Non Performing Assets: Presented by Group

Presented by Group B
NON PERFORMING ASSETS

(NPA)
Presented by
Group
B
1
GROUP MEMBERS
 Sweta Bajaj Co-ordinator
 Sarita Binani
 Joydeb Bhattacharya
 Priyanka Khandelwal
 Sarita Somany
 Amit Chamaria
 Sunny Ladia
 Ashish Kejriwal
 Ashish Bansal
 Ravi Kumar
Co-ordinator
 Nilesh kedia
2
INTRODUCTION
 Default in repayment of a secured debt or

installment thereof.
 In simple words it is a Bad loan.
3
ORIGIN OF NPA
 Pre-liberalization era  Post-liberalization era
a. Down swing in a. Delicensing of Select
agricultural sectors industries
b. Industrial licensing b. Creeping relaxation of
c. Controlled Interest rate imports
d. Sector Wise Reservation c. Stable political Scenario
e. Tariff protection d. Hyped-up demand
projections
e. Liquidity crisis
4
NARSIMHAM COMMITTEE
RECOMMENDATIONS
 Improving the quality of bank assets by reducing the

contamination coefficient of directed credit.
 Strict adherence to classificatory norms for NPAs.
 Reduce NPAs by means of institutional strengthening.
 Approaches like constituting Asset reconstruction Fund
(ARF) can be followed.
5
DEFINITION OF NPA’S
A NPA is a loan or an advance where;
 Interest and/ or installment of principal remain overdue
for a period of more than 90 days in respect of a term
loan,
 The account remains “out of order” in respect of an
overdraft/ cash credit
 The bill remains overdue for a period of more than 90
days in the case of bills purchased and discounted
 The installment or interest remains overdue for two crop
seasons in case of short duration crops and for one crop
season in case of long duration crops
6
CATEGORIES OF NPA
 Substandard Assets – Which has remained NPA for a

period less than or equal to 12 months.
 Doubtful Assets – Which has remained in the sub-

standard category for a period of 12 months
 Loss Assets – where loss has been identified by the

bank or internal or external auditors or the RBI
inspection but the amount has not been written off
wholly.
7
PROVISIONING NORMS
 Standard Assets – general provision of a minimum of
0.25%
 Substandard Assets – 10% on total outstanding
balance, 10 % on unsecured exposures identified as
sub-standard & 100% for unsecured “doubtful” assets.
 Doubtful Assets – 100% to the extent advance not
covered by realizable value of security. In case of
secured portion, provision may be made in the range of
20% to 100% depending on the period of asset
remaining sub-standard
 Loss Assets – 100% of the outstanding
8
SPECIAL CASES OF NPA ( RBI GUIDELINES)

Important considerations which must be taken into account
before considering any asset/loan as NPA:-
1. Record of Recovery of Debt

2. Borrower wise classification of assets rather than
facility wise.
3. Default in payment due to natural calamities in case of
Agricultural Advances.
4. Housing Loan Advances to staffs.
5. Loans guaranteed by the Central/State Governments.
6. Project Financing
9
1. RECORD OF RECOVERY OF DEBT
 Bank should not classify an asset as NPA merely due to the existence of some
deficiencies which are of temporary in nature such as non-availability of
adequate drawing power based on the latest available stock statement, balance
outstanding exceeding the limit temporarily, non-submission of stock
statements and non-renewal of the limits on the due date, etc.
 Where the accounts of the borrowers have been regularised by repayment of

overdue amounts through genuine sources (not by sanction of additional
facilities or transfer of funds between accounts), after the ending of financial
year but before the Balance Sheet date, the accounts need not be treated as
NPAs. However, in such cases, it should be ensured that the accounts remain in
order subsequently.
10
2. BORROWER WISE CLASSIFICATION OF ASSETS RATHER

THAN FACILITY WISE.
 Borrower having more than one facility with a particular bank has
to be classified as NPA for all the facilities even if repayment of
only one facility is irregular.
 However, in respect of consortium advances or financing under

multiple banking arrangements, each bank may classify the
borrower accounts according to its own record of recovery and
other aspects having a bearing on the recoverability of the
advances.
11
3. AGRICULTURAL ADVANCES
Where natural calamities impair the repaying capacity of agricultural
borrowers, as a relief measure, banks may
decide on their own to:
a) convert the short-term production loan into a term loan or re- schedule the
repayment period, and
b) sanction fresh short-term loans

