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NPA

INTRODUCTION
Banking sector reforms in India has progressed promptly on aspects
like interest rate deregulation, reduction in statutory reserve requirements,
prudential norms for interest rates, asset classification, income recognition
and provisioning.
But it could not match the pace with which it was expected to do. The
accomplishment of these norms at the execution stages without restructuring
the banking sector as such is creating havoc.
This research paper deals with the problem of having non-performing
assets, the reasons for mounting of non-performing assets and the practices
present in other countries for dealing with non-performing assets.
During pre-nationalization period and after independence, the banking
sector remained in private hands Large industries who had their control in the
management of the banks were utilizing major portion of financial resources of
the banking system and as a result low priority was accorded to priority
sectors.
Government of India nationalized the banks to make them as an
instrument of economic and social change and the mandate given to the
banks was to expand their networks in rural areas and to give loans to priority
sectors such as small scale industries, self-employed groups, agriculture and
schemes involving women.
To a certain extent the banking sector has achieved this mandate. Lead
Bank Scheme enabled the banking system to expand its network in a planned
way and make available banking series to the large number of population and
touch every strata of society by extending credit to their productive endeavors.
This is evident from the fact that population per office of commercial
bank has come down from 66,000 in the year 1969 to 11,000 in 2004.
Similarly, share of advances of public sector banks to priority sector increased
form 14.6% in 1969 to 44% of the net bank credit.
The number of deposit accounts of the banking system increased from
over 3 crores in 1969 to over 30 crores. Borrowed accounts increased from
2.50 lakhs to over 2.68 crores.

DEFINITION:A loan or lease that is not meeting its stated principal and interest
payments. Banks usually classify as nonperforming assets any commercial
loans which are more than 90 days overdue and any consumer loans which
are more than 180 days overdue. More generally, an asset which is not
producing income.

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NON PERFORMING ASSET

Action for enforcement of security interest can be initiated only if the
secured asset is classified as Non Performing Asset.
Non Performing Asset means an asset or account of borrower, which
has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it
has not been paid within 30 days from the due date. Due to the
improvement in the payment and settlement systems, recovery climate, up
gradation of technology in the banking system, etc.
It was decided to dispense with 'past due' concept, with effect from
March 31, 2001. Accordingly, as from that date, a Non performing asset
(NPA) shell be an advance where
i.

Interest and /or installment of principal remain overdue for a period of
more than 180 days in respect of a Term Loan,

ii.

The account remains 'out of order' for a period of more than 180 days,
in respect of an overdraft/ cash Credit(OD/CC),

iii.

The bill remains overdue for a period of more than 180 days in the
case of bills purchased and discounted,

iv.

Interest and/ or installment of principal remains overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purpose, and

v.

Any amount to be received remains overdue for a period of more than
180 days in respect of other accounts.

With a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the '90 days overdue' norm
for identification of Naps, form the year ending March 31, 2004. Accordingly,
with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan
or an advance where;
i.

Interest and /or installment of principal remain overdue for a period of
more than 90 days in respect of a Term Loan,

ii.

The account remains 'out of order' for a period of more than 90 days, in
respect of an overdraft/ cash Credit(OD/CC),

iii.

The bill remains overdue for a period of more than 90 days in the case
of bills purchased and discounted,

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NPA

iv.

Seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purpose, and

v.

Any amount to be received remains overdue for a period of more than
90 days in respect of other accounts.

“OUT

OF

ORDER”

An account should be treated as 'out of order' if the outstanding
balance remains continuously in excess of the sanctioned limit/ drawing
power. In case where the outstanding balance in the principal operating
account is less than the sanctioned limit/ drawing power.
But there are no credits continuously for six months as on the date of
balance sheet or credits are not enough to cover the interest debited during
the same period, these account should be treated as 'out of order'.

“OVERDUE”
Any amount due to the bank under any credit facility is 'overdue' if it is
not paid on the due date fixed by the bank.

Classification of Assets as Non-Performing
An asset becomes non-performing when it ceases to generate
Income for the bank. Earlier an asset was considered as nonperforming
Asset (NPA) based on the concept of 'Past Due'. A ‘non
Performing asset’ (NPA) was defined as credit in respect of which
Interest and/ or installment of principal has remained ‘past due’ for
A specific period of time. The specific period was reduced in a

Phased manner as under:
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Year ended March, 31 Specific period
------------------------------ --------------------1993 4 quarters
1994 3 quarters
1995 2 quarters
An amount is considered as past due, when it remains outstanding for
30 days beyond the due date. However, with effect from March 31, 2001 the
‘past due’ concept has been dispensed with and the period is reckoned from
the due date of payment.
With a view to moving towards international best practices and to
ensure greater transparency, '90 days' overdue* norms for identification of
NPAs have been made applicable from the year ended March 31, 2004. As
such, save and except certain relaxations mentioned at Para 2.1.3 and 2.1.4
below, with affect from March 31, 2004, a non-performing asset shall be a
loan or an advance where:
(I) Interest and/or installment of principal remain overdue for a period of
more than 90 days in respect of a Term Loan.
(ii) The account remains 'Out of order'@ for a period of more than 90
days, in respect of an Overdraft/ Cash Credit
(OD/CC).
(iii) The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted,
(iv) In the case of direct agricultural advances as listed in Annex 1, the
overdue norm specified at Para 2.1.5 would be applicable. In respect of
agricultural loans, other than those specified in Annex 1, identification
of NPAs would be done on the same basis as non-agricultural
advances.
(v) Any amount to be received remains overdue for a period of more
than 90 days in respect of other accounts. Any amount due to the bank
under any credit facility, if not paid by the due date fixed by the bank
becomes overdue.

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“An account should be treated as 'out of order' if the
outstanding balance remains continuously in excess of the sanctioned
limit/drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing
power, but there are no credits continuously for 90 days or credits are
not enough to cover the interest debited during the same period, these
accounts should be treated as 'out of order'”.

