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Published by Rohan Singh

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Published by: Rohan Singh on Sep 06, 2011
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Managing Non-Performing Assets
 While for productive assets it is not difficult toconceive performance status by the yield the assetsresults, but for financial assets it was in ambiguous statefor a quite a long time. In time eighties when health codesystem came on the scene NPA status was accorded,over the years, to advances with the health code 5 and incertain cases to health code 4. But a host of subjectiveconsiderations, varying perception and discretion of manager normally shape the allocation of health codeand result the system could only force the banks to stopcharging interest on such accounts. So emerged the newdefinition of Nonperforming assets.The principle is based on the premise that one couldnot take anything into income if not realized. The word
 “REALISE” is not notewo
rthy, as distinct from the wordreliability, which was the focus of earlier approach tohmanner, thus allowing lot of room for maneuvering. Itpropagates that if an advice made by bank fails to fetch areturn in form of interest realized from borrower one hasno right to debit the borrowable account with the interestchargeable, following the accrual principle.
Mechanics of the system
A term loan account gets NPA status by virtue of non repayment of interest onl, irrespective of 
whether installments of principal are overdue ornot.(2)
A cash credit hypothecation gets NPA status on thebasis of non operation in the account on the basisof continuous overdrawing above the sanctionedlimit.(3)
Banks get 30 days of time to term any interestdefault as past thereby due allowing lot of leveraged to postpone the date of accountbecoming NPA, thus an interest debit on 27.4.06and NPA on 27.10.06. this NPA would be reportedon 31.03.07.(4)
Similarly for cash credit hypothecation accountsmay get 2 quarters to avoid NPA status.(5)
While nonpayment of principal amount is notlinked to NPA status accreditation but forprovisioning requirement, assets classificationtakes care of overdoes in term loan accountExtent of provision depends on the age by whichaccount is NPA. An account gets doubtful assetcategory III status if it is NPA for more than 5years, requiring 50% if it is fully backed bysecurity.(6)
Linkage of extent of provision with the securitybacking of assets and DICGC coverage.(7)
Assets classification system, although basicallyintended for provisioning has got creditmanagement instinct.
Refined Objective of Managing NPA’s
 The discussion enumerated above points finger atcredit manager indicating the extent by which a credit
manager is responsible for a bank‟s survival and can be
stretched further to bring about a new outlook towardsmanaging credit portfolio. The task of redefining theobjective of managing credit asset will centre aroundthe following two approaches arising out of prudentialnorms.
Profit Maximization
By linking income recognition principle with assetclassification system one can list out certain stepsthat can be taken to negate the pressure onprofitability arising out of imposition of the norms.
Risk management
Asset classification on annual basis opens before acredit manager a canvas exposing the extent of risk attached to an assets by showing period of time for which the asset is NPA. Asset classificationobjective is(A)
To shape the asset to push it to performingstatus

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