the loan assets
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Standard Assets: It carries not more than the normal risk attached to
the business and is not an NPA.
Sub-standard Asset: An asset which remains as NPA for a period
exceeding 24 months, where the current net worth of the borrower,
guarantor or the current market value of the security charged to the
bank is not enough to ensure recovery of the debt due to the bank in
full.
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Chapter 5
The main reasons for sickness and the factors leading to N.P.As are as
under:
Internal Factors:
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External factors:
Failure, non-payment/overdue, recession in other countries,
externalization problems, adverse exchange rate, etc.
Government policies like excise, import duty changes, deregulation,
pollution control orders, etc. Willful default, siphoning of funds, fraud,
misappropriation, promoter/management disputes, etc.
Deficiencies on the part of the bank, viz, in credit appraisal, monitoring
and follow up, delay in release of limits, delay in settlements
payments/subsidies by government bodies, etc.
External factors like raw material shortage, raw material/input price
escalation, power shortage, industrial recession, excess capacity,
natural calamities like floods, accidents, etc. Contribution to N.P.As by
factors like siphoning off funds through fraud/misappropriation was
less significant in comparison with other factors.
Incidence of N.P.As on account of deficiencies on the part of
banks such as delay in sanction and disbursement of funds whereby
borrowing units are starved of funds when in need, and delay in
settlement of payments/subsidies by the government bodies was on
the low side in proportion to other factors. Lack of effective co-
ordination between banks and financial institution in respect of large
value projects does contribute to the emergence of N.P.As even at the
implementation stage. RBI had, in February 2000 drawn up certain
ground rules in this regard in consultation with the banks, FII and IBA
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and circulated the same among banks and financial institution for
implementation.
Susceptibility of the sanctioning authorities to external pressure,
failings of CEOs and the ineffectiveness of the board to check his ways
also contributed in no small measures to the unusual build up of N.P.As
in some of the banks. One of the most prominent causes for N.P.As, as
often observed by RBI Inspectors, is the slackness on the part of the
credit management staff in their follow up to detect and prevent
diversion of funds in the post disbursement stage.
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Chapter 6
N.P.As are by-product of most financial systems and the level of N.P.As
is an indicator of the health of the financial system of an economy.
Valuation techniques should present the situation, which maximize the
overall interest of all the concerned parties.
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the company or its debt. The matrix shows the risk profile of the NPA
based on its cash flows and collateral. As shown, stronger the cash
flows and collateral, lower the risk profile of the asset. Some of the
widely used approaches towards valuation of an NPA by the valuation
firms are detailed as under:
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Earning Model -
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Chapter 7
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Managing N.P.As:
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Chapter 8
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Over the last few years Indian banking in its attempt to integrate itself
with the global banking has been facing lots of hurdles in its way due
to its inherent weaknesses, despite its high sounding claims and lofty
achievements. One of the major hurdles, the Indian banking is facing
today, is its ever-growing size of non-performing assets over which the
top management of almost each bank is baffled. On account of the
intricacies involved in handling the N.P.As the ticklish task of assets
management of the bank has become a tight rope walk affair for the
controlling heads, because a little wavering ‘this or that side’ may land
the concern bank in trouble. The growing N.P.As is a potent source of
worry for the finance minister as well, because in a developing country
like ours, banking is seen as an important instrument of development,
while with the backbreaking N.P.As banks have become helpless
burden on the economy.
In case of doubtful and loss assets, through the modified schemes, the
banks have been directed to follow up a settlement formula under
which the minimum amount to be recovered, amounts to be entire
outstanding running ledger balances as on the date the account was
identified as NPA i.e. the date from which the interest was not charged
to the running ledger, an analysis of the given formula shows that RBI
has been very much generous in granting huge relaxation to the
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borrowers who were not coming forward for setting their overdue loans
due to one or other reason. The scheme is of high practical value as it
protects the borrowers who were having genuine problems in clearing
their dues because the interest component constituted a multiplied
amount of principal outstanding. On the other hand, the concerned
banks were also finding in difficult to sacrifice the entire interest
component, but outstanding in the dummy ledger. Now as per the
provision to the scheme, they will be ready to grant such relaxation in
favour of the borrowers. These guidelines have come as a windfall for
borrowers who after a lot of negotiations were almost ready to repay
back their principal as well as part of the interest component to settle
their accounts, as under the modified scheme, they would be able to
save the interest component. To that extent the concerned bank
stands to lose.