Unit banks i.e. banks having a single branch/ HO with deposits
unto Rs. 100 crore and banks having multiple branches within a single
district with deposits upto Rs. 100 crore have been permitted to classify
loan accounts as NPAs based on 180 days delinquency norm instead
of the extant 90 days norm.
This relaxation will be in force for three financial years i.e.
financial years ended/ ending March 31, 2005, 2006 and 2007.
The details of the changes and the consequent impact on the
existing instructions with regard to asset classification and income
recognition in respect of these banks are given in the Annex 5.
The deposit base of Rs. 100 crore for the above will be
determined on the basis of average of the fortnightly Net Demand and
Time Liabilities in the financial year concerned. For the above category
of banks, an account would be classified as Non Performing Asset if
the:
(I) Interest and/or installment of principal remain overdue for a period of
more than 180 days in respect of a Term Loan.
(ii) The account remains 'Out of order' for a period of more than 180
days, in respect of an Overdraft/Cash Credit (OD/CC).
(iii) The bill remains overdue for a period of more than 180 days, in the
case of bills purchased and discounted.
(iv) Any amount to be received remains overdue for a period of more
than 180 days in respect of other accounts.
The relaxations are given for the explicit purpose of enabling the UCBs
concerned to transit to the 90 day NPA norm in the year 2007-2008 by
building up adequate provisions and strengthening their appraisal,
disbursement and post disbursement procedures.

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(ii) For the purpose of these guidelines. would be as determined by the State Level Bankers' Committee in each state. other than those specified in the Annex 1 and term loans given to nonagriculturists.B.TY B. the above NPA norms would also be made applicable to agricultural term loans availed of by him. which means the period up to harvesting of the crops rose. In respect of agricultural loans. 52 .3 shall classify their loan accounts as NPA as per 90 day norm as hitherto. if the installment of principal or interest thereon remains overdue for one crop season. Gold loans and small loans up to Rs. (iii) The crop season for each crop. 2007. at present. they will be governed by the 180-day norm as thereto. 2004 the following revised norms are applicable to all direct agricultural advances (as listed in the Annex a) A loan granted for short duration crops will be treated as NPA. 1 lakh will be governed by the 90-day norm with effect from the year ending March 31. is the 90 days delinquency norm. Till then. b) A loan granted for long duration crops will be treated as NPA. (iv) Depending upon the duration of crops raised by an agriculturist.1. Agricultural Advance (i) With effect from September 30. identification of NPAs would be done on the same basis as non-agricultural an advance which. realistic repayment schedules are fixed on the basis of cash flows / fluidity with the borrowers. which are not "long duration" crops would be treated as "short duration" crops. "long duration" crops would be crops with crop season longer than one year and crops.I NPA All UCBs other than those referred to at Para 2. However. if the installment of principal or interest thereon remains overdue for two crop seasons. (v) Banks should ensure that while granting loans and advances.

Banks should also make provisions for NPAs as at the end of each calendar quarter i.e. (iii) While compounding interest at monthly rests effective from April 1.TY B. (ii) The existing practice of charging/compounding of interest on agricultural advances would be linked to crop seasons and the instructions regarding charging of interest on monthly rests shall not be applicable to agricultural advances.f. 52 . the date of classification of an advance as NPA as stated in proceeding pares. they should re-align the rates suitably keeping in view the minimum lending rate charged by the bank (in view of the freedom given to them for fixing lending rates) so that they comply with the same.I NPA Identification of assets as NPAs should be done on an ongoing basis The system should ensure that identification of NPAs is done on an ongoing basis and doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per prescribed norms. 2003 banks should ensure that in respect of advances where administered interest rates are applicable. so that the income and expenditure account for the respective quarters as well as the P&L account and balance sheet for the year end reflects the provision made for NPAs. 2004 and consequential need for close monitoring of borrowers' accounts. In all other cases also.B. However. banks should ensure that the effective rate does not go up merely on account of the switchover to the system of charging interest on monthly rests. Charging of interest at monthly rests I) Banks should charge interest at monthly rests in the context of adoption of 90 days norm for recognition of loan impairment w.e. from the year ended March 31. should not be changed on account of charging of interest at monthly basis. as at the end of March/ June/ September/ December.

the date of a NPA account would be the actual date on which the slippage occurred. 3.TY B. The guidelines issued by Credit Monitoring Cell (CMC) CAD. Identification and monitoring of potential NPA / stressed assets: Indention of potential NPA account as its incipient stage of sickness and initiating immediate corrective measures is the most important step for preventing an asset from becoming NPA. It will conduct its meeting every fortnight. If an account is regularized before the balance sheet date by repayment of overdue amount through genuine sources (not by sanctioning of additional facilities or transfer of funds between accounts). The cell headed by Regional Manager would comprise Regional Manager. Reckoning of NPA : A NPA account to be identified based on its status / position of the accounts erosion in security as on the date of balance sheet of the bank. the account need not be treated as NPA. It has been decided to constitute a NPA Prevention cell at the ROs to monitor the Standard-B accounts and to ensure the prevention of their slippage to NPA. Regional Manager and Credit Officer. HO should be followed in this regard. Dy. It has. 2.B. 52 . Constitution pf NPA Prevention Cell at the ROs.I NPA NPA MANAGEMENT IDENTIFICATION OF POTENTIAL NPA / STRESSED ASSETS 1. Nevertheless. to be ensured that in the account remains in order subsequently and a solitary or few credits made in the account on or before the balance sheet date which extinguishes the overdue amount of interest or installment of principal is not reckoned as the sole criterion for treating the asset as standards one. however.

to be watched and addressed to. if any. problem character of the A\c. Review and reporting of potential NPA / Stressed assets Following steps be taken for review and reporting of potential NPA / Stressed Assets: Step-1: Analysis of reason of deterioration of health. . Step-2: Close interaction with the borrower.  Regional Manager to cell for the explanation from the Branch Managers whose performance in recovery is far from satisfactory. The entire process should be completed within a time frame of 30 days. 4. Step-3: Advice the borrower to correct the irregularity immediately in a time bound manner and obtain his categorical assurance. drawing the attention of the borrower to the irregularity / deterioration in he asset quality / signs of weakness in the account. NPA accounts and identify the accounts for restructuring. Step-4: Corrective measures for prevention of slippages: 52  Review the account and consider sanction of need based working capital limits on merits. visit to the unit.B.  Identify Stressed Assets accounts and consider restructuring / realignment / re-schedulement on merits. CAD Head Office. close and frequent monitoring of the account.  The cell will send information on fortnightly basis to CMC.I NPA ITS FUNCTION WILL BE AS UNDER:  To examine the information received from branches relating to Standard ‘B’ (based on 60 days norms).  To review the performance of the existing restructured accounts including BIFR and CDR cases. if the present limits are inadequate.  Early warning signal.TY B. signs of sickness.

