classificationofnpas-120505210923-phpapp02

7/27/2019 classificationofnpas-120505210923-phpapp02

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Non Performing Assets(NPA)

Prudential Norms on Asset

Classification

Aditya Lathe


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What is an NPA?

A simplified definition:

An asset becomes non performing when it ceasesto generate income for the Bank.


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NPAs across Banking Sector (FY 10)

2.27 2.31

3.22

4.26

0.00

1.00

2.00

3.00

4.00

5.00

Public Sector

Banks

Old Private

Sector Banks

New Private

Sector Banks

Foreign Banks

Gross NPAs to Gross

Advances Ratio (%)

Source: RBI Data

Gross

NPAs

Gross

Advances

Gross NPAs to Gross

Advances Ratio

Public Sector Banks 57300 2519330 2.27%

Old Pvt. Sector Banks 3612 156407 2.31%

New Pvt. Sector Banks 13772 428184 3.22%

Foreign Banks 7127 167438 4.26%

81813 3271361 2.50%


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Kotak Bank NPAs

2.9

1.8

4.3

2.4

3.6

1.72.0

0.7

0.0

1.0

2.0

3.0

4.0

5.0

2008 2009 2010 2011

KMBL Historical NPAs

Gross NPAs to Gross Advances (%) Net NPAs to Net Advances (%)

Year

Gross

NPAs

Gross

Advances

Gross NPAs

to GrossAdvances Net NPAs

Net

Advances

Net NPAs to Net

Advances

2011 603 29722 2.03% 211 29328 0.72%

2010 767 21178 3.62% 360 20824 1.73%

2009 731 16959 4.31% 397 16604 2.39%

2008 453 15729 2.90% 276 15515 1.78%


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Criteria for NPA recognition

Term Loan:If interest and/ or installment of principal remains overdue fora period of more than 90 days

Bills purchased/ discounted: If the bill remains overdue for a period ofmore than 90 days in the case of bills purchased and discounted

Derivatives:If the overdue receivables representing mark-to-market valueof a derivative contract remain unpaid for a period of 90 days from thespecified due date for payment.

Agriculture/ Crop Loans: Case I: If the installment of principal or interest thereon remains

overdue for two crop seasons for short duration crops,

Case II: If the installment of principal or interest thereon remainsoverdue for one crop season for long duration crops,


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Criteria for NPA recognition: Cash Credit

In case of cash credit / overdraft accounts, a NPA is an loan or advance wherethe account remains outof order.

An account should be treated as 'out of order' if the outstanding balanceremains continuously in excess of the sanctioned limit/drawing power.

In cases where the outstanding balance in the principal operating account isless than the sanctioned limit/drawing power, but there are no creditscontinuously for 90 days as on the date of Balance Sheet or credits are notenough to cover the interest debited during the same period, these accountsshould be treated as 'out of order'.


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Criteria for NPA recognition: General

Guidelines

The availability of security or net worth of borrower/ guarantor should not be

taken into account for the purpose of treating an advance as NPA or

otherwise, as income recognition is based on record of recovery.

The classification of an asset as NPA should be based on the record ofrecovery. Bank should not classify an advance account as NPA merely due to

the existence of some deficiencies which are 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 duedate, etc.


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Guidelines

Banks should ensure that drawings in the working capital accounts arecovered by the adequacy of current assets, since current assets are firstappropriated in times of distress. Drawing power is required to be arrived atbased on the stock statement which is current. However, considering thedifficulties of large borrowers, stock statements relied upon by the banks for

determining drawing power should not be older than three months. Theoutstanding in the account based on drawing power calculated from stockstatements older than three months, would be deemed as irregular.

A working capital borrowal account will become NPA if such irregulardrawings are permitted in the account for a continuous period of 90 dayseven though the unit may be working or the borrower's financial position issatisfactory.


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Guidelines

Regular and ad hoc credit limits need to be reviewed/ regularized not laterthan three months from the due date/date of ad hoc sanction. In case ofconstraints such as non-availability of financial statements and other datafrom the borrowers, the branch should furnish evidence to show thatrenewal/ review of credit limits is already on and would be completed soon.In any case, delay beyond six months is not considered desirable as a generaldiscipline. Hence, an account where the regular/ ad hoc credit limits have notbeen reviewed/ renewed within 180 days from the due date/ date of ad hocsanction will be treated as NPA.

All the facilities granted by a bank to a borrower and investment in all thesecurities issued by the borrower will have to be treated as NPA/NPI and notthe particular facility/investment or part thereof which has become irregular.


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Guidelines

Government guaranteed advances

The credit facilities backed by guarantee of the Central Government though

overdue may be treated as NPA only when the Government repudiates its

guarantee when invoked. However, With effect from the year ending 31March 2006 State Government guaranteed advances and investments in

State Government guaranteed securities would attract asset classification

and provisioning norms if interest and/or principal or any other amount due

to the bank remains overdue for more than 90 days.

Advances against Term Deposits, NSCs, KVP/IVP, etc

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and

life policies need not be treated as NPAs, provided adequate margin is

available in the accounts. Advances against gold ornaments, government

securities and all other securities are not covered by this exemption.


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Criteria for NPA recognition: Project Loans

Two things to remember:

What is a Project Loan: Any term loan which has been sanctioned for thepurpose of setting up of an economic venture.

For all projects financed by the FIs/ banks after 28th May, 2002, the date of

completion of the project should be clearly spelt out at the time of financial

closure of the project. Therefore, a Commercial Operation Date (COD) mustbe fixed at the time of loan sanction / financial closure for Project Loans.


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Project Loan- Non Infrastructure project:

Before COD

If interest remains overdue for a period of more than 90 days

If it fails to commence commercial operations within 6 months from the

original COD, even if it is regular as per record of recovery.

After COD

If interest and/ or installment of principal remains overdue for a period ofmore than 90 days,


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Project Loan- Infrastructure project:

Before COD

If interest remains overdue for a period of more than 90 days

If it fails to commence commercial operations within 2 years from the

original COD, even if it is regular as per record of recovery.

After COD

If interest and/ or installment of principal remains overdue for a period ofmore than 90 days,


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NPA Sub categories

Non Performing

Assets

Substandard Assets Doubtful Assets Loss Assets


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Criteria for classification

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.


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NPA Provisioning norms

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 theoutstanding balance.


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NPA Provisioning norms

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:

Time spent in

doubtful category

Provision

requirement

< 1 year 25 %

1 to 3 years 40 %

> 3 years 100 %

Loss Assets Write Off or provision of 100% of outstanding


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Light at the end of the tunnel- Upgradation

of NPAs

In case of NPA accounts, if arrears of interest and principal paid by theborrower, the account to be no longer treated as non-performing andmay be classified as standard.

Caution: In case of accounts with inherent weakness, even if there are a

few credits before the balance sheet date, the account should still bedeemed as a NPA.

In other genuine cases, the banks must furnish satisfactory evidence tothe Statutory Auditors/Inspecting Officers about the manner ofregularization of the account to eliminate doubts on their performing

status.


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Thank You

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