new npa ruzbe sir

8/9/2019 New Npa Ruzbe Sir

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FARAZ SAHIBOLE

SHADAB QURESHI

AMIT THOKALE

RAJKUMAR SINGH

AGINKIYA KEDAR

TARAL MANDALIYA

NIKHIL PURI

JITESH RAJPALYADAV

NASIM MANIYAR

RONAK PRADHAN


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A Man without money is like a bird withoutwings, the Rumanian proverb insists the

importance of the money. A bank is anestablishment, which deals with money. The basic

functions of Commercial banks are the acceptingof all kinds of deposits and lending of money. Ingeneral there are several challenges confronting

the commercial banks in its day today operations.The main challenge facing the commercial banks isthe disbursement of funds in quality assets (Loans

and Advances) or other wise it leads to Non-

performing assets.


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An asset which ceases to generate income of

the bank is called non-performing asset.

The past due amount remaining uncovered

for the two quarter consequently the

amount would b classified as NPA for the

whole year. It includes borrowers defaultsor delays in interest or principal

repayment.


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A LOAN or lease that is not meeting its

stated principal and

interest payments. Banks usually classify as

nonperforming assets any commercial loans which

are more than 90 days overdue and any consumer

loans which are more than 180 days overdue. More

generally, an asset which is not producing income.


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In order to ensure greater transparency in the borroweraccounts and to reflects actual health of Banks in their

balance sheets. NBE introduced regulations relating to

NPA, the most important four aspects are as follows.

Suspended

Interest

Account:

Classification

of Loans or

Advances:

ProvisioningRequirementfor Loans or

Advances

CapitalAdequacy:


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It means an account where previously accrued

but uncollected interest on loans or advancesrequired placing on non- accrual status is

reserved out of the income of the bank. A

separate account opened in the name of

Suspended interest Account, the uncollectedinterest amount transfer to this account.


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PASS

SUBSTANDARD

LOSSDOUBTFUL

SPECIALMENTION


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Loans or advances in this category are fully protected by the currentfinancial and paying capacity of the borrower and or not subject to

critism. In general, any loans or advance or portion thereof, this is fully

secured, both as to principal and interest, by cash or cash substitutes,

shall be classified under this category regardless of past due status or

other adverse credit factors.

Any loan or advance part due 30 (thirty) days or more, but less than 90

(ninety) days shall be classified Special Mention.


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Non-performing loans or advances past due 90(ninety) days or more

but less than 180(one-hundred- eighty days) days shall, at a minimum, is

classified sub standard. Without prejudice to the classification criteria

used for the sub standard category set out above, the following non-performing loans and advances shall be categorized as substandard;

ii) Renegotiated non-performing overdraft facilities unless

equivalent of all past due interest is paid by the borrower in cash at the

time of renegotiation and the account shows at a minimum.

A nil balance at least once; or

A turnover rate of once the approved limit.


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Non-performing loans or advances past due 180 days ormore, but less than 360 days shall be classified, at a

minimum, as doubtful.

Non-performing loans or advances past due 360 days or more

shall be classified as Loss.


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All Banks shall maintain a Provision for Loans Losses Account which

shall be created by charges to provision expense in the income

statement and shall be maintained at a level adequate to absorb

potential losses in the loans or advances portfolio. In

determining the adequacy of the Provisions for Loan LossesAccount, provisions may be attributed to individual loans or

advances or groups of loans or advances.

provisions for Loan Losses Account shall always have a credit

balance. Additions to or reductions of the Provisions for Loan

Losses Account shall be made only through charges to provisionsin the income statement.Based on the asset classification, the

banks are required to make a provision against the Loans or

advances. Bank shall maintain the minimum provision

percentages against the outstanding provision and of each loan

or advances.


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Sl.No. Classification of Loans and Advances Minimum Provisioning

1 Pass (in accordance with the following build up in minimum

required provisioning)

By December 31, 2002

By June 30, 2003

Effective January, 2004

0.5%

0.75%

1%

2 Special Mention (In accordance with the following build up in

minimum required provision)

By December 31, 2002

By June 30, 2003

Effective January, 2004

1%

2%

3%

3 Sub-standard

Until December 2003

Effective January 2004

25%

20%

4 Doubtful 50%

5 Loss 100%


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NPA doesnt earn any income, it adversely

affects the capital adequacy ratio, and the

adequacy ratio reveals the health condition ofthe bank. The capital adequacy ratio is

defined as the ratio between a banks total

capital and its risk-weighted assets.


