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Non-Performing Assets in Banking Sector

Learn about asset classification, identification, and provisioning norms for non-performing assets (NPAs) in banking. Discover how NPAs impact financial institutions.

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Non-Performing Assets in Banking Sector

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  1. NONPERFORMING ASSETS’s Non Performing Assets

  2. Asset Classification – 4 way - 1993 • Standard Assets • All regular loan accounts & investments (Performing Assets) • Non-Performing Assets • Sub-Standard Assets • Doubtful Assets • Loss Assets Non Performing Assets

  3. Performing Asset defined … • An account (loan or investment) is classified as Performing Asset if it does not disclose any problems and carry more than normal risk attached to the business • All loan facilities which are regular ! Non Performing Assets

  4. N P As : Definition • An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. • A credit facility in respect of which the interest and/or instalment of principal has remained “past due” for a specified time. Non Performing Assets

  5. Non Performing Assets • In accounting, originally Bad & Doubtful Debts • In 1980s, RBI followed 8 point Health Code • Also called Non Performing Loans (NPLs) • or Stressed Assets • An advance where interest and / or instalment of principal remain ‘overdue’ for a period of more than 90 days in respect of Term Loan / OD / CC /BP / BD / other accounts – investments, export finance, SSI/SME/ agricultural, housing loan, educational loan, lease and hire purchase …. Etc. • Sub-standard, Doubtful and Loss Assets… Non Performing Assets

  6. % NPAs to Total Advances (Rs in crores) • Year NPAs Total Loans % • 1998 50,816 3,52,696 14.4 • 1999 58,722 3,99,436 14.7 • 2000 60,840 4,75,757 12.8 • 2001 63,962 5,58,679 11.4 • (Source : Trends & Progress : RBI, 2001) Non Performing Assets

  7. NPAs as % to Total Advances Non Performing Assets

  8. IRACNORMS • Master circular dated 17th July, 2004. • Superceded earlier master circular dated 22nd August, 2003. • Status-quo of classification in respect of earth-quake affected accounts available upto 15/07/2004. • Natural Calamities – Floods, Cyclones, Earth quakes, Failure of Monsoon, Fire Accidents, etc... Non Performing Assets

  9. ASSETTYPE STANDARD ASSET / PERFORMING ASSET The account is not non-performing and does not carry more than the normal risk attached to the business. NON-PERFORMING ASSET (NPA) The asset ceases to generate income for the bank. (Para 2 of the Master Circular) Non Performing Assets

  10. IDENTIFICATION OF NPA Cash Credit / Overdrafts Account remains ‘out of order’ for 90 days or more. The account is treated as ‘out of order’ if : * Outstanding Balance remains continuously in excess of sanction limit/drawing power for 90 days or more. * No credit continuously for 90 days or more as on the date of Balance Sheet. * Credits in the account are not sufficient to cover interest debited during the same period. Non Performing Assets

  11. IDENTIFICATION OF NPA … Term Loans Interest and/or instalment remains overdue for 90 days or more. Bills Purchased and Bill remains overdue for 90 Discounted days or more. Agricultural Advances Interest and/or installment remains overdue for two harvest seasons for short duration crop, one harvest season for long duration crop. Others  Any amount to be received remains overdue for 90 days or more . Non Performing Assets

  12. CLASSIFICATIONNORMS Standard Asset The account is not non-performing. Sub-Standard Asset A sub standard Asset is one which has remained NPA for a period less than or equal 12 months. (w.e.f. 31st March 2005) Loss Assets These are accounts, identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off. Non Performing Assets

  13. CLASSIFICATIONNORMS Doubtful Asset - Three Categories CategoryPeriod Doubtful - I up to One Year Doubtful - II Up to Three Years Doubtful - III More than Three Years Non Performing Assets

  14. PROVISIONING NORMS STANDARD ASSET • 0.25% on Standard Assets on Global loan portfolio basis SUB-STANDARD ASSET • 10% of total outstanding • 20% of total outstanding if loan is unsecured ab initio (new guidelines) Non Performing Assets

  15. PROVISIONING NORMS SUB-STANDARD (Cont’d) Banks are permitted to phase the additional provisioning upon reduction in transition period from 18 to 12 months Over a period of four years with minimum 20% each year (new guidelines) LOSS ASSET: 100% should be provided for Non Performing Assets

  16. PROVISIONING NORMS DOUBTFUL ASSETS Period Provision (Secured +Unsecured) Upto 1 year 20% + 100% 1to 3 years 30% + 100% More than 3 years 100% + 100% (effective from 31st March 2005) Outstanding as on 60%, 75%, 100% on secured portion. 31st March 2004 2005 2006 2007 Non Performing Assets