TY B. (iv) Stock Statements: Branches should obtain stock statements at monthly intervals regularly. and follow up Following measures should be put in place. the details on the above aspects and suggesting specific corrective measures in time. Step-5: Report to the next higher authority. 5.B. as per norms are the most important steps. enforceability. stocks and assets by Bank officials or through duly appointed concurrent auditors as per norms for effective monitoring of the accounts. the outstanding in the A/C based on the drawing powers calculated from stock statements older than 3 months would be deemed as irregular and if such irregular drawings are permitted for 90 days continuously. As per RBI guidelines. (iii) Legal Formalities: Formalities like obtaining / execution of documents / search certificates. (i) Terms and condition of the sanction: Terms and condition of sanction have to be strictly complied with (ii) Verification: Verification of end use of the funds. Step-6: Implement the corrective action and report to higher authority.  Verification of existence of primary / collateral security of the borrower. Maintaining the Assets Quality : Post sanction monitoring. (ii) correctness of ROD (iii) insurance covers (iv) value/marketability of prime/collateral security eye. completion of equitable mortgage formalities etc. supervision.I NPA  Verification of (i) the documents for its correctness. 52 . registration of charges. the A/C will be NPA. timely revival of the documents.

if there is no specific term as regards appropriation of recovery in the decrial terms. The same norm will be applicable to the compromised accounts also. Doubtful or loss categories strictly as per prudential norms. if any. especially in high value accounts due to willful non-compliance of RBI guidelines by any official responsible for classification then RBI may initiate deterrent action including imposition of monetary penalty. b) Decreed accounts: In case of decreed accounts where there is no compromise settlement amount recovered should be appropriated as per the decretal terms. It will be their responsibility to finalize and eliminate delay or postponed of identification of NPA.TY B. Appropriation of recovery in NPAs: a) Non decreed accounts: In case of NPA accounts in all categories i. However.I (v) NPA Stock audit: Stock audit is to be conducted every year in every NPA account with outstanding limit of Rs 1 crore and above. especially high value advances are properly classified into standard. Doubtful and Loss appropriated first against outstanding in the account and the surplus available. Sub standard. However. Sub-std. Management of NPA: The RMs personally verify and ensure that all accounts. 7. is to be taken to interest / income.B. In case of doubts due to any reason. RMs may seek guidance from HO and settle the matter within one month from the date on which the account would have been classified as NPA as per norms. wherever current assets are depleted or unit is closed. It may be noted that if RBI observes any divergences in asset classification. 52 . 6. the stipulation may be exempted.e. the recovery should be appropriated first towards Principal and the balance towards interest.

I NPA c) Appropriation of ECGC claim amount in NPA Accounts: As per the existing procedure. Bank is expected to keep the claim amount received from the ECGC in a separate memorandum account and pursue recovery efforts against the concerned Exporter borrower for the full amount of dues inclusive of the claim amount settled.B.TY B. 52 .

the Health Code based system for classification of advances has ceased to be a subject of supervisory interest. The requirements of the State Co-operative Societies Acts and / or rules made thereunder or other statutory enactments may continue to be followed.B. the policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Narasimham). prudential norms for income recognition. The provisioning should be made on the basis of the classification of assets into different categories. the classification of assets of banks has to be done on the basis of objective criteria. etc. the Reserve Bank has introduced. all related reporting requirements. if they are more stringent than those prescribed hereby. asset classification and provisioning for the advances portfolio of the primary (urban) co-operative banks. With the introduction of prudential norms. PROVISIONING & OTHER RELATED MATTERS GENERAL In order to reflect a bank's actual financial health in its balance sheet and as per the recommendations made by the Committee on Financial System (Chairman Shri M. which would ensure a uniform and consistent application of the norms.TY B. ASSET CLASSIFICATION. Likewise. As such. 52 . in a phased manner. Availability of security or net worth of the borrower/ guarantor should not be taken into account for the purpose of treating an advance as nonperforming asset or otherwise. but could be continued in the banks entirely at their discretion and the management policy. also ceased to be a supervisory requirement. Broadly. if felt necessary .I NPA MASTER CIRCULAR ON INCOME RECOGNITION.

Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power. each bank may classify the borrower accounts according to its own record of recovery and other aspects having a bearing on the recoverability of the advances.1 above.I NPA TREATMENT OF ACCOUNTS AS NPAS Record of Recovery (i)The treatment of an asset as NPA should be based on the record of recovery. In such cases. however. in respect of consortium advances or financing under multiple banking arrangements. However. all the facilities granted by the bank will have to be treated as NPA and not the particular facility or part thereof which has become irregular. it should. (ii) However. 52 . be ensured that the accounts remain in order subsequently and a solitary credit entry made in an account on or before the balance sheet date which extinguishes the overdue amount of interest or installment of principal is not reckoned as the sole criteria for treatment the account as a standard asset. the accounts need not be treated as NPAs. balance outstanding exceeding the limit. where the accounts of the borrowers have been regularized by repayment of overdue amounts through genuine sources (not by sanction of additional facilities or transfer of funds between accounts). (ii) A credit facility should be treated as NPA as per norms given in paragraph 2.B. etc. the asset should be treated as NPA. or the recoverability of the advances is in doubt. Treatment of NPAs – Borrower-wise and not Facility-wise (I) In respect of a borrower having more than one facility with a bank. No submission of stock statements and the non-renewal of the limits on the due date.TY B. Where there is a threat of loss.