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A multiplicity of factor is responsible forever increasing size of NPAs inbanks. A few prominent reasons for assets becoming NPAs are as

under.

*Poor credit appraisal system*Lack of proper monitoring

*Reckless advances to achieve the budgetary targets.*There is no or lack of corporate culture in the Bank. In adequate

legal provisions onforeclosure and bankruptcy.

*Change in economic policies/ environment.*No transparent accounting policy and poor auditing practices.

*Lack of coordination between banks.*Directed lending to certain sectors.

*Failure on of the promoters to bring their portion of equity fromtheir own

*source or public issue due to market turning lukewarm.


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The management of NPA is the difficult task in

practice. Management of NPAs means, how to

settle the NPAs account in the books. Insimple it focuses on the methods of

settlement of NPAs account. The methods are

differs from bank to bank. The following

paragraph explains some general methods of

Management of NPAs by the banks. The same

information is given in the chart


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COMPROMISE

LEGAL REMEDIES

REGULAR TRAINING PROGRAM

RECOVERY CAMPS

WRITE OFFS

SPOT VISIT

REHABILIATION


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The dictionary meaning of the term compromise is settlement of dispute reached

by mutual concessions. The following are the detailed guidelines for

compromise/negotiated settlements of NPAs.

The compromise should be a negotiated settlement under which the bank

should ensure recovery of its dues to the maximum extent possible of minimum

expenses.

Proper distinction should be made between willful defaulters andborrowers defaulting in repayments due to circumstances beyond their control.

Where security is available for assessing the realizable value, proper weight

age should be given to the location, condition and marketable title and

possession of sub security.

An advantage in settlement cases is that banks can promptly recycle thefunds instead of resorting to expensive recovery proceedings spread over a long

period.

All compromise proposals approved by any functionary should be promptly

reported to the next higher authority for post facto scrutiny.

Proposal for write off/ compromise should be first by a committee of seniorexecutives of the bank.


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The legal remedies are one of the methods of management of NPAs.The banks observed that the borrower is making willful default; no

more time should be lost instituting appropriate recovery proceedings.

The legal remedies are filling of civil suits.

The all levels of executives are compelling to undergrowth the regulartraining program on credit and NPA management. It is very useful and

helpful to the executives for dealing the NPAs properly.


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The banks should conduct the regular or periodical recovery campsin the bank premises or some other common places; such type of

recovery camps reduces the level of NPAs in the Banks.

Write offs is also one of the common management techniques of NPAs.

The assets are treated as loss assets, when the bank writes off the

balances. The ultimate aim of the write off is to cleaning the Balance

sheet.

The bank officials should visit to the borrowers business place or

borrowers field regularly or periodically. It is also help full to the bank to

control or reduce the NPAs limit.


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The unit is sick due to technical obsolescences of

inefficient management or financial irregularities.

When the Bank settles the dues, of such, companies

through the compromise or through the legal actions

the better is to be followed.


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NPA reduce the yield on evidences but also

reduces the profitability of CBE. The effect of

NPAs can be classifies in to two categories i.e.

Impact on internal factors and Impact on

external factors.

EXTERNALINTERNAL


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NPAs increase Total Expenditures:

The overall expenses of the bank continued to rise for a number ofreasons. The Provision for doubtful accounts, that caused the dramatic

increase in total expenses. The size of provision for doubtful accounts

varies from year to year because of the differences in the levels of the

risk anticipated

NPAs reduce the earning Capacity:

The NPA affects earning capacity of the bank. In general various causes

reduce the profitability performance of the bank. The provision for

doubtful debts is one among the most important cause for reducing

the profitability of the bank

NPAs reduce the ROA and ROE:

NPA reduce the earning capacity of assets, return on assets also gets

affected. The major reason for the slight decrease in the level of ROA

and ROE was, of course, the provision for doubt full debts accounts


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1.Regulatory and credit rating agencies are also not happywith the level of NPA

2.F Regulatory and credit rating agencies abroad also notcomfortable with the high level of NPAs.

