Commercial Banking : NPAs

Banking

Non Performing Assets

NON PERFORMING ASSETS INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING NORMS (IRAC NORMS) &
Asset Reconstruction Companies

Banking

Non Performing Assets

Bank Credit (% to GDP)

Banking

Non Performing Assets

Banking

Non Performing Assets

Banking

Non Performing Assets

Banking

Non Performing Assets

Why Loan accounts go bad ?

BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within No contribution No modernisation Improper monitoring Industrial Relations.. Natural Calamities ...
Non Performing Assets

BANKER SIDE Defective Sanction No post-sanction supervision, etc Delay in releases Directed lending Slow decision making process Etc etc etc .
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Banking

Health Code System in Indian Banks during 1980s

1. 2. 3. 4. 5. 6. 7. 8.

Satisfactory Accounts Irregular Accounts Sick-viable : Under Nursing Sick Non-viable : Sticky accounts Advances Recalled Suit Filed Accounts Decreed Debts and Debts classified by the Bank as Bad/Doubtful Accounts
Non Performing Assets 9

Banking

Asset Classification 4 way - 1993

Standard Assets
All regular loan accounts & investments (Performing Assets)

Non-Performing Assets
1. 2. 3. Sub-Standard Assets Doubtful Assets Loss Assets
Non Performing Assets 10

Banking

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 !

Banking

Non Performing Assets

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N P As : Definition

An asset, becomes ceases to bank.

including a leased asset, non-performing when it generate income for the

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 12

Banking

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

Banking Non Performing Assets

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Recovery of Loans

Field Visits, Personal persuasion, Stock Statements Notices on due dates Ordy, Regd, Legal Civil Procedure, Winding Up Notices, Seizure and disposal of assets thro auctions Criminal Action per Sec 138 of NI Act Compromises Interest reduction / waiver, deferment, Simple or Compound calculation Lok Adalat, DRT / BIFR Awards, OTS, CDR Asset Securitisation under SARFAESI Act
Banking Non Performing Assets 14

Defn of NPAs Chronologically

Mar 31, 1993 Mar 31, 1994 Mar 31, 1995 Mar 31, 2004

4 quarters 3 quarters 2 quarters 1 quarter only ???

Banking

Non Performing Assets

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Banking

Non Performing Assets

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Sticky Loans in Banks in India

Year 1998 1999 2000 2001

Loss 6,242 7,444 7,558 8,001

Non Performing Assets

Doubtful Sub-std 27,146 17,428 31,350 33,688 37,756 19,928 19,594 18,206
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Banking

Sticky Loans in Banks in India

(Rs. In crores)
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1998 1999
Non Performing Assets

Loss Doubtful Sub-Std

2000

2001
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Banking

% NPAs to Total Advances (Rs in crores)

Year 1998 1999 2000 2001

NPAs 50,816 58,722 60,840 63,962

Total Loans 3,52,696 3,99,436 4,75,757 5,58,679

% 14.4 14.7 12.8 11.4

(Source : Trends & Progress : RBI, 2001)

Non Performing Assets 19

Banking

NPAs as % to Total Advances

600000 500000 400000 300000 200000 100000 0 1998 199 2000 2001
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NPAs Total Loans % to Total

Banking

Non Performing Assets

IRAC NORMS

Master circular dated 17th July, 2004. Superceded earlier master circular dated 22nd August, 2003. Status-quo of classification in respect of earthquake affected accounts available upto 15/07/2004. Natural Calamities Floods, Cyclones, Earth quakes, Failure of Monsoon, Fire Accidents, etc...
Banking Non Performing Assets 21

ASSET TYPE
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)
Banking Non Performing Assets

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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.
Banking Non Performing Assets 23

IDENTIFICATION OF NPA
Term Loans Bills Purchased and Discounted Interest and/or instalment remains overdue for 90 days or more. Bill remains overdue for 90 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
Banking Non Performing Assets

or more .

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CLASSIFICATION NORMS
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.

Banking

Non Performing Assets

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CLASSIFICATION NORMS
Doubtful Asset - Three Categories Category Doubtful - I Doubtful - II Doubtful - III
Banking Non Performing Assets

Period up to One Year Up to Three Years More than Three Years

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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)
Banking Non Performing Assets 27

PROVISIONING NORMS
SUB-STANDARD (Contd) 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

Banking

Non Performing Assets

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PROVISIONING NORMS
DOUBTFUL ASSETS
Period Provision (Secured +Unsecured) + 100% + 100% + 100%

Upto 1 year 20% 1to 3 years 30% More than 3 years 100% (effective from 31st March 2005) Outstanding as on 31st March 2004

60%, 75%, 100% on secured portion. 2005 2006 2007

Banking

Non Performing Assets

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PROVISIONING NORMS
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 30

Banking

IMPORTANT ASPECTS
Exempted Category Master Circular) (Para 4.2.10 of
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 availability of margin. subject to /

Advance against gold ornaments Government securities not exempt.