  17. PROVISIONINGNORMS Provision Under Special circumstances • Normal provision on Government guaranteed advances. • In case of advances guaranteed by DICGC/ECGC, Provision should be made only for balance in excess of the amount guaranteed by these corporations. Non Performing Assets

  18. IMPORTANTASPECTS Exempted Category (Para 4.2.10 of Master Circular) • Advances against term deposits, NSCs, IVPs, KVPs and Life Insurance Policies need not be treated as NPAs, till security cover is sufficient to cover outstanding balance. • Income to be recognised subject to availability of margin. • Advance against gold ornaments / Government securities not exempt. Non Performing Assets

  19. IMPORTANTASPECTS Consortium Advances (Para 4.2.7 of Master Circular) • Member banks shall classify the accounts according to their own record of recovery. • Bank needs to arrange to get their share of recovery or obtain an express consent from the Lead Bank. • Bank may obtain Lead Bank confirmation & cognizance of the same may be taken? Non Performing Assets

  20. GREENING ISSUES Sanction/extension of Additional facility / Adhoc facility. Enhancement of Limit. Conversion of Overdue Limits. Frequent Re-schedulement of Term Loans. Adjusting Loan of one borrower against other borrower. Non Performing Assets

  21. INCOME RECOGNITION Income Recognition For NPA accounts income should be recognised on realisation basis. When an account becomes non-performing, unrealised interest of the previous year to be derecognised/ reversed. Adjustment of Recoveries - Priority Unrealised Expenses Unrealised Interest Amount of Principal Outstanding Clarification vide Master Circular - in the absence of clear agreement between the Bank and the Borrower, an appropriate policy to be followed in uniform and consistent manner. Non Performing Assets

  22. DISCLOSURE  At Branch Level • Auditor needs to report the compliance with IRAC norms of RBI with respect to classification & provisioning for NPA and income recognition in Long Form Audit Report (LFAR) of the branch.  At Head Office Level • Advances are disclosed net off NPA provisions & Interest Suspense. • Accounting policy for classification, provisioning & income recognition need to be disclosed. • Disclosure needs to be made as required in terms of the guidelines issued by the Reserve Bank of India in connection with Percentage of Net NPAs to Net Advances, Provision for Standard Assets & NPAs, Movements in NPAs, Movement in Provision for NPAs. Non Performing Assets

  23. Non Performing Assets

  24. Non Performing Assets

  25. Non Performing Assets

  26. Developments in India • Ordinance in June 2002 on Securitisation Law • Enacted by Parliament in December 2002 • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) 2002 • Powers to Lenders – To Seizure of Assets, Change of Management, Securitisation of Financial Assets, etc • Challenged in Supreme Court by M/s. Mardia Chemicals Ltd., against right of ICICI Bank Non Performing Assets

  27. Setting up of AR Companies in India • Asset Reconstruction Company India Ltd (ARCIL) – (SBI+ HDFC+ IDBI+ ICICI Bk) • Asset Care Enterprise (ACE) – (IFCI + PNB) • ARC to be floated by Kotak Mahindra Bank? • ASREC – Andhra Bank, Stanchart, Deutsche and UTI Bk? • Corp Bank, ING Vysya and Actis to start? Non Performing Assets

  28. Definition of ARCs (RBI _ April 2003) • A company which is set up with the objective of taking over distressed assets (Non Performing Assets) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable Non Performing Assets

  29. Objectives of ARCs in India • 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 — essential for a comprehensive restructuring strategy of weak banks. Non Performing Assets

  30. ARCIL • www.arcil.co.in • Sponsored by SBI, ICICI Bank Ltd., IDBI Ltd. and Punjab National Bank • Vision - Mission Statement • Vision • Be a major contributor to the Indian economy by capturing value from the impaired assets •  Mission • Maximise value through innovative resolution • Establish fair and transparent business practices • Facilitate development of market for distress debt Non Performing Assets

  31. ARCIL : Shareholding Pattern Non Performing Assets

  32. Developments in 2004 • Revised Definition of NPA to 90 Days • Banks managed to bring down NPAs < 3% • SARFAESI Act, 2002 amended in Dec 2004 • To set up Asset Reconstruction Companies • Take possession of secured assets of borrowers • Right to lease out, sell and realize such assets • Right to take over the management of borrowers • 60 days notice by lenders is adequate • No appeal permissible unless borrowers deposit 50% amount due and approach DRT / DRAT Non Performing Assets

  33. NPAs in Banks : March 2005 (Rs in Cr) Non Performing Assets

  34. CIBIL – www.cibil.com • Credit Information Bureau of India Ltd • Exchange of Credit Info among Banks/FIs • Unscrupulous borrowers cannot play one bank against another for credit facilities • Set up in January 2001 by SBI + HDFC + Dun and Bradstreet Info Pvt Ltd + Trans Union International Inc – Rs 25 cr Capital • Formal set up 2005 onwards ... Non Performing Assets

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