PRESENTED BYVishnu Patel (113)Vijay Makvana(59)

Apurva Kataria (57)

NON-PERFORMING ASSETS

A Presentation oN

PRESENTED TO:

Prof. Haresh Barot

Contents

Meaning of NPAClassification of NPAFactors contributing to NPAImpact of NPA on OperationsReasons for an account becoming NPAPreventive MeasuresNPA Management-ResolutionConclusion

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NPA –Meaning

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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 bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted

The installment or interest of principal remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops

Definition of NPA

An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank

NPA is defined as an advance for which interest or repayment of principal or both remain outstanding for a period of more than one quarters.

An asset is classified as Non-performing Asset (NPA) if due in the form of principal and interest are not paid by the borrower for a period of 90 days.

The level of NPA acts as an indicator showing that the bankers credit risks and efficiency of its allocation of resource.

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Classification of NPA

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NPA is an asset or account of a borrower, which is classified by a bank or financial institution based on the strength and on collateral securities into sub-standard asset, doubtful asset and loss asset .

Standard assets-These are loans which do not have any problem and has less risk

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.

Factors contributing to NPAs

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Diversion of funds by promotersPoor Credit disciplineInadequate Credit & Risk ManagementBusiness failure,Deficiencies on the part of banks Funding of non-viable projects Government policies Absence of written policiesRecession, input and power shortage, price escalation,

accidents, natural calamities, external problems in other countries leading to non –payment of over dues.

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Cont…

Time and cost over run during project implementation stage.

Delay in finalization of rehabilitation package by the board of Industrial and Reconstruction (BIFR).

Excessive reliance on collateral, absence of follow up action by banks, poor control on loan documentation

Inadequate mechanism to gather and disseminate credit information amongst commercial banks

The lack of co-ordination between the financial institutions and commercial banks, which provide long-term needs of industry that, enables the industry to misuse the funds.

Impact of NPAs on Banking Operations

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Drain on ProfitabilityBanks profitability is affected adversely because of the

providing of doubtful debts and consequent to writing it off as bad debts.

Return on investments (ROI) is reduced.The capital adequacy ratio is disturbed as NPAs are entering

into its calculation.The assets and liability mismatch will widen.The economic value addition (EVA) by banks gets upset

because EVA is equal to the net operating profit minus cost of capital and

It limits recycling of the funds.

General reasons for an account becoming NPA

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.2. Project not completed in time.3. Poor recovery of receivables.4. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets.5. Business failures.6. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns.7. Willful defaults, draw off funds, fraud, disputes, management disputes, mis-appropriation etc.,8. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.,

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External factors:

1. Sluggish legal system -Long legal tanglesChanges that had taken place in labour lawsLack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.

4. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents.

5. Failures, non payment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes etc.,

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Other Causes

a) Failure to bring in Required capitalb) Too ambitious projectd) Unwanted Expenses e) Over tradingf) Imbalances of inventoriesg) Lack of proper planningh) Dependence on single customersi) Lack of expertisej) Improper working Capital Mgmt.k) Mis-managementl) Diversion of Fundsm) Poor Quality Managementn) Heavy borrowingso) Poor Credit Collectionp) Lack of Quality Control

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NPA Management – Preventive measures

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Formation of the Credit Information Bureau (India) Limited (CIBIL)

Release of Willful Defaulter’s List. RBI also releases a list of borrowers with aggregate outstanding of Rs.1 crore and above against whom banks have filed suits for recovery of their funds

Reporting of Frauds to RBICredit assessment and Risk management RBI has advised banks to examine all cases of willful

default of Rs.1 corer and above and file suits in such cases. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff accountability.

NPA Management - Resolution

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Compromise Settlement SchemesRestructuring / ReschedulementLok AdalatCorporate Debt Restructuring CellDebt Recovery Tribunal (DRT)Proceedings under the Code of Civil ProcedureBoard for Industrial & Financial Reconstruction

(BIFR)/ AAIFRNational Company Law Tribunal (NCLT)Sale of NPA to other banks

Compromise Settlement Schemes

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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.

Restructuring and Rehabilitation

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Banks are free to design and implement their own policies for restructuring/ rehabilitation of the NPA accounts

Reschedulement of payment of interest and principal after considering the Debt service coverage ratio, contribution of the promoter and availability of security

Lok Adalats

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Small NPAs up to Rs.20 LacsSpeedy RecoveryVeil of AuthoritySoft DefaultersLess expensiveEasier way to resolve

Sale of NPA to other banks

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A NPA is eligible for sale to other banks only if it has remained a NPA for at least two years in the books of the selling bank

The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banks but not to bank, which originally sold the NPA.

The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasing

The bank may purchase/ sell NPA only on without recourse basisIf the sale is conducted below the net book value, the short fall

should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.

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CONCLUSION

The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively higher in public sectors banks. To improve the efficiency and profitability, the NPA has to be scheduled and percentage should be reduced.

Various steps have been taken by government to reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard

THANK YOU

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