Npa - Presentation Transcript

1. NON-PERFORMING ASSETS
2. What is NPA ……
o Non performing advances or non-performing
o Assets (or non-performing loans) are loans
o that are not being repaid or serviced through Interest payments on time.
o def : when interest or other dues to a bank remain unpaid for more than 90 days
the entire bank loan automatically turns a “ Non-Performing Asset ”
3. Indian Economy and NPA’s
o The Indian Economy has been much affected due to lack of infrastructure
facilities, sticky legal system, cutting of exposures to emerging markets by
FII’s,etc.
o Under such a situation it goes without saying that banks are no exception and are
bound to face the heat of a global downturn.
o Banks and FII’s in India hold NPA’s worth around Rs 1,10,000 crores.
4. Global Developments and NPA’s
o The core banking business is of mobilizing the deposits and utilizing it for lending
to industry.
o Lending business is encouraged which helps in productive purposes which results
in economic growth.
o However lending also carries credit risk, which arises from the borrower’s
inability to repay it .
5. How much risk can a bank afford to take?
o Recent happenings in the business world-Enron, Worldcom, Xerox, global
crossing do not give much confidence to banks.
o The history of FII’s also reveals the fact that the biggest banking failures were due
to credit risk.
o Due to this, banks are restricting their lending operations to secured avenues only
with adequate collateral on which to fall back upon in a situation of default.
6. Why NPA’s have become an issue for banks and FII’s in India?
o The origin of the problem of burgeoning NPA’s lies in the quality of managing
credit risk by the banks concerned.
o What is needed is having adequate preventive measures in place namely, fixing
pre-sanctioned appraisal responsibility & having an effective post-disbursement
supervision.
o Banks concerned should continuously monitor loans to identify accounts that have
potential to become non-performing.
7. Resolution of NPA’s
o At present, local banks are saddled with the management of NPA’s for which they
do not have management time for proper resolution.
o As a result, they are reluctant to make new loan to industrial or commercial
enterprises as NPA’s have strained their resources.
o The unavailability of new loans has therefore hindered economic growth and
development.
8. Contd……
o ADB intends to assist local banks resolve their problems with NPA’s by
facilitating the financing of SPV’s and other mechanisms designed to acquire and
service such assets.
o This will enable the local banking system to focus on its core operations and
provide financing to productive sectors of economy.
o In addition ADB will assist distressed companies in their restructuring &
rehabilitation efforts.
9. Indian Banking systems – some hard facts
o Gross NPA’s of the financial system is placed at Rs 1,35,000 crore, of which,
over Rs 98,000 crore pertains to Scheduled Commercial Banks (SCB’s) and FII’s.
o Gross NPA’s showed increasing trend over the yrs and accretion to gross NPA’s
by SCB’s during last two fiscals were Rs 24,824 crore(2001-02) & Rs 21,862
crore(2002-03).
10. Contd…….
o This accretion is not considering the cases restructured through CDR mechanism
during 2002-03 and thereafter (Rs 46,000 crore).
o On account of low “Loan to GDP Ratio” (around 60%) in India, the enormity of
NPA’s in India in GDP term appears to be low in comparison with china, korea,
etc.
o 43% of the capital base of the financial system stands eroded on account of net
NPA’s.
11. RBI Guidelines on classification of bank advances
o According to RBI guidelines, bank advances are mainly classified into:
o Standard assets: such an asset is not a Non-Performing Asset.
o Sub-standard assets : it is classified as NPA for a period not exceeding 18 months.
o Doubtful assets: Asset that has remained sub standard for a period of 12 months
(w.e.f. March 31, 2005).
o Loss Assets: here loss is identified by the banks concerned or by internal auditors
or by RBI inspectors.
12. Financial statements in assessing the risk of default for lenders
o For banks and Financial Institutions, both the balance sheet and income statement
have a key role to play by providing valuable information on a borrowers ability
o The key accounting ratios generally used for the purpose of ascertaining the
creditworthiness of a business entity are that of debt-equity ratio & interest
coverage ratio.
