npa

NON PERFORMING ASSETS

Presented by

Group

B

(NPA)

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Presented by Group B

GROUP MEMBERS

Sweta Bajaj Sarita Binani Joydeb Bhattacharya Priyanka Khandelwal Sarita Somany Amit Chamaria Sunny Ladia Ashish Kejriwal Ashish Bansal Ravi Kumar Nilesh kedia

Co-ordinator

Co-ordinator

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Presented by Group B

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INTRODUCTION

Default in repayment of a secured debt or installment thereof.

In simple words it is a Bad loan.

ORIGIN OF NPA

Pre-liberalization era

a. Down swing in agricultural sectors

b. Industrial licensingc. Controlled Interest

rated. Sector Wise

Reservatione. Tariff protection

Post-liberalization era

a. Delicensing of Select industries

b. Creeping relaxation of imports

c. Stable political Scenario

d. Hyped-up demand projections

e. Liquidity crisis

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Presented by Group B

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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.

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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

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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.

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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

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 Debt2. 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

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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.

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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.

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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.

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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.

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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.

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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.

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Revenue Recognition

Accounting

Standard

RBI Guideline

s

IFRS’s Stand

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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.

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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.

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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.

FACTORS CONTRIBUTING TO NPAS

Factors contributing to NPAs can be divided into two sub parts:

Internal Factors

External Factors

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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

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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

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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

MANAGEMENT OF NPA

Securitization Corporate Debt Restructuring Filing of cases in HC/ Lok Adalats

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SECURITIZATION

Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors.

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SECURITIZATION PROCESS

Participants• Demanders of funds

o Homeowner / borrower of fundso Bank / Loan originator

• Special purpose entity / trust• Suppliers of funds

o Underwriter / investment banko Capital markets / investors

Some of the Benefits• Liquidity• Market values• Lower cost

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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.

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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.

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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

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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

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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

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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.

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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

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

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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

LOK ADALATS

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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

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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.

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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.

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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

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IMPACT OF NPA ON BANK

1. Profitability:2. Liquidity:3. Involvement of management:4. Credit loss:5. High cost of funds

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1. PROFITABILITY

NPA means booking of money in terms of bad assets

NPA lead to opportunity cost Adversely affect current earning of

bank

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2. LIQUIDITY

decreased profit lead to lack of enough cash at hand

Difficulty in operating the functions of bank

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3. INVOLVEMENT OF MANAGEMENT Time and efforts of management is

another indirect cost which bank has to bear due to NPA

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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

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5. HIGH COST OF FUNDS As NPA decreases the rate of return

thereby increases the cost of funds.

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The Asset Reconstruction Company Limited(ARCIL)

ARCIL

IDBIICICI

SBI

Feb. 11, 2002

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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.

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GROSS & NET NPA (AS PERCENTAGE OF TOTAL ASSETS)

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 0

1

2

3

4

5

6

7

8

7

6.46.2

5.5

4.94.6

4.1

3.3

2.5

1.81.5

1.3

3.33 2.9

2.72.5

2.3

1.8

1.20.9

0.7000000000000010.6000000000000010.600000000000001

Gross Net

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NET NPA TO TOTAL ASSETS

2001-02 2002-03 2003-04 2004-050

0.5

1

1.5

2

2.5

3

public sectorprivate sectorforeign banks

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ROLE OF CHARTERED ACCOUNTANTSAssist 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

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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 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.

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CONCLUSION

NPAs have negative impact on theproductivity, achievement of capitaladequacy level, funds deployment andmobilization policy, credibility of bankingsystem and overall economy.

Therefore, concerted efforts are requiredat ministry of finance, RBI and bankslevel to control the menace of NPAs.

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ANY QUERIES ????

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