REPORTREPORT

NON-PERFORMING ASSETS

:

2

CONCEPTCONCEPT

SARFAESI Act,2002 defined non-performing assets as “an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful, or loss assets in accordance and guidelines relating to asset classification by the RBI”.

3

CLASSIFICATIONCLASSIFICATION

STANDARD ASSETS: These are good and performing assets.

SUB-STANDARD ASSETS: an asset is considered bad when borrower has defaulted on principal and interest repayment for more than one quarter or 90 days.

4

CONTDCONTD….….

DOUBTFUL ASSETS: they find their way from sub-standard assets after 18 months in Indian context against 12 months under the international norms.

LOSS ASSETS: An asset which has been declared by the bank or auditors or by RBI on inspection.

5

PROVISIONINGPROVISIONING

STANDARD ASSETS: which are not NPAs, but involve business risks, require a minimum of 5%.

SUB-STANDARD ASSETS: secured portion10% and non-secured portion 100%.

6

CONTDCONTD……

DOUBTFUL ASSETS: unsecured portion 100% & secured portion up to 1 year 20%, up to 2 year 30%, up to 3 years or more 100%.

LOSS ASSETS: 100% provision for amount outstanding.

7

Classification of accounts on the basis of Classification of accounts on the basis of viability and intention of the borrowerviability and intention of the borrower.. NPA accounts which are viable and intentions are

positive. Re-schedulement/ restructuring Need-based enhancement be done by taking

adequate collaterals/third party guarantee

NPA accounts which are non- viable and intentions are positive.

Compromise/One time settlement

8

CONTDCONTD…………

NPA accounts which are viable but intentions are negative

Efforts will be made through guarantors for regularizations of the account and thereafter adjustment of the accounts.

NPA accounts which are non- viable but intentions are negative

Civil suit/DRT/Actions under securitizations act

9

CONTDCONTD……..……..

Following securities have been exempted under SARFAESI act:

Agriculture land Creation of security in aircraft Pledge of movables Where amount due is less than

20%of principal and interest

10

CAUSES – MACRO LEVELCAUSES – MACRO LEVEL

Liberalized capital and current account Directed credit and non payment by

borrower Compressed growth policy Lack of monitoring Lack of strong legal mechanism to

dispose bad loans were time consuming

11

CAUSES- MICRO LEVELCAUSES- MICRO LEVELa. Operationsb. Human resourcesc. Management

OPERATIONS Lack of realistic strategic plan of action Long time lag between sanctions and disbursements-

slow decision making process Limited product line & revenue stream Slow growth & loss of fund based advances leading to fall

in income from non fund based business Absence of cost control Poor management of risks Locational disadvantages Poor customer acquisition

12

CONTDCONTD….….

HUMAN RESOURCE Excess staffing Low skill levels Lack of motivation

MANAGEMENT Lack of succession planning Lackadaisical implementation of earlier

SRPs & MOUs

13

CONSEQUENCESCONSEQUENCES

Reduce earning capacity of assets and badly affect the ROA

Higher provisioning leads to adverse affect on capital adequacy and banks profitability

Affect the market competitivenessAffect risk taking ability of bank

14

CONTD….CONTD….

Cause reduction in availability of funds for credit expansion due to unproductiveness of existing portfolio

Decrease in value of sharesAffects the credibility of bank in

raising fresh capital for future financial needs

15

DIFFICULTIES WITH NON DIFFICULTIES WITH NON PERFORMING ASSETSPERFORMING ASSETSOwners do not receive market return

on their capitalDepositors do not receive a market

return on savingsNPL epitomize bad investmentContract the money stock

16

Sector-wise NPAs Sector-wise NPAs

Various Sectors 2004 (CRORES) 2005 (CRORES)

A.Priority Sector 26,323 25,586

i. Agriculture 7,699 7,719

ii. SSI 10,101 8,799

iii. Others 8,523 9,067

B. Public Sector 684 493

C. Non Priority 33,494 30,417

Total (A+B+C) 60,501 56,496

17

STRATEGY TO REDUCE NPAsSTRATEGY TO REDUCE NPAs

Measures required to reduce NPAs are two fold:

Preventive measures-Assessment, prevention of fresh NPAs

Curative measures-recovery

18

NPA OF PUBLIC SECTORNPA OF PUBLIC SECTOR

19

PREVENTIVE MEASURESPREVENTIVE MEASURES

Banks need to ensure that only genuine proposals are accepted & projects having inherited weakness are rejected at first instance.

Need to upgrade the credit appraisal skills which are highly inadequate

Economic viability, technical feasibility, quality of management and financial position of borrower should be evaluated properly.

20

CONTDCONTD……

Banks need to have industry cells which can provide them with the updated information about performance industry from time to time.

Credit information bureau (CIB) must maintain the data base of all the borrowers of different banks which can be easily accessible

21

CONTD….CONTD….

Credit Information Bureau of India Ltd. (CIBIL) from March 2003 - which would help in enhancing the quality of credit decisions, improve the asset quality, and facilitate faster credit delivery.

CAPITAL ADEQUACY RATIO The concept of minimum capital to risk weighted

assets ratio (CRAR) has been developed to ensure that banks can absorb a reasonable level of losses. Application of minimum CRAR protects the interest of depositors and promotes stability and efficiency of the financial system.

22

CONTD….CONTD….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 Guidelines were modified in July 2000 for recovery of NPAs of Rs.5 crore and less as on 31st March 2007.

MEASURES IN CASE OF NON PAYMENT If the borrower pays within 60 days no further action is

required. However if he fails to pay full amount within specified period the secured creditor can take one or more of the following measures to recover his dues.

