NPA Management

Prepared By:

Simran Khilwani

Prateek Kakkar

Performing Asset

• An account does not disclose any problems and carry more than normal risk attached to the business.

• All loan facilities which are regular.

Non Performing Assets

• Non Performing Asset means a loan or an account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

With effect form March 31, 2004 a non-performing asset (NPA) shall be 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' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

Introduction

CATEGORIES OF NPA Standard Assets : Arrears of interest and the principal amount of loan does

not exceed 90 days at the end of financial year

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 more than 12 months

• D1 i.e. up to 1 year : 25% provision is made by the bank• D2 i.e. from 1 year to 2 years : 40% provision is made by the bank • D3 i.e. more than 3 years : 100% provision is made by the bank

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.

Reasons behind rise in NPA

• Lack of proper pre-enquiry by the bank for sanctioning a loan to a customer.

• Non performance of the business or the purpose for which the customer has taken the loan.

• Willful defaulter.• Loans sanctioned for agriculture purposes.• Change in govt. policies leads to NPA.

Effects of NPA on banks & FI

• Restriction on flow of cash done by bank due to the provisions of fund made against NPA.

• Drain of profit.• Bad effect on goodwill.• Bad effect on equity value.

Factors Impacting Rise In NPAs

External factors :• Ineffective legal framework & weak recovery

tribunals • Lack of demand / economic recession or slowdown• Change in Govt. policies • Wilful defaults by customers • Alleged political interferences

TYPES OF NPA• Gross NPA : Gross NPAs are the sum total of

all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets.

• Gross NPAs Gross NPAs

Gross Advances

• Net NPA: Net NPAs are those type of NPAs in

which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks.

Net NPAs Gross = __NPAs – Provisions__

Gross Advances - Provisions

NPA Management Strategies

• Indian Banks are pursuing variety of strategies to control NPAs, which can be studied under two broad categories as under :

– a. Preventive Management – b. Curative Management

NPA Management Strategies

A. Preventive Management:• It is rightly said that prevention is better than cure.• Developing ‘Know Your Client’ profile (KYC)• Monitoring Early Warning Signals • Installing Proper Credit Assessment and Risk

Management Mechanism• Reduced Dependence on Interest• Generating Watch-list/Special Mention Category

NPA Management Strategies

B. Curative Management:• Re-phasement of loans • Pursuing Corporate Debt Restructuring (CDR)• Encouraging acquisition of sick units by healthy units• Using Lok Adalats for compromise settlement for smaller

loans in “doubtful” and “loss” category. • Using Securitization & SARFAESI Act• Using Asset Reconstruction Company (ARC)• Approaching Debt Recovery Tribunals (DRTs). • Recovery Action against Large NPAs

Rates Of Provisions

Assets

Non-Performing

Assets

Secured

Sub-Standard

Assets (15%)

Doubtful Assets

Up to 1 year (25%)

1 year to 2 year (40%)

Above 3 years (100%)

Loss Assets (100%)

Unsecured

Sub-Standard

Assets (25%)

Doubtful Assets (100%)

Performing Assets

Standard Assets (0.40%)