Non Performing Assets

A non-performing asset in the banking sector may be

referred to an asset not contributing to the income of
the bank or which does not generate income for the
bank. In other words, an advance account, which
ceases to yield income, is a non-performing asset. If
the customers do not repay principal amount and
interest for a certain period of time then such loans
become non-performing assets (NPA).
Definition of NPAs
• Definition as per Narasimham Committee: Narasimham Committee clearly defined that an asset
may be treated as Non-performing Asset (NPA), if interest or installments of principal or both
remain unpaid for a period of more than 180 days. However, with effect from March 2004, default
status is given to a borrower account if dues not paid for a period of 90 days.

• Definition as per RBI Guidelines: RBI guidelines defined that NPAs consist of sub-standard
assets, doubtful assets and loss assets. Any asset usually turns as NPA when it fails to yield income
during a certain period.

Year ending March, 31st Specified period

1993- Four Quarters 1994- Three Quarters 1995- Onwards Two Quarters
2001- 180 Days 2004 -90 Days
• NPA is a loan or an advance where,
1. Interest and/ or instalment of principal remains overdue for a period of
more than 90 days in respect of term loan.
* Any amount due to the bank under any credit facility, if not paid by
the due date fixed by the bank becomes overdue.
2. The account remains 'Out of order' for a period of more than 90
days, in respect of an Overdraft / Cash Credit (OD/CC).
“An account should be treated as 'out of order' if the outstanding
balance remains continuously in excess of the sanctioned limit /
drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing
power, but there are no credits continuously for 90 days or credits are
not enough to cover the interest debited during the same period,
these accounts should be treated as 'out of order'”.
• The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,
• In the case of direct agricultural advances or loan any overdue would be
A loan granted for short duration crops would be treated as an NPA if the
instalment of principal/ interest remains overdue for two crop season.
A loan granted for long duration crops would be treated as an NPA if the
instalment/ interest remains overdue for 1 crop season.
1 crop season (long duration- 1 year). Anything less than that is a short crop
duration.
• Any amount to be received remains overdue for a period of more than 90
days in respect of other accounts. Eg Credit Card.
C.C A/c – Payment can be in fractions as well. So if the fractions remains
overdue for a period of 90 days i.e the C.C bill is not paid within 90 days
then the CC a/c would be treated as an NPA.
Special Mention Account

SMA Sub-
categories Basis for classification (Principal or Interest is wholly or
partially due)

SMA-0 Principal or interest payment overdue upto 30 days

SMA-1 Principal or interest payment overdue between 31-60 days

SMA-2 Principal or interest payment overdue between 61-90 days

Special Mention Account
• Credit Card
SMA Sub Categories- where the o/s balance remains continuously in
excess to sanctioned limit or drawing power whichever is lower.

SMA 1- More than 30 days and upto 60 days.

SMA 2- More than 60 days and upto 90 days.

Classification of NPAs
• Banks are required to identify the quality of assets of the bank for the evaluation of bank
performance. As per the recommendations of Narasimham Committee, the Reserve Bank
of India has redefined the non-performing assets and advised all commercial banks to
classify their advances into four broad categories i.e. standard, sub-standard, doubtful and
loss assets.
• The standard assets are treated as performing assets and the remaining three categories are
treated as non-performing assets.
• Therefore, banks are required to classify non-performing assets further into the following
three categories based on the period for which the asset has remained nonperforming and
the realisability of the dues:
• a) Sub-standard Assets
• b) Doubtful Assets
• c) Loss Assets
Definitions
• Standard Assets: A standard asset is a performing asset. It generates continuous
income and repayments as and when they fall due. Such assets carry a normal risk
and are not NPA in the real sense. Therefore, no special provisions are required
for standard assets.
• Sub-standard Assets: 1. With effect from March 31, 2005 an asset would be
classified as sub-standard if it remained NPA for a period less than or equal to 12
months. In such cases, the current net worth of the borrowers / guarantors or the
current market value of the security charged is not enough to ensure recovery of
the dues to the banks in full. In other words, such assets will have well defined
credit weaknesses that jeopardize the liquidation of the debt and are characterized
by the distinct possibility that the banks will sustain some loss, if deficiencies are
not corrected.
Definitions
• (ii) An asset where the terms of the loan agreement regarding
interest and principal have been re-negotiated or rescheduled
after commencement of production, should be classified as sub-
standard and should remain in such category for at least 12
months of satisfactory performance under the re-negotiated or
rescheduled terms. In other words, the classification of an asset
should not be upgraded merely as a result of rescheduling,
unless there is satisfactory compliance of this condition.
Definitions
• Doubtful Assets
With effect from March 31, 2005, an asset is required to be classified
as doubtful, if it has remained NPA for more than 12 months.
• Loss Assets
A loss asset is one where loss has been identified by the bank or
internal or external auditors or by the Co-operation Department or
by the Reserve Bank of India inspection but the amount has not
been written off, wholly or partly. In other words, such an asset is
considered un-collectible and of such little value that its
continuance as a bankable asset is not warranted although there
may be some salvage or recovery value.
Provisioning Norms
Loss Assets

(a) The entire assets should be written off after obtaining

necessary approval from the competent authority and as per the
provisions of the Co-operative Societies Act / Rules.