Take possession of the secured assets of the borrower. Takeover the management of secured asset of the

borrower. Appoint any person as manager to manage the secured

assets the possession of which has been taken over by the secured creditor.

23

CURATIVECURATIVE MEASURESMEASURES

Fresh limit/Renewal/enhancement to wilful defaulters

Banks to set up debt restructuring cell

Lok adalats for small loan casesNew arbitration scheme to speed up

recovery process

24

CONTDCONTD……

Debt recovery tribunalsAsset reconstruction company

25

20042004 20052005Source Cases

referredAmt.

Inv.

Amt

Recov

Cases referr.

Amt.

Invol.

Amt.

Recov.

One time settlement

1,39,562 1,510 617 1,32,781 1,332 880

Lok Adalats

1,86,100 1,063 149 1,85,395 801 113

DRTs 7,544 12,305 2,117 4,744 14,317 2,688

26

Non-performingNon-performing loansloans atat globalglobal levellevelCountries NPLs $ billion

JAPAN 330

CHINA 307

INDIA 30

KOREA 15

GERMANY 283

TURKEY 8

THAILAND 18

TAIWAN 19

27

28

SECURITIZATIONSECURITIZATION

Securitization is the process of pooling and packaging Financial Assets, usually relatively illiquid, into liquid marketable securities

All assets can be securitized so long as they are associated with a steady amount of cash flow

29

CONTD….CONTD….

PARTIES INVOLVED IN SECURITIZATION PROCESS

The originator Special Purpose Vehicle (SPV) Investors Obligor Rating agency Administrator (Servicer) Agent and Trustee Structurer

30

31

CONTD….CONTD….

CURRENT SECURITIZATION ACTIVITY IN INDIA

Asset backed securities (ABS)Mortgage backed securities (MBS)Collateralized debt obligations (CDO)Asset backed commercial paper

(ABCP)

32

ASSET RCONTRUCTION ASSET RCONTRUCTION COMPANY(ARC)COMPANY(ARC) India owes its origin of ARC to Narsimham I

which envisaged the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans.

The Asset Reconstruction Company of India Ltd (ARCIL) has acquired non-performing loans (NPAs) totaling 8.3% out of the gross NPAs up till financial year 2006.

33

CONTD….CONTD….

FUNCTIONS OF ASSETS RECONSTRUCTION COMPANY For the purpose of asset reconstruction the following

functions can be performed: It can ensure that proper management of the borrower’s

business is done by change in, or takeover of, the management of the borrower’s business,

It can sell or lease a part or whole of the business of the borrower,

It can reschedule payment of debts payable by the borrower,

It can enforce the security interest in accordance with the provisions of this act,

It can settle dues payable by the borrower , and It can take possession of secured assets in accordance

with the provisions of this act

34

DEBT RECOVERY TRIBUNAL DEBT RECOVERY TRIBUNAL (DRT)(DRT) Section 1(4) of the act 51 of 1993 makes it clear that the act

in not applicable to amount of debt, which is less than Rs.1 lakh due to a bank or financial institution.

The main objective behind the establishment of DRT was to improve the recovery of loans given by banks and financial institutions.

The tribunal is expected to deal with cases in a speedy manner.

Supreme court has also expressed concern over the locking of huge amounts in the hands of debtors. Consequently , the nation is losing its valuable assets. The supreme court has asked the courts and tribunals to hasten the process of adjunction and recovery.

In short it is said that debt recovery tribunal were established with the sole object of expediting the recovery of debts enabling the banks and financial institutions to safe guard their interest.

35

CONCLUSION & CONCLUSION & RECOMMENDATIONSRECOMMENDATIONS Don’t Eliminate – Manage! Studies have shown that management of NPAs rather than elimination is

prudent. The securitization market in India, though in its infancy, holds great

promise especially in the MBS area. While more complex securitization transactions and public issuances of securitized paper are still a distant dream, appropriate legislation and investor education can give the securitization market in India a much-needed thrust.

Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective.

Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective.

There is importance of a sound understanding of the macroeconomic variables

Foreign experiences must be utilized along with a clear understanding of the local conditions to create a tailor made solution which is transparent and fair to all stakeholders.

36

Lok Adalats and Debt Recovery Tribunals are effective mechanism to handle the problem. ARCs should focus on the larger borrowers. Further, there is a need for private sector and foreign participation in the ARC.

A well developed capital market in the restructuring process. A capital market brings liquidity and a mechanism for write off of loans. Without this a bank may seek to postpone the NPA problem for fear of capital adequacy problems. India debt market is relatively under developed and attention should be focused on building liquidity and volumes.

Realignment of Performance metrics Traditional performance measures like ROE and NPA Ratio are not really

indicative of performance - A high volume of bad lending today will impact positively on ROE, asset growth and NPA Ratio and only show up 5 years later as NPAs. The complexity of the balance sheet makes it impossible to disaggregate the impact of these actions even if stricter disclosure norms are put in place.

Economic Value of Equity (EVE) (or market value) and Economic Value of Equity at Risk (EVER) are useful mechanisms to handle this problem. EVE is the value of the firm if its assets are instantaneously liquidated (assuming the availability of liquid markets). Book Value vis-à-vis EVE comparisons give an idea of whether the ‘fair’ value is being reflected. EVER can be computed by using ‘what if’ scenarios like downgrading the ratings of assets or changing interest rates. Now, at every stage banks can check if their actions are consistent with the goal of maximizing EVE, subject to an acceptable level of EVER.

37

NPAs have negative impact on the productivity, achievement of capital adequacy level, funds deployment and mobilization policy, credibility of banking system and overall economy.

Therefore, concerted efforts are required at ministry of finance, RBI and banks level to control the menace of NPAs.