In the case of sub standard assets, the settlement formula as
given in the modified scheme states that the minimum sum to be
recovered must contain the entire running ledge outstanding balance
as on the date of the account was identified as NPA i.e. the date from
the which interest was not charged to the running ledger + interest at
the existing prime lending rate of the bank. As per the modified sac
scheme, the terms suggested for the payment of settlement amount
NPA are simple and pragmatic. As per the terms of the scheme, the
settlement amount should be paid in lump sum by the borrower.
However in case of the borrower is unable to repay back in a lump
sum, the scheme allows sufficient breathing period to enable him to
arrange the funds and clear at least 25 percent of the settlement
amount to be paid upfront and the remaining amount to be recovered
in installments spread over a period of one year along with interest at
the existing PLR from the date of settlement up to the date of final
payment.
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For recovery of N.P.As over Rs. 5 crore, RBI has left the matter to the
concerned banks and advised that the concerned banks may formulate
policy guidelines regarding their settlement and recovery. The
freedom, in such cases, is given to the banks, because the attending
circumstances in each case may vary from the other. Therefore it was
in the right direction that adopting a generalized approach was not
thought appropriate. In cases, where the amount involved is above Rs.
5 crore, RBI expects CMD of each bank to supervise the NPA
personally. The CMDs of the concerned banks are advised to review all
such cases within a given timeframe and decide the course of action in
terms of rehabilitation/restructuring. RBI also desires the submission of
a quarterly report of all N.P.As above Rs. 5 crore from PSU banks. Thus
by putting up the cut-off dates for the implementing of the scheme,
RBI desires the banks to realize the seriousness of the issue and gear
up to sweep away the N.P.As in one go.
For commercial banks, it is a golden opportunity to clear the
mess, consolidate and come out on a track leading t the path of global
banking. The time given for weeding out the disastrous N.P.As is
neither too long nor too short and the banks, with proper planning and
follow up can drastically reduce their N.P.As, if they firmly resolve to do
so. RBI expects the commercial banks to follow the guidelines in letter
and spirit without any discrimination or discretion as a slight dilution
may jeopardize their interest. A proper monitoring system is also
desired to be evolved for monitoring the progress of the scheme. As
this is a rare opportunity given to the defaulting borrowers so that they
can avail the chance given for the settlement of their loans. Without
adequate publicity of the scheme the response from the defaulting
borrowers may not be there to the expected level.
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Chapter 9
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Private
4 Sector 5.78 5.22 5.14 5.20 3.56 3.27 3.28 3.22
Banks (old)
Private
5 Sector 2.26 1.60 2.05 3.91 1.59 1.08 1.18 2.10
Banks (new)
Foreign
6 3.10 3.16 3.04 2.43 1.10 1.03 0.77 0.82
Banks
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Chapter 10
Recommendations
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profits that will result from the disposal of N.P.As will pass back
to the creditors as the tax payers who incurred the losses today.
The swift disposal of N.P.As during the Great Depression in the
middle of a severe current helped restore the credibility of the
financial system.
Some experts argues that the current organizational
competencies, regulatory framework, quality of disclosure and
incentive structure produce an inconsistent framework, which
leads to an unsustainable performance level for a bank. Macro
level issues will have to be addressed in order to root out the
problem. Processes at every stage of an assets life impact the
overall quality of the intermediation process and so a consistent
set of procedures are necessary to handle the problem.
There have been instances of banks extending credit to doubtful
debtors (who willfully default on debt) and getting kickbacks for
the same. Ineffective legal mechanism and inadequate internal
control mechanism have made this problem grow quick actions
has to be taken on both counts so that both the defaulters and
the authorizing officer are punished heavily. Without this, all the
mechanism suggested above may prove to be ineffective.
Conclusion
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CHAPTER 11
BIBLIOGRAPHY
Books –
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Websites –
www.indiainfoline.com
www.rbi.org.com
www.economictimes.com
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