Non Performing Assets

Shrawanthi Amruthwar-3 Arun Aggarwal-13 Aniket Kurup-22 Shruti Pai-35

Non Performing Assets

A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments

Current Guidelines of RBI

A Non-Performing Asset (NPA) is a loan or an advance where : 1- Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, 2- The account remains out of order in respect of an Overdraft/Cash Credit (OD/CC), 3- The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, 4- The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

Contd..
5- The instalment of principal or interest thereon remains overdue for one crop season for long duration crops, 6- The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006. 7- In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Classification of NPA
Substandard Assets - A substandard asset is one, which has remained NPA for a period less than or equal to 12 months. Doubtful Assets - A doubtful asset is one, which remained NPA for a period exceeding 12 months. Loss Assets - A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI

Doubtful asset Secured portion

Upto 1 year

PROVISIONS FOR NPA

Provision requirement (%) 25%

Period for which the adv. has remained doubtful

1 to 3 year
More than 3 years

40%
100%

Unsecured portion

100 percent of the extent to which the advance is not covered by the realisable value of the security

 Loss asset- If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. Sub-standard asset Secured part - General provision of 15% on total outstanding. Unsecured part- Additional provision of 10% i.e., a total of 25% on the outstanding balance. Infrastructure loans-20%

 Standard asset a) direct advances to agricultural and SMEs sectors at 0.25% b) advances to Commercial Real Estate (CRE) Sector at 1.00% c) all other loans and advances are above or at 0.40%

FACTORS CONTRIBUTING NPA

Inefficiency in management
Slackness in credit management and monitoring Funding of non-viable projects Faulty credit appraisal. Mis-utilization of loans by the borrower

IMPACT OF NPA
Drain on Profitability Impact on capital adequacy High cost of funds due to NPAs. The assets and liability mismatch will widen The economic value additions (EVA) by banks gets upset since EVA = net operating profit minus cost of capital

Prevention of NPAs
Appraisal techniques of bank to be sharpened Strict due diligence to ensure that project is technically feasible Avoiding fixing of unrealistic payment schedule Off site surveillance or Onsite inspection Trying to look for early warning signals

Sale of NPA to other Banks

A NPA is eligible for sale to other banks only if it has remained a NPA for at least two years in the books of the selling bank The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banks but not to bank, which originally sold the NPA. The bank may purchase/ sell NPA only on without recourse basis

Contd..
The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasing

If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.

Restructuring and Rehabilitation

Banks are free to design and implement their own policies for restructuring/ rehabilitation of the NPA accounts Reschedulement of payment of interest and principal after considering the Debt service coverage ratio, contribution of the promoter and availability of security

Corporate Debt Restructuring (CDR)

The objective of CDR is: To ensure a timely and transparent mechanism for restructuring of the debts of viable corporate entities To aim at preserving viable corporates affected To minimize the losses to the creditors and other stakeholders It is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with outstanding exposure of Rs.10 crores and above

Contd..
The CDR system is applicable to standard and sub-standard accounts with potential cases of NPAs getting a priority Reference to CDR Mechanism may be triggered by: Any or more of the creditors having minimum 20% share in either working capital or term finance, or By the concerned corporate, if supported by a bank/FI having minimum 20% share as above Structure of CDR System: CDR Standing Forum CDR Empowered Group CDR Cell

Conclusion
Management of NPA is need of the hour To be effective, NPA management has to be an exercise pervading the entire bank from the Board down the last level The course open to the banker is to ensure that an asset does not become NPA If it does, banks should take steps for early recovery failing which the profitability of the bank will be eroded That can trigger other problems to undermine the banks financial condition