3.In different attitude developed in the mind of the Bank

customers.

4.Image of the bank in the minds of the general public willgo down.


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The outstanding loans and advances are generally determined by what

happened to the trends in fresh loan disbursement and loan collections, whichin turn, are dependent on the performance of the overall economy. Generally,

the economic performance is weakened, disbursements of fresh loans and

collections of loans trend to slow down. The following table will explain the

past 10 years amount of Loans and Advances of CBE

Sl. No. Year Loans and advances

1 1994-1995 5,033.9

2 1995-1996 6,977.7

3 1996-1997 8,121.1

4 1997-1998 9,066.9

5 1998-1999 9,784.76 1999-2000 10,345.0

7 2000-2001 10,472.1

8 2001-2002 9,181.7

9 2002-2003 8,097.5

10 2003-2004 7,911.3


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0

200000

400000

600000

800000

1000000

1200000

1400000

YE

LO NS ND DV NCES


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Sl.No Year Gross NPA Gross NPA as % of Gross Advance

1 1994-1995 289.0 5.74%

2 1995-1996 352.5 5.02%

3 1996-1997 477.8 5.88%

4 1997-1998 717.8 7.91%

5 1998-1999 874.0 8.93%

6 1999-2000 1,408.1 13.61%

7 2000-2001 1,614.4 16.02%

8 2001-2002 1,834.6 19.98%

9 2002-2003 2,050.8 25.32%

10 2003-2004 2,109.7 26.66%


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Loans and advances are shown at the gross amount adjusted for

any provision for impairment losses. A provision for loan

impairment is established if there is objective evidence that

the Bank will not be able to collect all amounts due accordingto the original contractual terms of the loan. The amount of

provision is the difference between the carrying amount and

the estimated receivable amount.In additions, a general

provision is made based on managements assessment of the

inherent risk in the loans and advances portfolio.

When a loan is decided uncollectible, it is written off against

the related provision for impairment. Subsequent recoveries

are credited to the provisions for loan losses in the Income

statement.


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With the help of the analysis, the researcher has observed the following findings.The findings are as follows.

1 The loans and advances have increased from the year 1994-95 to 2000-01

continuously.

2 The loans and advances have started to decrease from the fiscal year 2001-02

3 From the year 1994-95 to 2003-04, the gross NPA has increased continuously.

4

In the fiscal year 1995-96, the gross NPA percentage has increased (5.74% -5.02%) 0.72 %

5 The highest percentage of increase in gross NPA was the year between 2001-02

and 2002- 03 i.e. 5.34%.


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6 The lowest percentage of increase in gross NPA was the yearbetween 1997-98 and 1998-99 i.e. 5.34%

7 The amount written off against the loans and advances has

been made in the years 2001-02 and 2003-04 for Birr 192.4 andBirr 656.8 million respectively.

8 The CBE has created the additional provisions every year,proportionately on loans and advances.

9 Total expenses including provision for doubtful debts hasshowed increasing trend except the fiscal year 2000 and 2003.

10 There is no uniformity in net income before tax of CBE. In

the fiscal year 2002, the CBE has incurred loss of Br. 506 million.


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Projects with old technology should not be considered for finance

Large exposure on big corporate or single project should be avoid

Operating staffs credit skills should be up graduation.

Analysis should therefore be based on trends of capacity utilization,

profitability etc. Assumptions not account for ground realities.

Better taking up any fresh/exciting proposals for assessment, sourcesfor margin money should be thoroughly examined.


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Uneven scale of repayment schedule with higher repayment in the

initial years normally is preferred

Bank should prevent diversion of funds by the promoters.

Effective inspection system should be implemented.

Operating staff should scrutinize the level of inventories/receivables

at the time of assessment of working capital.


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NPA is a double-edged weapon, which affects bank

profitability due to interest income not being

recognized on NPA accounts and loan loss previously

to be created from profit earned. The bank mustadopt structured NPAs management policy for

elimination or reducing the NPAs in the Bank. In

general the trend of NPAs in CBE are increasing

trend, on the same time the CBE has been adopted avery good techniques to control over the NPAs.


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new npa ruzbe sir

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