B. The asset classification of these loans would. primary (urban) co-operative banks. 52 . and (b) sanction fresh short-term loans (ii) In such cases of conversion or re-schedulement.TY B. therefore.I NPA Agricultural Advances – Default in repayment due to natural Calamities (I) Where natural calamities impair the repaying capacity of agricultural borrowers. the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as non performing asset (NPA). interest need not be considered as overdue from the first quarter onwards. as a relief measure may decide on their own to: (a) convert the short-term production loan into a term loan or re-schedule the repayment period. Housing Loan to Staff In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal. Such loans/ advances should be classified as NPA only when there is a default in repayment of installment of principal or payment of interest on the respective due dates. be governed by the revised terms and conditions and these would be treated as NPA under the extant norms applicable for classifying agricultural advances as NPAs.

if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days irrespective of the fact whether the guarantee have been invoked or not.TY B. (iii) From the year ended March 31.I NPA CREDIT FACILITIES GUARANTEED BY CENTRAL /STATE GOVERNMENT (I) The credit facilities backed by guarantee of the Central Government though overdue should not be treated as NPA. They become overdue after due date for payment of interest. (ii) This exemption from classification of government guaranteed advances as NPA is not for the purpose of recognition of income. such amounts of interest do not become overdue and hence NPA. (i) Where a unit commences commercial production. it may be necessary to re-fix the repayment schedule. if uncollected. the Board of Directors of the bank may lay down broad parameters for guidance of the staff for taking a view whether the unit has stabilized commercial production and there is a need for rescheduling of the loan to treat such advance as NPA or not. but the level and volume of production reached immediately after the date of completion of the project is not adequate to generate the required cash flow to service the loan. with reference to the date of debit of interest. Project Financing Therefore. In such cases. 2006. State Government guaranteed advance and investment in State Government guaranteed securities would attract asset classification and provisioning norms. the following points may be kept in view: 52 . In framing these parameters.B.

TY B. etc. the decision as to whether the borrowing unit has achieved regular commercial production and there is a need for rescheduling may be taken by the lead institution or lead bank and other participating institutions/banks may follow the same. 52 . (ii) In respect of credit facilities sanctioned under consortium arrangements. the main guiding factor would be whether the unit has achieved cash break-even in order to service the loan. the bottleneck in achieving regular commercial production is of a temporary nature not indicative of any long-term impairment of the unit's economic viability and it is likely to achieve cash break even if some time is allowed. (ii) In each of the foregoing three stages.I NPA (a) In order to arrive at a decision as to whether the unit/project has achieved regular commercial production. (b) after commencement of commercial production but before the asset has been classified as sub-standard. the rescheduling. the lead time would normally not exceed one year from the schedule of commencement of commercial production as indicated in the terms of sanction. viz. and (c) after commencement of commercial production and the asset has been classified as sub-standard. (iii) (A) TREATMENT OF RESTRUCTURED ACCOUNTS (i) Restructuring/rescheduling/re negotiation of the terms of loan agreement in respect of standard and substandard accounts can take place at three stages.B. (b) If in the opinion of the bank. (a) before commencement of commercial production. (c) However. the bank may reschedule the loan and treat the asset as standard. of principal and/or of interest could take place with or without sacrifice.

falls due. (C) TREATMENT OF STANDARD ACCOUNTS RESTRUCTURED SUB- (I) A rescheduling of the installment of principal alone would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period. provided the loan/credit facility is fully secured. (iii) The substandard accounts which have been subjected to structuring.e. in the element of interest. if any. is either written off or provision is made to the extend the sacrifice involved. one year term the date when the first payment of interest or principal. in the element of interest.B. 52 . (ii) A rescheduling of interest element would render a substandard asset eligible to be continued to be classified in substandard category for the specified period subject to the condition that the amount of sacrifice. subject to satisfactory performance during the period.I NPA (B) TREATMENT OF RESTRUCTURED STANDARD ACCOUNTS (i) A rescheduling of the installments of principal alone. is either written off or provision is made to the extent of the sacrifice involved. at any of the stages at (a) and (b) above would not cause a standard asset to be classified in the substandard category provided the loan/credit facility is fully secured. i. if any. whether in respect of principal installment or interest amount. would be eligible to be upgraded to the standard category only after the specified period.TY B. (ii) A rescheduling of interest element at any of the aforesaid two stages would not cause an asset to be down-graded to sub-standard category subject to the condition that the amount of sacrifice. whichever is earlier. etc.

All other prudential guidelines relating to income recognition. 52 . would be eligible for fresh financing of funding requirements. etc. asset classification and provisioning would remain unaltered. the satisfactory performance during the one ear period is not evidenced. (ii) The aforesaid instructions would be applicable to all types of credit facilities. etc. (iii) These guidelines are not applicable to credit facilities extended to traders. collateral security would also be reckoned.B. etc.I NPA (iv) In case. as per normal policy parameters and eligibility criteria. however. would be applicable to standard and sub-standard assets only. the asset classification of the structured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. provided they are fully covered by tangible securities. (e) General all standard and sub-standard accounts subjected to structuring. (iv) While assessing the extent of security available to the credit facilities. including working capital limit extended to industrial units.TY B. provided such collateral is a tangible security properly charged to the ankh and is not in the intangible form like guarantee. (D) APPLICABILITY (I) The foregoing norms for restructuring.