In such cases of conversion or re-schedulement, the term loan as well as fresh
short-term loan may be treated as current dues and need not be classified as
non performing asset (NPA). The asset classification of these loans would,
therefore, be governed by the revised terms and conditions and these would
be treated as NPA under the extant norms applicable for classifying
agricultural advances as NPAs.
12
4. HOUSING LOAN OR ADVANCES TO STAFF
In the case of housing loan or similar advances granted to staff

members where interest is payable after recovery of principal,
interest need not be considered as overdue from the first quarter
onwards. Such loans/ advances should be classified as NPA only
when there is a default in repayment of instalment of principal or
payment of interest on the respective due dates.
13
5. LOANS GUARANTEED BY THE CENTRAL/STATE

GOVERNMENTS.
 Credit facilities backed by guarantee given by Central Govt. should not be

treated as NPA.
 State Govt.guaranteed advances would be treated as NPA if interest/principal

amount is overdue for more than 90 days.
14
6. PROJECT FINANCING
 Project Loan means term loan which can be extended for the purpose of any
venture.
 Banks should fix a date of commencement of such loan at the time of sanction.
15
Revenue Recognition
Accounting RBI IFRS’s

Standard Guidelines Stand
16
ACCOUNTING STANDARD – 9 ON REVENUE RECOGNITION
 Revenue is the gross inflow of resources arising in the course

of ordinary activities of an enterprise from the sale of goods,
the rendering of services and the use of enterprise resources
yielding interest, royalties, and dividends.
 Where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any
claim, revenue recognition is postponed to the extent of
uncertainty involved.
 When recognition of revenue is postponed due to the effect
of uncertainties, it is considered as revenue of the period in
which it is properly recognised.
17
RBI GUIDELINES
 In respect of accounts classified as NPA for the first time, the

unrealised portion of interest credited to the income account in the
previous year as well as interest credited during the current year
has to be reversed.
 In respect of accounts classified as NPA in the previous year,
banks are not allowed to credit any interest income until such
income is received.
 In respect of operative cash credit/ overdraft accounts, unrealised
interest is reversed in the year in which account is classified a
NPA for the first time, but it is re-debited in the beginning of the
next financial year and this continues.
18
WHAT DOES IFRS SAY ?
 Large Non-Performing and Doubtful Loans should be
evaluated separately and written down to the discounted
value of all future cashflows.
 Other loans and commitments should be evaluated on a
portfolio basis.
 Amortised cost (balance sheet) – Discounted value of
future cashflow = write down / losses.
 Written down value in the balance sheet x internal rate on
loan prior to non performance = Interest income in the
accounts.
19
FACTORS CONTRIBUTING TO NPAS
Factors contributing to NPAs can be

divided into two sub parts:
Internal External
Factors Factors
20
INTERNAL FACTORS
 Poor lending Decisions

 No satisfaction regarding credit worthiness of
borrowers
 Non-compliance to lending norms
 Lack of appropriate margins
 Lack of post credit supervision
 Inadequacy of documents
 Excessive overdraft lending
21
EXTERNAL FACTORS
 Willful Defaults
 Improper functioning of the Debt Recovery Tribunal
 Diversion of Funds
 Ineffective Management
 Ineffective Legal System
 Business Failure
 Failure of Suppliers
 Lack of Demand
 Time and Cost overrun in Project Implementation
22
EXTERNAL FACTORS
 Change in Government Policies

 Natural Calamities
 Industrial Sickness
 Shortage of raw materials, power and other resources
 Non payment\ over dues in other countries, recession
in other countries, adverse exchange rates, etc
23
MANAGEMENT OF NPA
 Securitization
 Corporate Debt Restructuring
 Filing of cases in HC/ Lok Adalats
24
SECURITIZATION
Securitization is the process of pooling and

repackaging of homogenous illiquid financial
assets into marketable securities that can be
sold to investors.
25
SECURITIZATION PROCESS
 Participants
• Demanders of funds
o Homeowner / borrower of funds
o Bank / Loan originator
• Special purpose entity / trust
• Suppliers of funds
o Underwriter / investment bank
o
Capital markets / investors
 Some of the Benefits
• Liquidity
• Market values
• Lower cost
26
SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS

AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
 Enforcement of security interests by secured creditors in

movable (tangible or intangible, including accounts
receivable) and immovable property without the intervention
of court.
 Establishment of Asset Reconstruction Companies.
 Securitisation of Assets.
 More Asset Reconstruction Companies to be approved.
27
CORPORATE DEBT RESTRUCTURING

 Meaning : A method used by companies with
outstanding debt obligations to alter the terms of the
debt agreements in order to achieve some advantage.
 Methods of CDR : The existing debt is called and

then replaced with new debt at a lower interest rate.
Companies can also restructure their debt by altering
the terms and provisions of the existing debt issue.
28
OBJECTIVES OF CDR
 To support continuing economic recovery