(b) In respect of an asset identified as a loss asset, full provision

at 100 per cent should be made if the expected salvage value of
the security is negligible.
Provisioning Norms
Doubtful Assets

(a) Provision should be for 100 per cent of the extent to which
the advance is not covered by the realisable value of the security

(b) In regard to the secured portion, provision may be made on

the following basis, at the rates ranging from 20 per cent to 100
per cent of the secured portion depending upon the period for
which the asset has remained doubtful:
Provisions
Period for which the advance has remained in Provision Requirement
'doubtful' category
Upto 1 year 20 %
1 to 3 years 30%
More than 3 years
outstanding stock of NPAs as on March 31, 2010 60% with effect from March 31, 2011
75% with effect from March 31, 2012
100% with effect from March 31, 2013
advances classified as 'doubtful for more than three 100%
years' on or after April 1, 2010
Provisioning Norms
(iii) Sub-standard Assets

A general provision of 10 per cent on total outstanding should be

made

(iv) Provision on Standard Assets

(a) From the year ended March 31, 2000, the banks should
make a general provision of a minimum of 0.25 per cent on
standard assets.
Provisions of NBFCs
Asset classification Provisioning for NBFCs
Loss assets Entire asset to be written off Or 100 per
cent provision on outstanding amount
Doubtful assets A. Unsecured portion 100 per cent
provision B. Secured portion 20 per cent to
50 per cent provision on the basis of period
for which asset is considered doubtful
Sub-standard assets Provision of 10 per cent on outstanding
amount
Standard assets A. For all NBFCs MFI and IFC and for Factors
with asset size less than INR500 crore 0.25
per cent of standard asset B. For other
NBFCs, including Factors with asset size
greater than INR500 crore 0.4 per cent of
standard asset.
Provisioning for HFCs
Entire asset to be written off Or
100 per cent provision on
outstanding amount
A. Unsecured portion 100 per
cent provision B. Secured
portion 25 per cent to 100 per
cent provision on the basis of
period for which asset is
considered doubtful
Provision of 15 per cent on
outstanding amount
Differential standard asset
provisioning based on category
of assets.
Recovery Mechanism
Lok Adalat-
Lok Adalat has developed in India by Legal Services Authorities Act, 1987.
Otherwise it is called as "People's court", Encouraged by Justice
P.N.Bhagwati, a former Chief Justice of India. Lok Adalat is a non-
adversarial system, whereby mock courts (called Lok Adalats) are held by
the State Authority, District Authority, Supreme Court Legal Services
Committee, High Court Local Services Committee, or Taluk Legal Services
Committee.
They help banks to settle the loans by way of compromising between
bankers and defaulters of the bad loans through where the NPA are of Rs
10 lakh and more.
Recovery Mechanism
• Debt Recovery Tribunals (DRTs)-
Debts Recovery Tribunals (DRT) and Debts Recovery Appellate Tribunals
(DRAT) were constituted under the Act of Parliament (act 51 of 1993)
for speedy swift recovery of debts due to banks and financial
institution’s by GOI.
• SARFAESI Act- SARFAESI ACT was formed in Dec’ 2002 based on
recommendations of
a) Committee on Banking Sector reforms (Narasimham Committee
Report II) and
b) Restructuring of Weak Public sector Banks (Verma Committee).
Recovery Mechanism

This Act aims at speedy recovery of defaulting loans and to reduce the
mounting levels of Non-performing Assets of banks and financial institutions.
The provisions of the Act enable the banks and financial institutions to realize
long-term assets, manage problems of liquidity and asset liability disparities
and to improve recovery by exercising powers to take possession of
securities, sell them and reduce non-performing assets by adopting measures
for recovery or reconstruction. The Act provides three alternative methods
for recovery of non-performing assets, viz;
• Securitization
• Asset Reconstruction
Recovery Mechanism
• Securitization
Securitization implies the issue of security receipt by raising of funds or
receipts by SCs / ARCs. The Securitization company or Reconstruction
company raises from the Qualified Institutional Borrowers (QIBs) by
way of schemes to acquire funds. They have to maintain proper book of
accounts separately for each and every acquiring asset on the
investments made by QIBs.
Recovery Mechanism
Assets Reconstruction
• Assets Reconstruction companies buy the NPAs from Banks and take measures
to recover the bad loans amount from the borrowers and also empower with,
• Proper Management of the borrower business,
• Change of management in the business
• Take Over
• Sale or lease,
• Restructuring the business of the borrower,
• Rescheduling of the repayments of debts payable by the borrower,
• Possession of Secured assets.