I NPA ASSET CLASSIFICATION CLASSIFICATION The primary (urban) co-operative banks should classify their assets into the following broad groups. (I) Standard Assets (ii) Sub-standard Assets (iii) Doubtful Assets (iv) Loss Assets DEFINITIONS Standard Assets Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. 2005 an asset would be classified as sub-standard if it remained NPA for a period less than or equal to 12 months. Sub-standard Assets (i) With effect from March 31. 52 . such assets will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss. if deficiencies are not corrected. In other words.B. In such cases. Such an asset should not be an NPA.TY B. the current net worth of the borrowers/ guarantors or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. viz.

Note: Consequent to change in asset classification norms w. 2005. unless there is satisfactory compliance of this condition. As in the case of sub-standard assets. highly questionable and improbable. A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard. March 31.B. with a minimum of 10 % of the required provision in each of the first two years and the balance in equal installments over the subsequent three years .e. 2005 banks are permitted to phase the consequent additional provisioning over a five year period commencing from the year ended March 31. if it has remained NPA for more than 12 months. wholly or partly. 2005. rescheduling does not entitle the bank to upgrade the quality of an advance automatically. such an asset is considered un-collectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off. should be classified as substandard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms.f. the classification of an asset should not be upgraded merely as a result of rescheduling. 52 . an asset is required to be classified as doubtful. In other words.TY B. on the basis of currently known facts. conditions and values. In other words. Doubtful Assets With effect from March 31.I NPA (ii) An asset where the terms of the loan agreement regarding interest and principal have been re-negotiated or rescheduled after commencement of production. with the added characteristic that the weaknesses make collection or liquidation in full.

I NPA Credit monitoring “Keeping a constant watch on the conduct and performance” of the borrower for the purpose of ensuring regular returns and safely of banks funds is termed as ‘credit monitoring’. through various systems. broadly outlined as under:  Conduct and operations in the account  Statements of stocks / book debts and audit thereof.  CREDIT MONITORING MECHANISM :: Traditionally.TY B.B. These are picked up from all possible sources viz.  Inspection / verification of assets charged  Financial Follow up reports (FFR)  Quarterly Review sheets (QRS  Monthly control returns (M1-M9) and M2  D-3 / W-3 Returns  Credit Rating and Periodical Review / Renewals  STEPS IN CREDIT MONITORING: 1. monitoring of advances is being done at various levels starting from the desk officer at the branch to the corporate level. 52 . Detection: There should be early detection of signals that indicate determination in the quality of an account.  Conduct of account  Compliance of terms and conditions of sanction  Business performance  Market reports.

I NPA  Probe : Obtaining regular and comprehensive information on a Bank’s borrower s the step towards effective monitoring system. watch the condition of the security provided. Some of the actions which can be taken are:  Stipulating higher margin on primary security  Asking for more collateral  Influencing business decisions of the borrower  Infusion of fresh funds  Induction of more banks into the consortium  Calling in the loans  Exit from the account. The causes can be:  Incorrect business decisions  Bad intentions  Adverse market conditions  Unplanned expansions  Action : The main action plan of credit monitoring is to be able to act quickly and early. understand the signals supplied by a borrower’s financial and market position. asses the compliance with loan covenants.B. 52 . and grasp / signals are just the symptoms and the causes of these symptoms need to be identified. We need to probe and evaluate the conduct of a borrower’s account.TY B.

this may affect a broad pool of shareholders. some politician would ask the bank to extend the loan to a particular corporate and the bank would oblige. It is common knowledge that loans are given to various industrial houses not on commercial considerations and viability of project but on political considerations. Banking panic follows. 52 .B. (a) When many borrowers fail to pay interest. Banks also redistribute losses to other borrowers by charging higher interest rates. by extension. Lower deposit rates and higher lending rates repress savings and financial markets. In the worst case if the bank fails. (b) Illiquidity constraints bank in paying depositors e. which do not receive funding. Non performing loans may spill over the banking system and spillover effect can canalize through illiquidity or bank insolvency. They misallocate credit from good projects. labour and natural resources. 4. Bad investment ends up in misallocation of capital and. Non performing loans epitomize bad investment. The money stock contracts and economic contraction follows. owners lose their assets. In the worst case.I NPA DIFFICULTY WITH THE NON-PERFORMING ASSETS: 1.TY B. cashing their paychecks. if the bank fails. 2. These shortages can jam payments across the country. Lending by banks has been highly politicized. (c) Undercapitalized banks exceeds the banks capital base. The economy performs below its production potential. A run on banks by depositors as part of the national money stock become inoperative. banks may experience liquidity shortages. Depositors do not receive a market return on savings.g. to failed projects. depositors lose their assets or uninsured balance. Owners do not receive a market return on their capital. 3. which hampers economic growth. In modern times.

while the same depositors are being made to pay through taxes to cover the losses of the bank. the quality of management and so on.I NPA In normal circumstances banks. The loans for the weaker sections of the society and the waiving of the loans to farmers are another dimension of the politicization of bank lending. (b) Measures: (i) Reducing risk by strengthening banks. the prospects of the business in which it is engaged. (iii) Banks are reluctant to lend to the private enterprises because while an NPA of an SOE is financially undesirable. an NPA of a private enterprise is both financially and politically undesirable. (ii) Political and social implications of restructuring big SOE’s force the government to keep them afloat. its track record. Since this is not looked into. would make a thorough study of the actual need of the party concerned.TY B. 52 . Comparative Study with Other Countries. I. before extending any loan. (iv) Courts are not reliable enforcement vehicles. raising disclosure standards and spearheading reforms of the SOE’s by reducing their level of debt.B. Most of the depositor’s money has been frittered away by the banks at the instance of politicians. CHINA: (a) Causes: (i) The State Owned Enterprises (SOE’s) believe that there the government will bail them out in case of trouble and so they continue to take high risks and have not really strived to achieve profitability and to improve operational efficiency. many of the loans become NPAs.

and little attention was paid to earnings performance and cash flows. exemption from administration fees and clear cut asset evaluation norms were implemented. II. (iii) Creation of the Korea Asset Management Corporation (KAMCO) and a NPA fund to fund to finance the purchase of NPAs. (iv) Strengthening of Provision norms and loan classification standards based on forward-looking criteria (like future cash flows) were implemented.B. foreign equity participation in securitization and asset backed securitization. (ii) Corporate Restructuring Vehicles (CRVs) and Debt/Equity Swaps were used to facilitate the resolution of bad loans. (ii) Lack of Monitoring Banks relied on collaterals and guarantees in the allocation of credit. (iv) Incentives like tax breaks. (iii) The government which bore the financial loss of debt ‘discounting’. KOREA: (a) Causes: (i) Protracted periods of interest rate control and selective credit allocations gave rise to an inefficient distribution of funds.TY B. 52 .I NPA (ii) Laws were passed allowing the creation of asset management companies. (b) Measurers: (i) The speedy containment of systemic risk and the domestic credit crunch problem with the injection of large public funds for bank recapitalization. Debt/equity swaps were allowed in case a growth opportunity existed.