 Enabling viable debtors to continue business
operation
 Promoting fair and equitable debt repayment
to creditors
 Ensuring safety of money lent by Banks and
FI’s
29
THREE - TIER STRUCTURE OF CDR
CDR system in the country has a three tier

structure :
 CDR Standing Forum and its core group

 CDR Empowered Group
 CDR Cell
30
CDR STANDING FORUM
 Representing general body of all financial

institutions and Banks participating in CDR
system
 To lay down policies and guidelines
 To monitor the progress of corporate debt
restructuring
31
CDR EMPOWERED GROUP
 To decide individual cases of corporate debt

restructuring
 Consisting of ED level representatives of
IDBI , ICICI Bank Ltd and SBI as standing
members, in addition to ED level representative
of financial institutions and banks who have an
exposure to the concerned company.
32
CDR CELL
 To make the initial scrutiny of the proposals

received from borrowers/lenders
 If found feasible, the CDR cell will proceed to
prepare detailed rehabilitation plan with the
help of lenders and, if necessary, experts to be
engaged from outside
 If not found prima facie feasible, the lenders
may start action for recovery of their dues
33
RBI GUIDELINES ON CDR

 CDR does not apply to accounts involving only
one financial institution or bank
 The CDR mechanism will cover only multiple
banking accounts/syndication/consortium
accounts with outstanding exposure of Rs.20
crore and above by banks and institutions
 Category 1- Accounts classified as Standard and
Sub- standard
 Category 2- Accounts classified as Doubtful
34
LOK ADALATS
 Small NPAs up to Rs.20 Lacs

 Speedy Recovery
 Veil of Authority
 Soft Defaulters
 Less expensive
 Easier way to resolve
 Can handle both civil and criminal cases
35
DRT ACT
 Filing an application for recovery of dues

 Recovery certificate is issued
 Powers to grant injunctions
 Pass attachment orders
 Personal properties can also be attached and sold.
 Realization is usually time-consuming
 Steps have been taken to create additional benches
36
PROCEEDING UNDER CODE

OF CIVIL PROCEDURE
 For claims below Rs.10 lacs, the banks and FIs can initiate
proceedings under the Code of Civil Procedure of 1908, as
amended, in a Civil court.
 The courts are empowered to pass injunction orders restraining
the debtor through itself or through its directors, representatives,
etc from disposing of, parting with or dealing in any manner with
the subject property.
 Courts are also empowered to pass attachment and sales orders
for subject property before judgment, in case necessary.
 The sale of subject property is normally carried out by way of
open public auction subject to confirmation of the court.
 The foreclosure proceedings, where the DRT Act is not applicable,
can be initiated under the Transfer of Property Act of 1882 by
filing a mortgage suit where the procedure is same as laid down
under the CPC. 37
COMPROMISE SETTLEMENT SCHEMES
 Banks are free to design and implement their

own policies for recovery and write off
incorporation compromise and negotiated
settlements with board approval
 Specific guidelines were issued in May 1999
for one time settlement of small enterprise
sector.
 Guidelines were modified in July 2000 for
recovery of NPAs of Rs.5 crore and less as on
31st March 2007.
38
38
HOW TO RESTRICT NPA

 To Restricts their lending operations on
security
 Advances only with adequate collateral
security
 Quality of appraisal supervision
 Follow up should be improved
 Putting rigorous and appropriate credit
appraisal mechanism
 Judicial system should revamped
39
IMPACT OF NPA ON BANK
1. Profitability:
2. Liquidity:
3. Involvement of management:
4. Credit loss:
5. High cost of funds
40
1. PROFITABILITY
 NPA means booking of money in terms of bad
assets
 NPA lead to opportunity cost
 Adversely affect current earning of bank
41
2. LIQUIDITY
 decreased profit lead to lack of enough cash at

hand
 Difficulty in operating the functions of bank
42
3. INVOLVEMENT OF MANAGEMENT
 Time and efforts of management is another
indirect cost which bank has to bear due to
NPA
43
4. CREDIT LOSS
 It will lose it’s goodwill and brand image and
negative impact to the people who are putting
their money in the banks
44
5. HIGH COST OF FUNDS