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IMPORTANT ASPECTS
Classification of a Borrower (Para 4.2.6 of Master Circular)
All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. Obtain cross-branch classification. confirmation for

Exception: Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement.
Banking Non Performing Assets 32

IMPORTANT ASPECTS
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?
Banking Non Performing Assets 33

 Corporate Debt Restructuring (CDR) - (Para 4.2.15 of Circular)

IMPORTANT ASPECTS

Master

CDR is an institutional mechanism for evolving financial solution. CDR will be available only in respect of multiple banking/syndication/consortium accounts with outstanding exposure of Rs.20 Crores & above. (Not available for sole banking accounts) Accounting treatment for restructuring under CDR will same as applicable to otherwise restructured accounts. be

Projects under implementation

Treatment to be in line with Para 4.2.16 of Master Circular

Banking

Non Performing Assets

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GREENING ISSUES
Sanction/extension of Additional Adhoc facility. Enhancement of Limit. Conversion of Overdue Limits. Frequent Re-schedulement of Term Loans. Adjusting Loan of one borrower against other borrower.
Banking Non Performing Assets 35

facility /

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.
Banking Non Performing Assets 36

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 & recognition need to be disclosed. income

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.
Banking Non Performing Assets 37

Banking

Non Performing Assets

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Non Performing Assets

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Non Performing Assets

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Asset Reconstruction Companies

Banking

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Experience abroad

Spain - Dep Guarantee Fund : 1977-80 Chile - Cash Purchase of Bad Loans1982 USA - Resolution Trust Corpn, 1989 Japan - Coop Cr Purchasing Co 1993 Poland : Rescheduled Bad Loans : 1994 Eastern Europe : Govt Bonds : 1994 (Hungary)
Banking Non Performing Assets 42

Experience abroad...

Tanzania - 1988 Ghana - NPA Recovery Trust 1989 Sweden - SECURUM - January 1993 Uganda - 1995 Philippines - Asset Privatisation Trust Malaysia - Soft loans by Central Bank Colombia, Czech, Slovak, etc too
Banking Non Performing Assets 43

Capital from Banks/Financial Instns ARCs in private sector like an SPV Staff from Banks/Financial Instns Issue Bonds in lieu of Assets taken over Guaranteed by Government of India Stamp Duty to be exempted On par with Venture Funds for Inc. Tax
Banking Non Performing Assets 44

Asset Reconstruction Companies

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
Banking Non Performing Assets 45

Setting up of AR Companies in India

1.

2.

3. 4.

5.

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?
Banking Non Performing Assets 46

Definition of ARCs (RBI _ April 2003)

Banking

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 47

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 48

Banking

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

Banking

Non Performing Assets

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ARCIL : Shareholding Pattern

Banking

Non Performing Assets

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Non Performing Assets

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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
Banking Non Performing Assets 52

NPAs in Banks : March 2005 (Rs in Cr)

Banks Public (27) Private (29) Foreign (31) IDBI Bank
Banking

Total Gross NPAs Net NPAs Assets 16,76,847 46,380 16,135 4,25,802 8,715 4,038

81,360
Non Performing Assets

1,216

848
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CDR mechanism

Corporate Debt Restructuring mechanism Similar to UK, Thailand, Korea & Malaysia RBI guidelines to Banks and FIs in Aug01 To ensure timely and transparent mechanism to restructure debts, outside purview of BIFR, DRTs and other legal proceedings To consider all viable entities with dues above Rs. 20 crores facing problems of repayment ...
Banking Non Performing Assets 54

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 ...
Banking Non Performing Assets 55

Economic Times dt Jan 05, 2006

Bad Loans cross 16% of Indias GDP ARCIL puts figure at Rs. 2,36,000 crores Says unlocking value from NPAs will help banks meet additional capital requirements Gr NPAs in financial sector Rs 1,11,000 crores; Restructured Standard Assets Rs. 27,000 crores; Corporate Debt Restructring Rs. 65,000 crores; Bad Loans Written off by Banks Rs. 77,000 crs.
Banking Non Performing Assets 56

Banking Asset Quality

Banking

Non Performing Assets

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Gross NPAs as % of Total ASSETs

BANKS 2001-2 2002-3 2003-4 2004-5 2005-6 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking

4.60 4.89 5.20 3.90 2.41

4.00 4.21 4.34 3.76 2.44

3.30 3.50 3.64 2.42 2.13

2.52 2.73 3.15 1.56 1.43

1.86 2.09 2.50 0.96 0.96

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Non Performing Assets

Net NPAs as % of Total ASSETs

BANKS 2001-2 2002-3 2003-4 2004-5 2005-6 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking

2.30 2.42 3.23 2.10 0.81

1.90 1.93 2.51 2.116 0.79

1.20 1.28 1.17 1.10 0.66

0.92 0.95 1.39 0.80 0.42

0.66 0.72 0.91 0.43 0.40

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Non Performing Assets

Ne t NPAs as % of T otal Asse ts

3.5 3 Percentages 2.5 2 1.5 1 0.5 0 2001-2 2002-3 2003-4 Ye a rs
Banking Non Performing Assets 60

87 S CB s 28 P S B s 20 OP B s 9 NP B s 30 FB s 2004-5 2005-6

Gross NPAs as % of Total Advancess

BANKS 2001-2 2002-3 2003-4 2004-5 2005-6 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking

10.40 11.09 11.01 8.86 5.38

8.80 9.36 8.86 7.64 5.25

7.20 7.79 7.59 4.99 4.62

5.20 5.53 5.97 3.59 2.85

3.30 3.70 4.30 1.70 1.90

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Non Performing Assets

Net NPAs as % of Total Advances

BANKS 2001-2 2002-3 2003-4 2004-5 2005-6 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking

5.50 5.82 7.13 4.94 1.89

4.40 4.53 5.54 4.63 1.76

2.90 2.99 3.85 2.36 1.48

2.00 2.06 2.74 1.85 0.86

1.20 1.30 1.60 0.80 0.80

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Non Performing Assets

Ne t NPAs as % of T otal Adv ance s

8 7 6 5 4 3 2 1 0 2001-2 2002-3 2003-4 Ye a rs
Banking Non Performing Assets 63

87 S CB s 28 P S B s 20 OP B s 9 NP B s 30 FB s 2004-5 2005-6

Percentages