13. Measures to reduce NPA’s
o Provision of bad debts from net profit.
o Implementation of Securitisation Act 2002.
o Increasing the share of Retail business i.e., personal loans, vehicle loans, home
loans, credit cards, etc.
o Increasing the deposits.
o Increase lending share to priority sector.
14. High cost of funds due to NPA
 o Quite often genuine borrowers face difficulties in raising funds from banks due to
mounting NPA’s.
o With the enactment of the Securitiastion and Reconstruction of Financial Assets
and enforcement of Security Interest Act, 2002, banks can issue notices to pay up
the dues
o And the borrowers will have to clear the dues within 60 days.
o If the defaulters don’t pay the dues, then the banks can takeover the possession of
assets & also takeover the management of the company.
15. Credit Risk And NPA
o NPAs are a result of past action whose effects are realized in the present
o Credit risk is a much more forward-looking approach and is mainly concerned
with managing the quality of credit portfolio before default takes place
16. Credit Rating
o Credit rating has been explained as forming an opinion of the future ability, legal
obligation and willingness of a bond issuer or obligor to make full and timely
payments on principal and interest due to the investors

Definition by Moody

17. Tangled By Huge NPAs……..WHY

o Indian banks so far were encircled by the chains of regulation and aegis of
protection
o No formal policies, procedures, systems, tools and techniques of credit risk
assessment
18. At The Mercy Of Balance Sheet
o Operating margin
o Current ratio
o cash flow
o Fund flow
19. Perception and reality may differ 180*
o Accounting policies has loopholes
o Chartered Accountants make their balance sheet look as they want it to look like
o Past performance is no indicator of the future performance ideally
20. Darling Of Bourses Takes A Hit
o Hasty commitments to expand rapidly by rediff have brought it to red
o Its share price is ruling well below its issue price
o So relying completely on the past ratios meant no monitoring of the management
decisions and no control over their decisions
21. Collateral-A Defensive Approach
o Collateral was another way to judge the credit quality
o A client is good if she had attractive assets to put as collateral and bad otherwise.
o Poor decision making-accepted clients of poor quality and rejected the clients of
good quality
o Collateral is hardly a security
22. Credit Risk Techniques
 o Quantitative
 Ratio analysis
 Fund flows
 Mathematical models
o Qualitative
 Policies
 Procedures
 Concentration
23. Playing with Precision
o Altman's Z Score predicts whether or not a company is likely to enter into
bankruptcy within one or two years
o the algorithm has been consistently reported to have a 95 % accuracy of
prediction of bankruptcy
o Consideration-current assets, total assets, net sales, interest, total liability, current
liabilities, market value of equity, earnings before taxes and retained earnings
24. Play or Leave
o 3.0 or more : Most likely safe
o 2.8 to 3.0 : Just safe
o 1.8 to 2.7 : likely to bankrupt in two years
o Below 1.8 : Recovery least expected
25. Getting The Combination Right
o Credit metrics works on the statistical concepts like probability, means, and
standard deviation, correlation, and concentrations
26. Credit Metrics-Application
o Reduce the portfolio risk : reevaluate obligors having the largest absolute size
arguing that a single default among these would have the greatest impact
o reevaluate obligors having the highest percentage level of risk arguing that these
are the most likely to contribute to portfolio losses
27. Balancing Act
o Identifying the correlations across the portfolio so that the potential concentration
may be reduced and the portfolio is adequately diversified across the uncorrelated
constituents
o Concentration may lead to an undue accumulation of risk at one point.
28. ARCIL
o system-wide clean up of NPAs result in creation of Asset Reconstruction
Company
o Governments may also provide special powers to ARCs that are not otherwise
available to banking system
29. ARCIL Objectives
o Convert NPA into performing assets
o Act as nodal agency for NPA resolution
o Create a vibrant market for NPA estructured debt
o Re-energize the financial sector.
30. Transaction Structure
31. Transaction Structure- Stage-2
32. ARCIL- International Examples
o In 1980s, U.S. used government sponsored ARC - Resolution Trust Corporation
(RTC) to overcome thrift crisis. RTC acted as a “bad bank” and functioned as an
effective sales mechanism for disposal of assets
o In early 1990s Mexico and Sweden demonstrated successful use of ARC
mechanism (Fobaproa and Securum respectively) as a “bad bank” and to clean
and reprivatise/ recapitalise the banks
o Korea used KAMCO as the nodal agency for acquiring and disposing NPAs.
