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NPA & Categories Provisioning Norms

Non-performing assets (NPAs) refer to loans that are in default or close to being in default, and include sub-standard, doubtful, and loss loan classifications. NPAs arise due to factors attributable to borrowers, such as willful default, as well as factors attributable to lenders, such as weak loan underwriting. Banks employ strategies to both prevent the formation of NPAs through early warning systems and monitoring, as well as cure existing NPAs through debt restructuring, one-time settlements, and legal recovery avenues.

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Sarabjit Kaur
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148 views26 pages

NPA & Categories Provisioning Norms

Non-performing assets (NPAs) refer to loans that are in default or close to being in default, and include sub-standard, doubtful, and loss loan classifications. NPAs arise due to factors attributable to borrowers, such as willful default, as well as factors attributable to lenders, such as weak loan underwriting. Banks employ strategies to both prevent the formation of NPAs through early warning systems and monitoring, as well as cure existing NPAs through debt restructuring, one-time settlements, and legal recovery avenues.

Uploaded by

Sarabjit Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Non Performing Asset

Fig1:AssetClassification

Assets
1.Performing Assets 2. Non Performing Assets
(NPA)

Standard Assets

Sub -Standard Assets

Doubtful Assets

Loss Assets
PERFORMING
ASSET
• An account does not disclose any
problems and carry more than normal risk
attached to the business

• All loan facilities which are regular !


NON PERFORMING
ASSETS
• Non Performing Asset means a loan or an
account of borrower, which has been
classified by a bank or financial institution
as sub-standard, doubtful or loss asset, in
accordance with the directions or
guidelines relating to asset classification
issued by RBI.
INTRODUCTION
• Earlier assets were declared as NPA
after completion of the period for the
payment of total amount of loan and 30
days grace.

• In present scenario assets are declared as


NPA if none of the installment is paid till
180 days i.e. six months in respect of a
term loan.
INTRODUCTION
With effect form March 31, 2004 a non-performing asset
(NPA) shell be 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' for a period of more than 90


days, in respect of an overdraft/ cash Credit(OD/CC),

● the bill remains overdue for a period of more than 90 days in


the case of bills purchased and discounted,
CATEGORIES OF NPA
▪ Standard Assets : Arrears of interest and the principal
amount of loan does not exceed 90 days at the end of financial year

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 more than 12 months

• D1 i.e. up to 1 year : 20% provision is made by the bank


• D2 i.e. up to 2 year : 30% provision is made by the bank
• D3 i.e. up to 3 year : 100% provision is made by the bank

▪ 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.
REASONS BEHIND RISE IN NPA
• Lack of proper pre-enquiry by the bank for
sanctioning a loan to a customer.

• Non performance of the business or the purpose


for which the customer has taken the loan.
• Willful defaulter.

• Loans sanctioned for agriculture purposes.

• Change in govt. policies leads to NPA.


EFFECTS OF NPA ON BANKS & FI
• Restriction on flow of cash done by bank due
to the provisions of fund made against NPA.

• Drain of profit.

• Bad effect on goodwill.

• Bad effect on equity value.


FACTORS IMPACTING RISE IN NPAs
External factors :
• Ineffective legal framework &
weak recovery tribunals
• Lack of demand / economic recession
or slowdown
• Change in Govt. policies
• Wilful defaults by customers
• Alleged political interferences
FACTORS IMPACTING RISE IN NPAs
Internal factors :
• Defective Lending process
• Inappropriate / non –use of technology like
MIS , Computerization
• Improper SWOT analysis
• Inadequate credit appraisal system
• Managerial deficiencies
• Absence of regular industrial visits &
monitoring
• Deficiencies in re-loaning process
• Alleged corruption
• Inadequate networking & linkages b/w
banks
WHY LOAN ACCOUNTS GO
BAD ?
BORROWER-SIDE BANKER – SIDE

Defective Sanction
Lack of Planning No post-sanction
Diversion of Funds supervision, etc
Disputes within Delay in releases
Directed lending
No contribution Slow decision
No modernization making process
Improper monitoring
Industrial Relations
Natural Calamities
TYPES OF NPA
• Gross N P A :
Gross NPAs are the sum total of all
loan assets that are classified as
NPAs as per R B I guidelines as on
Balance Sheet date. Gross N P A
reflects the quality of the loans made
by banks. It consists of all the non
standard assets like as sub-standard,
doubtful, and loss assets.
• Gross NPAs Gross NPAs
Gross Advances
• Net NPA:
Net NPAs are those type of NPAs in which
the bank has deducted the provision
regarding NPAs. Net NPA shows the actual
burden of banks.

