PRESENTATION BYTEAM 6

PRATEEK GUPTASAMIR RUSTOGI

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

Presented by Team 62

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.

Presented by Team 63

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

Presented by Team 64

Poor Credit discipline Inadequate Credit & Risk Management Diversion of funds by promoters Funding of non-viable projects In the early 1990s PSBs started suffering

from acute capital inadequacy and lower/ negative profitability. The parameters set for their functioning did not project the paramount need for these corporate goals.

The banks had little freedom to price products, cater products to chosen segments or invest funds in their best interest

Presented by Team 65

Since 1970s, the SCBs functioned as units cut off from international banking and unable to participate in the structural transformations and new types of lending products.

Audit and control functions were not independent and thus unable to correct the effect of serious flaws in policies and directions

Banks were not sufficiently developed in terms of skills and expertise to regulate the humongous growth in credit and manage the diverse risks that emerged in the process

Presented by Team 66

Inadequate mechanism to gather and disseminate credit information amongst commercial banks

Effective recovery from defaulting and overdue borrowers was hampered on account of sizeable overhang component arising from infirmities in the existing process of debt recovery, inadequate legal provisions on foreclosure and bankruptcy and difficulties in the execution of court decrees.

Presented by Team 67

Drain on Profitability Impact on capital adequacy Adverse effect on credit growth as the

banker’s prime focus becomes zero percent risk and as a result turn lukewarm to fresh credit.

Excessive focus on Credit Risk Management

High cost of funds due to NPAs

Presented by Team 68

All SCB’s average Net NPA Ratio for 2005-06 is 1.22 (As per RBI’s Statistics)

The banks have been able to report lower NPA percentage mostly by providing against or writing off NPAs.

The provision to certain extent was facilitated by higher profits on account of treasury management

The better Net NPA ratio was also facilitated by higher credit off take resulting in larger asset portfolio/ book size.

Presented by Team 69

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

Release of Wilful 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 RBI Norms of Lender’s Liability – framing of

Fair Practices Code with regard to lender’s liability to be followed by banks, which indirectly prevents accounts turning into NPAs on account of bank’s own failure

Presented by Team 610

Risk assessment and Risk management RBI has advised banks to examine all

cases of wilful default of Rs.1 crore 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.

Reporting quick mortality cases Special mention accounts for early

identification of bad debts. Loans and advances overdue for less than one and two quarters would come under this category. However, these accounts do not need provisioning

Presented by Team 611

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.

Presented by Team 612

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 basis

If 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.

Presented by Team 613

Presented by Team 614

Presented by Team 615

BANKSBANKS 2001-2001-22

2002-2002-33

2003-2003-44

2004-2004-55

2005-2005-66

87 87 SCBsSCBs

4.604.60 4.004.00 3.303.30 2.522.52 1.861.86

28 PSBs28 PSBs 4.894.89 4.214.21 3.503.50 2.732.73 2.092.09

20 OPBs20 OPBs 5.205.20 4.344.34 3.643.64 3.153.15 2.502.50

9 NPBs9 NPBs 3.903.90 3.763.76 2.422.42 1.561.56 0.960.96

30 FBs30 FBs 2.412.41 2.442.44 2.132.13 1.431.43 0.960.9616

BANKSBANKS 2001-2001-22

2002-2002-33

2003-2003-44

2004-2004-55

2005-2005-66

87 87 SCBsSCBs

2.302.30 1.901.90 1.201.20 0.920.92 0.660.66

28 PSBs28 PSBs 2.422.42 1.931.93 1.281.28 0.950.95 0.720.72

20 OPBs20 OPBs 3.233.23 2.512.51 1.171.17 1.391.39 0.910.91

9 NPBs9 NPBs 2.102.10 2.1162.116 1.101.10 0.800.80 0.430.43

30 FBs30 FBs 0.810.81 0.790.79 0.660.66 0.420.42 0.400.4017

BANKSBANKS 2001-2001-22

2002-2002-33

2003-2003-44

2004-2004-55

2005-2005-66

87 87 SCBsSCBs

10.4010.40 8.808.80 7.207.20 5.205.20 3.303.30

28 PSBs28 PSBs 11.0911.09 9.369.36 7.797.79 5.535.53 3.703.70

20 OPBs20 OPBs 11.0111.01 8.868.86 7.597.59 5.975.97 4.304.30

9 NPBs9 NPBs 8.868.86 7.647.64 4.994.99 3.593.59 1.701.70

30 FBs30 FBs 5.385.38 5.255.25 4.624.62 2.852.85 1.901.9018

BANKSBANKS 2001-2001-22

2002-2002-33

2003-2003-44

2004-2004-55

2005-2005-66

87 87 SCBsSCBs

5.505.50 4.404.40 2.902.90 2.002.00 1.201.20

28 PSBs28 PSBs 5.825.82 4.534.53 2.992.99 2.062.06 1.301.30

20 OPBs20 OPBs 7.137.13 5.545.54 3.853.85 2.742.74 1.601.60

9 NPBs9 NPBs 4.944.94 4.634.63 2.362.36 1.851.85 0.800.80

30 FBs30 FBs 1.891.89 1.761.76 1.481.48 0.860.86 0.800.8019

Presented by Team 620