(iii) Expansionary fiscal policy measures administered to stimulate the economy supported industrial sectors like construction and real estate. (v) Inadequate accounting systems.B. (iii) Government Support . 52 .TY B.The government’s committed public funds to deal with banking sector weakness. (b) Measures: (i) Amendment of foreign exchange control law (l997) and the threat of suspension of banking business in case of failure to satisfy the capital adequacy ratio prescribed. (ii) Legal mechanisms to dispose bad loans were time consuming and expensive and NPAs remained on the balance sheet.I NPA III. JAPAN: (a) Causes: (i) Investments was made real estate at high prices during the boom. which may further exacerbated the problem. (iv) Weak corporate governance coupled with a no-bankruptcy doctrine. (ii) Accounting standards – Major business groups established a private standard-setting vehicle for Japanese accounting standards (2001) in line with international standards. The recession caused prices to crash and turned a lot of these loans bad.

large haircuts/ write offs. 1997 was introduced in February 1997. (iv) Directed lending where the senior management of the public sector banks gave loans to political heavy weights/ military commanders... i. (iii) Chronic over-capacity/lack of competitive advantage. Advances. (b) Measures: (i) The top management of the banks was changed and appointment of independent directors in the board of directors.. PAKISTAN: (a) Causes: (i) Culture of "zero equity" projects where there was minimal due diligence was done by banks in giving loans coupled with collusive lending and poor corporate governance.. (ii) Poor entrepreneurship..e.TY B.B. (ii) aggressive settlements were done by banks with their defaulting borrowers at values well below the actual debt outstanding and/or the amount awarded through the court process. Credits and Finances) Act. Special banking courts have been established under this Act to facilitate the recovery of non-performing loans and advances from defaulted 52 . (iii) setting up of Corporate and Industrial Restructuring Corporation (CIRC) to take over the non-performing loan portfolios of nationalized banks on certain agreed terms and conditions and issue government guaranteed bonds earning market rates of return (iv) The Banking Companies (Recovery of Loans.I NPA III.

the permission of original sanctioning authority should be obtained giving justification for the same. In the case of sanctions by Managing Committee / Board of Directors.  Proper execution of documentation including timely registration o charge with ROC should be ensured in accordance with the guide lined given in manual of instructions  Conduct of the unit should be examined through monthly Monitoring Statement for any symptoms of weakness in the health of the account. In cases of sanctions by Regional manager / General Manager (Gujarat) / General manager (Credit). sales.  The bank shall carry out dynamic financial analysis by scrutinizing the audited accounts for previous years so as to ascertain the trend of growth in production. and the same should be rectified to set right the account. land and building and other fixed assets should be done periodically should be rectified immediately. profitability and improvement / impairment . such permission shall be obtained from Chairman and Mg Director / Executive Director.  Wherever disbursements under FBL or opening / /issuance of Letters of credit / guarantee is necessary before full compliance to all terms and conditions. Post Disbursement Monitoring 52  Inspection of plant and machinery.TY B. before disbursing funds under FBL or open Letters of Credit or issue any guarantee under NFBL shall keep a certificate on record that all terms and conditions are complied with and that all required documentation is completed in respect of sanction at branch level.I NPA PREVENTION Credit Disbursal Norms  The bank will ensure that the company / borrower have achieved financial closure before disbursement to term loans. Branch.B.  No branch shall disburse funds or open letters of credit or issue any guarantee in respect of any borrower unless all terms and conditions as per sanction terms are complied with.

In case of adverse variations more than 10% or any significant deterioration in the financial health indicated by the Audit Report. the Bank shall review the he financial appraisal based on audited financial statements immediately on receipt. Further. a note shall be put up to the sanctioning authority for information and necessary direction within a month.TY B.I NPA in all important financial parameters in order to know the overall health of the borrower account. the bank will follow a system of introducing disincentives to borrowers who fail to submit audited accounts in time by levying interest rate applicable to next lower credit rating than the one assigned to the borrower beyond six months from closure of a financial year for which audited accounts are not submitted.  The Bank will follow a policy of appraising financial positions of a borrower (for sanction of new limits / enhancement of existing limits and for renewal / /review) based on the audited financial statements of the borrower for previous financial year whoever available.  Where appraisal of financial health of a borrower (for sanction of new limits / enhancement of existing limits and for renewal / review) has been based on unaudited financial statements of the borrower for previous financial year.B. 52 .

TY B.B. Such accounts should be straight away classified as doubtful asset or loss asset. as appropriate. (ii) A similar relaxation is made in respect of SSI units which are identified as sick by banks themselves and where rehabilitation 52 . classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realization of dues. irrespective of the period for which it has remained as NPA. it will not be prudent for the banks to classify them first as sub-standard and then as doubtful after expiry of 12 months from the date the account has become NPA. Advances Granted under Rehabilitation Packages Approved by BIFR/Term Lending Institutions (i) Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been re-negotiated unless the package of re-negotiated terms has worked satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by BIFR/term lending institutions will continue to be classified as sub-standard or doubtful as the case may be in respect of additional facilities sanctioned under the rehabilitation packages the income recognition and asset classification norms will become applicable after a period of one year from the date of disbursement. (ii) In respect of accounts where there are potential threats to recovery on account of erosion in the value of security and existence of other factors such as.I NPA GUIDELINES FOR CLASSIFICATION OF ASSETS Basic Considerations (i) Broadly speaking. frauds committed by borrowers.