Net NPAs Gross = NPAs – Provisions


Gross Advances -
Provisions
Causes
• NPA arises due to a number of factors or causes like:-
• Speculation : Investing in high risk assets to earn high income.
• Default : Willful default by the borrowers.
• Fraudulent practices : Fraudulent Practices like advancing loans to
ineligible persons, advances without security or references, etc.
• Diversion of funds : Most of the funds are diverted for unnecessary
expansion and diversion of business.
• Internal reasons : Many internal reasons like inefficient management,
inappropriate technology, labour problems, marketing failure, etc. resulting
in poor performance of the companies.
• External reasons : External reasons like a recession in the economy,
infrastructural problems, price rise, delay in release of sanctioned limits by
banks, delays in settlements of payments by government, natural
calamities, etc.
SBI
• State Bank of India

Net NPAs : Rs 12,347.90 crore


Gross NPAs : Rs 25,326.29 crore

• The gross non-performing assets (NPAs) of public sector


banks increased by 20 per cent during June-September 2011.
• Standard & Poor's, which had in September downgraded
standalone ratings of State Bank of India, said high credit
risks in the Indian banking sector reflects that the country has
a weak payment culture and legal system that often result in
low recoveries and delayed settlement of foreclosures.
ICICI BANK
• 2. ICICI Bank
• Net NPAs: Rs 2,407.36 crore
Gross NPAs: Rs 10,034.26 crore
• ICICI Bank has the highest NPAs among private
sector banks. ICICI Bank has slightly improved its
net bad debts to 0.90 per cent from 0.91 per cent in
the earlier quarter.
• Indian banks face challenges like increase in
interest rates on saving deposits, a tighter monetary
policy, restructured loan accounts and increasing
infrastructure loans.
NET NON PERFORMING
ASSETS
YEARS SBI PNB ICICI UTI SCB
1998 7.31 10.21 3.69 5.33 3.30
1999 7.30 10.38 3.22 3.66 2.88
2000 6.07 9.57 1.14 5.63 2.42
2001 7.33 8.96 2.88 6.32 NA
2002 6.65 8.52 1.53 4.71 2.04
2003 5.33 6.69 3.36 2.39 1.53
2004 5.63 5.32 5.48 3.46 3.46
2005 4.5 3.86 5.21 2.39 2.39
2006 3.48 0.98 2.21 1.29 1.29
2007 2.65 0.2 1.65 1.39 1.39
2008 1.87 0.29 0.72 0.98 0.98
2009 1.32 0.28 0.78 0.72 0.87
NON PERFORMING ASSETS
PROVISIONING NORMS
➢ Sub-Standard Assets: An asset which has remained
NPA for a period less than or equal to 12 months.

➢ Doubtful Assets: An asset that has remained in the


substandard category for a period of 12 months.

➢ Loss Assets: An asset 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.
Standard Assets
• Direct advances to agriculture and SME at 0.25%,
• CRE at 1%
• Other loans and advances at 0.40%
Substandard Asset
• A general provision of 15% on total outstanding
The ‘unsecured exposures’ which are
‘substandard’ to attract additional provision of
10%, i.e., a total of 25% on the outstanding
balance.
Doubtful Assets
• 100% of the extent to which the advance
is not covered by the realisable value of
the security
• For the secured portion, provision to be
made as follows, depending upon the
period for which the asset has
remained doubtful
Loss Assets
• Write Off or provision of 100% of
outstanding
NPA MANAGEMENT
STRATEGIES
• Indian Banks are pursuing variety of
strategies to control NPAs, which can be
studied under two broad categories as
under :

– a. Preventive Management
– b. Curative Management
NPA MANAGEMENT STRATEGIES
a. Preventive Management - It is
rightly said that prevention is better
than cure.
• Developing ‘Know Your Client’ profile
(KYC
• Monitoring Early Warning Signals
• Installing Proper Credit Assessment and
Risk Management Mechanism
• Reduced Dependence on Interest
• Generating Watch-list/Special Mention
Category
NPA MANAGEMENT STRATEGIES
b. Curative Management
• Re-phasement of loans
• Pursuing Corporate Debt Restructuring (CDR
• Encouraging rehabilitation of potentially viable
units
• Encouraging acquisition of sick units by healthy
units
• Entering compromise schemes with borrowers
/ Entering one time settlement
NPA MANAGEMENT STRATEGIES
• Using Lok Adalats for compromise
settlement for smaller loans in “doubtful”
and “loss” category.
• Using Securitization & SARFAESI Act
• Using Asset Reconstruction Company
(ARC)
• Approaching Debt Recovery Tribunals
(DRTs).
• Recovery Action against Large NPAs
• Circulation of Information of Defaulters-
Strengthening Database of Defaulters

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