 As NPA decreases the rate of return thereby
increases the cost of funds.
45
The Asset Reconstruction Company Limited(ARCIL)
Feb. 11, 2002
ARCIL
SBI
ICICI IDBI
46
OBJECTIVES OF ARCIL
 A company which is set up with the objective of taking over
distressed assets (NPA) from banks or financial institutions and to
reconstruct or re-pack these assets to make those assets saleable.
 To buy out troubled loans from banks and make special efforts at
recovering value from the assets, if necessary by special
legislation, with special powers for recovery.
 Restructuring of weak banks to divest the bad loan portfolio.
47
GROSS & NET NPA (AS PERCENTAGE OF TOTAL ASSETS)
Gross Net
7 7
6.4
6.2
6
5.5
5 4.9
4.6
4 4.1
3.3 3.3
3 3 2.9
2.7
2.5 2.5
2.3
2
1.8 1.8
1.5
1.2 1.3
1 0.9
0.7 0.6 0.6
0
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
48
NET NPA TO TOTAL ASSETS

3
2.5
public sector
1.5 private sector
foreign banks
1
0.5
0
2001-02 2002-03 2003-04 2004-05
49
ROLE OF CHARTERED ACCOUNTANTS

Assist
 and Prepare Viability study
Conduct
 Business, Assets & Share Valuation
Carry
 out Due Diligence Study for Business Restructuring
Verification
 and Vetting of Documents
Preparation
 of Scheme of Arrangement
Consultancy
 on Taxation aspects
Monitoring
 of Accounts
Credit Audit
 of borrowers
Stock Audits

50
CONCLUSION
 The Indian Banking sector is facing a serious problem of
NPA. The extent of NPA is comparatively higher in public
sector banks rather than private sector banks. To improve
the efficiency & profitability, the NPA has to be scheduled.
 Various serious steps have been taken by the government

to reduce NPAs. It is highly impossible to reduce NPAs to
zero. But, at least, Indian Banks can try to compete with
foreign banks to maintain international standard.
51
CONCLUSION
 NPAs have negative impact on the
productivity, achievement of capital
adequacy level, funds deployment and
mobilization policy, credibility of banking
system and overall economy.
 Therefore, concerted efforts are required

at ministry of finance, RBI and banks
level to control the menace of NPAs.
52
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Presented by Group B

NON PERFORMING ASSETS

 Default in repayment of a secured debt or

 Improving the quality of bank assets by reducing the

 Substandard Assets – Which has remained NPA for a

 Doubtful Assets – Which has remained in the sub-

 Loss Assets – where loss has been identified by the

SPECIAL CASES OF NPA ( RBI GUIDELINES)

1. Record of Recovery of Debt

1. RECORD OF RECOVERY OF DEBT

 Where the accounts of the borrowers have been regularised by repayment of

2. BORROWER WISE CLASSIFICATION OF ASSETS RATHER

 However, in respect of consortium advances or financing under

b) sanction fresh short-term loans

4. HOUSING LOAN OR ADVANCES TO STAFF

In the case of housing loan or similar advances granted to staff

5. LOANS GUARANTEED BY THE CENTRAL/STATE

 Credit facilities backed by guarantee given by Central Govt. should not be

 State Govt.guaranteed advances would be treated as NPA if interest/principal

Accounting RBI IFRS’s

 Revenue is the gross inflow of resources arising in the course

 In respect of accounts classified as NPA for the first time, the

FACTORS CONTRIBUTING TO NPAS

Factors contributing to NPAs can be

 Poor lending Decisions

 Time and Cost overrun in Project Implementation

 Change in Government Policies

Securitization is the process of pooling and

SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS

 Enforcement of security interests by secured creditors in

 Establishment of Asset Reconstruction Companies.

 More Asset Reconstruction Companies to be approved.

CORPORATE DEBT RESTRUCTURING

 Methods of CDR : The existing debt is called and

 To support continuing economic recovery

THREE - TIER STRUCTURE OF CDR

CDR system in the country has a three tier

 CDR Standing Forum and its core group

CDR STANDING FORUM

 Representing general body of all financial

CDR EMPOWERED GROUP

 To decide individual cases of corporate debt

 To make the initial scrutiny of the proposals

RBI GUIDELINES ON CDR

 Small NPAs up to Rs.20 Lacs

 Filing an application for recovery of dues

PROCEEDING UNDER CODE

COMPROMISE SETTLEMENT SCHEMES

 Banks are free to design and implement their

HOW TO RESTRICT NPA

IMPACT OF NPA ON BANK

 decreased profit lead to lack of enough cash at

5. HIGH COST OF FUNDS

The Asset Reconstruction Company Limited(ARCIL)

Feb. 11, 2002

 Restructuring of weak banks to divest the bad loan portfolio.

GROSS & NET NPA (AS PERCENTAGE OF TOTAL ASSETS)