I NPA packages/nursing programmers have been drawn by the banks themselves or under consortium arrangements. (ii) Responsibility and validation levels for ensuring proper asset classification may be fixed by the bank. The cut-off point should be valid for the entire accounting year. RBI would initiate deterrent action including imposition of monetary penalties. especially in respect of high value accounts. Internal System for Classification of Assets as NPA (i) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs.B. for fixing accountability. 52 . (iv) RBI would continue to identify the divergences arising due to noncompliance. Where there is willful noncompliance by the official responsible for classification and is well documented.TY B. (iii) The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. The banks may fix a minimum cut-off point to decide what would constitute a high value account depending upon their respective business levels.

interest accrued and credited to income account in the corresponding previous year. commission and similar income with respect to same borrower that have been accrued should ceased to accrue in the 52 . IVPs. Therefore. Reversal of Income on Accounts Becoming NPAs If any advance including bills purchased and discounted becomes NPA as at the close of any year. banks should not take to income account interest on nonperforming assets on accrual basis.B. should be reversed or provided for if the same is not realized This will apply to Government guaranteed accounts also. the interest on such advances should not be taken to income account unless the interest has been realized. If interest income from assets in respect of a borrower becomes subject to non-accrual. KVPs and Life policies may be taken to income account on the due date. NSCs. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. interest on advances against term deposits. Income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. However.TY B. provided adequate margin is available in the accounts.I NPA INCOME RECOGNITION Income Recognition – Policy The policy of income recognition has to be objective and based on the record of recovery. fees. If Government guaranteed advances become 'overdue' and thereby NPA.

However.I NPA current period and should be reversed or provided for with respect to past periods. such income should be booked on cash basis and not on accrual basis. It is simultaneously desirable to show such accrued interest separately or park in a separate account so that interest receivable on such NPA account is 52 . there is no use in debiting the said account by interest accrued in subsequent quarters and taking this accrued interest amount as income of the bank as the said interest is not being received. provided interest is serviced regularly and is not in arrears. The interest component alone should be taken to income account. Interest Application In case of NPAs where interest has not been received for 90 days or more. interest charge) and a charge towards recovery of the cost of the asset. Such income taken to income account. if uncollected. income may be booked on accrual basis. before the asset became NPA. Lease rentals comprise two elements – a finance charge (i. Partial Recovery of NPAs Interest realized on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/additional credit facilities sanctioned to the borrower concerned.B. Booking of Income on Investments in Shares & Bonds As a prudent practice and in order to bring about uniform accounting practice among banks for booking of income on 20 units of UTI and equity of All India Financial Institutions. in respect of income from Government securities/bonds of public sector undertakings and All India Financial Institutions. Banks undertaking equipment leasing should follow prudential accounting standards. where interest rates on the instruments are predetermined. as a prudential norm.TY B.e. and remained unrealized should be reversed or provided for in the current accounting period.

In case the accrued interest in respect of the borrower account is not actually realized and the account has become NPA as at the close of subsequent year.TY B. should be reversed or provided for. With a view to ensuring uniformity in accounting the accrued interest in respect of both the performing and non-performing assets. then the amount of interest so taken to income in the corresponding previous year should be reversed or should be provided for in full. if interest is not actually received for any reason in these cases and the account is to be treated as an NPA at the close of the subsequent year as per the guidelines. the following guidelines may be adopted notwithstanding the existing provisions in the respective State Co-operative Societies Act: (i) Interest accrued in respect of non-performing advances should not be debited to borrower accounts but shown separately under 'Interest Receivable Account' on the 'Property and Assets' side of the balance sheet and corresponding amount shown under 'Overdue Interest Reserve Account' on the 'Capital and Liabilities' side of the balance sheet. 52 . it may be clarified that overdue interest reserve is not created out of the real or earned income received by the bank and as such. interest accrued and credited to income account in the corresponding previous year. (ii) In respect of borrower accounts.I NPA computed and shown as such. (iii) The illustrative accounting entries to be passed in respect of accrued interest on both the performing and non-performing advances are indicated in the Annex 3. 1949 (As Applicable to Co-operative Societies) specifically requires the banks to show 'Overdue Interest Reserve' as a distinct item on the 'Capital and Liabilities' side vide item 8 thereof. the amounts held in the Overdue Interest Reserve Account can not be regarded as 'reserve' or a part of the owned funds of the banks.B. The interest accrued in respect of performing assets may be taken to income account as the interest is reasonably expected to be received. However. accrued interest can alternatively be debited to the borrower account and credited to Interest account and taken to income account. which are treated as performing assets. In the above context. It will also be observed that the Balance Sheet format prescribed under the Third Schedule to the Banking Regulation Act. though not accounted as income of the bank for the period.

the realization of the security and the erosion over time in the value of security charged to the bank.B. Taking into account the time lag between an account becoming doubtful of recovery. provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories as detailed in paragraph 3 above. (ii) Doubtful Assets (a) 100 per cent of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse should be made and the realizable value is estimated on a realistic basis.operative Societies Act/Rules. If the assets are permitted to remain in the books for any reason. doubtful assets and substandard assets as below: (i) Loss Assets (a) The entire assets should be written off after obtaining necessary approval from the competent authority and as per the provisions of the Co. (b) In respect of an asset identified as a loss asset.I NPA PROVISIONING NORMS Norms for Provisioning on Loans & Advances In conformity with the prudential norms.TY B. full provision at 100 per cent should be made if the expected salvage value of the security is negligible. 52 . 100 per cent of the outstanding should be provided for. its recognition as such. the banks should make provision against loss assets.