KAMCO has used securitisation and joint venture route for investor participation
in the assets
33. Indian Financial System -2003-04
34. Quantitative Factors
 Carrying Cost of NPAs 6.50%
 Management Cost 0.75%
 Total Cost 7.25%
 Net NPAs of banks/FIs is Rs. 470 billions
 Total holding Cost comes to Rs. 35 billions p.a. for banks/FIs.
 Which is around 20% of the reported Net profit (i.e., including non-core
income)
35. Qualitative Factors
o Banks fail to get “Interest spread” on the net realizable value of NPAs so long
they carry them in their books.
o Reduction of Risk Adjusted Capital Adequacy Ratio (RACAR). RBI deducts net
NPA from capital and risk weighted assets to compute RACAR.
o Carrying NPAs in books affects Rating and Capital mobilization.
36. MANAGING NPA
o There are two issues, which, if tackled properly, would efficiently solve the
problem of NPAs viz.
o (i) ‘STOCK’ ( accumulation of NPAs) problem and
o (ii) ‘FLOW’ ( accretion ) problem.
o Several measures like Lok Adalat, DRTs( Debt Recovery
Tribunals),Strengthening of credit appraisal and monitoring system have been
initiated by the regulators to tackle the ‘flow’ problem.
o Towards resolution of the ‘stock’ problem of NPAs GOI took proactive steps and
enacted the Securitasation & Reconstruction Act 2002 in December 2002.
37. MANAGING NPA- Models
o Globally there have been two models:
o (i) A central disposition agency which takes
o bad loans from all financial institutions or
o (ii) An entity specific to a particular bank or a group of banks e.g. Arcil.
38. MANAGING NPA- Resolution Strategy
o There are primarily two strategies
o (I) Loan Management Strategy
o - Restructuring of loan on sustainable debt considerations
o - Maximise overall recovery value
 o - Fair treatment to all stakeholders
o - One Time Settlement
39. MANAGING NPA- Resolution Strategy
o (II) Asset Management Strategy
o - Disposition by strip sale
o - Change in management
o - Takeover of assets
o - Legal route / Foreclosure
40. MANAGING NPA-Indian Approach
o The Indian system envisages multiple ARCs(Asset Reconstruction Company) as
non government entities with equity support of promoters.
o The ARCs in India are not supported by through Govt. funding and are not
structured like a Central disposition agency.
41. MANAGING NPA-Through ARCs
o ARCs are governed by the provisions of
o Securitisation Act 2002 and operates within the perview of RBI guidelines.
o The salient features of the Securitisation Act in respect of ARCs are as follows:
o - Unfettered right to the lenders acting in majority (> 75% by value) to enforce
security rights without judicial intervention
42. Salient Features ….
o - Establishment & empowerment of ARCs
o No single investor / sponsor to have majority control over ARCs
o - Paves way for debt aggregation in ARCs by enabling acquisition of assets
o - Accords ARCs the rights of the lenders
o - Additional rights to ARCs – not available with lenders
o Sale or lease of businesses by superceding board powers
o -Enables foreign investor participation
43. MANAGING NPA
o MEASURES FOR RECONSTRUCTION ( SECTION 9)
o - Change in or takeover of management of business of the borrower
o - Sale or lease of part or whole business of the borrower
o (Above two powers not available as of now, because RBI guidelines have not
been issued for the same)
44. MANAGING NPA
o - Rescheduling of payment of debt
o - Enforcement of security interest in accordance with the Act
o - Settlement of dues payable by the borrower
o - Taking possession of secured assets in accordance with the Act
45. Key Isuues before ARCs
o Valuation of NPA
o Debt Aggregation
o Legal & Regulatory
46. Suggestions and Conclusion
o Siphoning off money or diversion of loans from banks should be erased from
criminal offence.
o Government funding/guarantee in some form should be available for transfer of
assets to ARCs.
o Banks should restrain itself from lending to just about anything that is in fashion.