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 ³ 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««

Contd««. o Implementation of Securitisation Act 2002. personal loans. o Loss Assets: here loss is identified by the banks concerned or by internal auditors or by RBI inspectors. Indian Banking systems ± some hard facts o Gross NPA¶s of the financial system is placed at Rs 1. o 43% of the capital base of the financial system stands eroded on account of net NPA¶s. korea.824 crore(2001-02) & Rs 21. Financial statements in assessing the risk of default for lenders o For banks and Financial Institutions. Measures to reduce NPA¶s o Provision of bad debts from net profit.000 crore pertains to Scheduled Commercial Banks (SCB¶s) and FII¶s. March 31.f. 2005). o In addition ADB will assist distressed companies in their restructuring & rehabilitation efforts. vehicle loans. o . o Increase lending share to priority sector. o This accretion is not considering the cases restructured through CDR mechanism during 2002-03 and thereafter (Rs 46. o Sub-standard assets : it is classified as NPA for a period not exceeding 18 months.35. 14. 10. bank advances are mainly classified into: o Standard assets: such an asset is not a Non-Performing Asset.e. home loans. etc. 13. o Increasing the share of Retail business i.e. 12.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.000 crore. of which. 9. o This will enable the local banking system to focus on its core operations and provide financing to productive sectors of economy. etc.. over Rs 98. o Increasing the deposits. the enormity of NPA¶s in India in GDP term appears to be low in comparison with china. 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. o Doubtful assets: Asset that has remained sub standard for a period of 12 months (w. o On account of low ³Loan to GDP Ratio´ (around 60%) in India.000 crore). RBI Guidelines on classification of bank advances o According to RBI guidelines. credit cards.862 crore(2002-03). 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. 11. High cost of funds due to NPA o Quite often genuine borrowers face difficulties in raising funds from banks due to mounting NPA¶s.

With the enactment of the Securitiastion and Reconstruction of Financial Assets and enforcement of Security Interest Act. 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. then the banks can takeover the possession of assets & also takeover the management of the company. o If the defaulters don¶t pay the dues. 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. legal obligation and willingness of a bond issuer or obligor to make full and timely payments on principal and interest due to the investors o Definition by Moody 17. 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. systems. 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.WHY o Indian banks so far were encircled by the chains of regulation and aegis of protection o No formal policies. banks can issue notices to pay up the dues o And the borrowers will have to clear the dues within 60 days. 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. 15. o Poor decision making-accepted clients of poor quality and rejected the clients of good quality o Collateral is hardly a security 22. Tangled By Huge NPAs««. procedures. Credit Rating o Credit rating has been explained as forming an opinion of the future ability. Credit Risk Techniques o Quantitative  Ratio analysis  Fund flows . 2002..

total liability. Play or Leave o 3. used government sponsored ARC . 28.0 or more : Most likely safe o 2. 30. earnings before taxes and retained earnings 24. and concentrations 26.Mathematical models o Qualitative  Policies  Procedures  Concentration 23.Resolution Trust Corporation (RTC) to overcome thrift crisis. ARCIL.International Examples o In 1980s. U.7 : likely to bankrupt in two years o Below 1. interest. 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.Stage-2 32.0 : Just safe o 1.8 : Recovery least expected 25. net sales.S. RTC acted as a ³bad bank´ and functioned as an effective sales mechanism for disposal of assets  . correlation. 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. Getting The Combination Right o Credit metrics works on the statistical concepts like probability. 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. market value of equity. means. 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.8 to 3. Transaction Structure. current liabilities. and standard deviation. total assets.8 to 2. 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. Transaction Structure 31.

 Which is around 20% of the reported Net profit (i. MANAGING NPA. 470 billions  Total holding Cost comes to Rs. o (i) µSTOCK¶ ( accumulation of NPAs) problem and o (ii) µFLOW¶ ( accretion ) problem. would efficiently solve the problem of NPAs viz.Resolution Strategy o (II) Asset Management Strategy o .One Time Settlement 39.50%  Management Cost 0. Arcil. DRTs( Debt Recovery Tribunals).e. which.g. including non-core income) 35.75%  Total Cost 7. RBI deducts net NPA from capital and risk weighted assets to compute RACAR..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. 35 billions p. 36.a.Disposition by strip sale o .Fair treatment to all stakeholders o .Maximise overall recovery value o . KAMCO has used securitisation and joint venture route for investor participation in the assets 33. Indian Financial System -2003-04 34.25%  Net NPAs of banks/FIs is Rs. Quantitative Factors  Carrying Cost of NPAs 6. MANAGING NPA. MANAGING NPA o There are two issues. if tackled properly. 38. 37. Qualitative Factors o Banks fail to get ³Interest spread´ on the net realizable value of NPAs so long they carry them in their books. o Carrying NPAs in books affects Rating and Capital mobilization. for banks/FIs. o Reduction of Risk Adjusted Capital Adequacy Ratio (RACAR).Strengthening of credit appraisal and monitoring system have been initiated by the regulators to tackle the µflow¶ problem. o Towards resolution of the µstock¶ problem of NPAs GOI took proactive steps and enacted the Securitasation & Reconstruction Act 2002 in December 2002. MANAGING NPA. o Several measures like Lok Adalat.Restructuring of loan on sustainable debt considerations o .Resolution Strategy o There are primarily two strategies o (I) Loan Management Strategy o .In early 1990s Mexico and Sweden demonstrated successful use of ARC mechanism (Fobaproa and Securum respectively) as a ³bad bank´ and to clean and reprivatise/ recapitalise the banks o Korea used KAMCO as the nodal agency for acquiring and disposing NPAs.

Settlement of dues payable by the borrower o .Rescheduling of payment of debt o . MANAGING NPA o MEASURES FOR RECONSTRUCTION ( SECTION 9) o .Paves way for debt aggregation in ARCs by enabling acquisition of assets o . o Banks should restrain itself from lending to just about anything that is in fashion. because RBI guidelines have not been issued for the same) 44. Suggestions and Conclusion o Siphoning off money or diversion of loans from banks should be erased from criminal offence.Sale or lease of part or whole business of the borrower o (Above two powers not available as of now. o The ARCs in India are not supported by through Govt.Establishment & empowerment of ARCs o No single investor / sponsor to have majority control over ARCs o .Change in management . 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 Government funding/guarantee in some form should be available for transfer of assets to ARCs. Salient Features «. o o o . 41.Unfettered right to the lenders acting in majority (> 75% by value) to enforce security rights without judicial intervention 42. o ..Takeover of assets . o The salient features of the Securitisation Act in respect of ARCs are as follows: o .Change in or takeover of management of business of the borrower 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.Taking possession of secured assets in accordance with the Act 45.Accords ARCs the rights of the lenders o .Enforcement of security interest in accordance with the Act 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 . Key Isuues before ARCs o Valuation of NPA o Debt Aggregation o Legal & Regulatory 46. funding and are not structured like a Central disposition agency.

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