provision may be made on the following basis. The general provisioning requirement for ‘standard advances’ shall be 0. as hitherto ii.25 percent.40 per cent from the present level of 0. the banks should make a general provision of a minimum of 0. unit banks and banks having multiple branches within a single district with deposit of Rs 100 crore and above and all other UCBs operating in more than one district will be subjected to higher provisioning norms on standard asset as under: i. at the rates ranging from 20 per cent to 100 per cent of the secured portion depending upon the period for which the asset has remained doubtful: (iii) Sub-standard Assets A general provision of 10 per cent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available. For personal loans.B. direct advances to agricultural and SME sectors which are standard assets. 2000.I NPA (b) In regard to the secured portion. However. 52 .25 per cent on standard assets.0 %. (iv) Provision on Standard Assets (a) From the year ended March 31. loans and advances qualifying as capital market exposures and commercial real estate loans provisioning requirement would be 1. would attract a uniform provisioning requirement of 0.25 per cent of the funded outstanding on a portfolio basis.TY B. (b) However.

Shortfall if any. (e) The above contingent provision will be eligible for inclusion in Tier II capital. 52 . on this account may be made good in the normal course. (v) Higher provisions There is no objection if the banks create bad and doubtful debts reserve beyond the specified limits on their own or if provided in the respective State Co-operative Societies Acts.TY B.2 (viii) of Capital and Liabilities} in the Balance Sheet. additional provision required for Standard Assets may be segregated from Bad and Doubtful Debt Reserve and the same may be parked under the head "Contingent Provisions against Standard Assets" with the approval of their Board of Directors.B.I NPA (c) The provisions towards “standard assets” need not be netted from gross advances but shown separately as "Contingent Provision against Standard Assets" under "Other Funds and Reserves" {item. (d) In case banks are already maintaining excess provision than what is required/prescribed by Statutory Auditor/RBI Inspection for impaired credits under Bad and Doubtful Debt Reserve.

Provident Fund.B. the short fall should be written off / debited to P&L A/c of that year. Provisioning Norms for sale of financial assets to Securitization Companies (SC)/ Reconstruction Companies (RC) (a) If the sale to SC/RC is at a price below the net book value(NBV) (i. (ii) Advances granted under rehabilitation packages approved by BIFR/term lending institutions 52 . the excess provision will not be reserved but will be utilized to meet the shortfall/ loss on account of sale of other assets to SC/RC. if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days irrespective of the fact whether the guarantee have been invoked or not. subject to the provisions of the co-operative societies acts/rules/administrative guidelines in regard to write-off of debts.I NPA PROVISIONING FOR RETIREMENT BENEFITS Primary (urban) co-operative banks may have retirement benefit schemes for their staff. book value less the provision held).e.TY B. Gratuity and Pension. (b) If the sale is for a value higher than the NBV. viz. It is necessary that such liabilities are estimated on actuarial basis and full provision should be made every year for the purpose in their Profit and Loss Account. Guidelines for Provisions in Specific Cases (i) State Government guaranteed advances From the year ended March 31. 2006. State Government guaranteed advance and investment in State Government guaranteed securities would attract extant provisioning norms.

the additional facilities sanctioned as per package finalized by BIFR and/or term lending institutions. NSCs eligible for surrender. provision should be made only for the balance in excess of the amount guaranteed by these Corporations. no provision need be made for a period of one year. as compared to the method given above. government securities and all other kinds of securities are not exempted from provisioning requirements. and life policies are exempted from provisioning requirements. (iii) Advances against fixed/term deposit. (iv) Advances against gold ornaments. (v) Advances covered by ECGC/DICGC guarantee (a) In the case of advances guaranteed by DICGC/ECGC. (c) In respect of additional credit facilities granted to SSI units which are identified as sick and where rehabilitation packages/nursing programmers have been drawn by the banks themselves or under consortium arrangements.B. KVPs. 52 .TY B. the income recognition and asset classification norms will become applicable after a period of one year from the date of disbursement. they may have the option to continue to follow the same procedure. IVPs.I NPA (a) The existing credit facilities sanctioned to a unit under rehabilitation package approved by BIFR/term lending institutions should continue to be classified as sub-standard or doubtful asset as the case may be. (b) In case the banks are following more stringent method of provisioning in respect of advances covered by the guarantees of DICGC/ ECGC. (b) However.

(iii) The responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The cut off point should be valid for the entire year. Banks should fix a minimum cut off point to decide what would constitute a high value account depending upon their respective levels. 52 . (iv) Where there is willful non-compliance by the officials responsible for classification and is well documented. RBI would initiate deterrent action including imposition of monetary penalties.I NPA DIVERSION IN ASSET CLASSIFICATION AND PROVISIONING (i) Banks should ensure scrupulous compliance with the instructions for recognition of credit impairment and view aberrations by dealing officials seriously.TY B. (ii) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs.B. especially in respect of high value accounts.

. Table No.3 1998-99 399496 58722 367012 27892 14... Despite various correctional steps administered to solve and end this problem. 52 .TY B.I gives the figures of gross and net NPA for the last four years...03..7 6.. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions.4 7. since this accomplishment is on account of credit growth... Table No... The positive results of the chain of measures effected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralised by the ill effects of this surging threat.068 Crore or more than 25% in the last financial year..B...2 %-age of %-age of Gross Net NPA to NPA to net total advances advances The apparent reduction of gross NPA from 14.6 1999-2000 475113 60408 444292 30211 12.. The severity of the problem is however acutely suffered by Nationalised Banks..I NPA The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks..... It shows an increase of Rs. which was higher than the growth of Gross NPA and not through appreciable recovery of NPA..4% between 1998 and 2001 provides little comfort..63... (Amount in Crores) Year Gross Net Net NPA Advances NPA 1997-98 352697 50815 325522 25734 14..2001 the aggregate gross NPA of all scheduled commercial banks amounted to Rs. As at 31.8 2000-2001 558766 63883 526329 32632 11.. indicating that fresh accretion to NPA is more than the recoveries that were effected.... I NPA Statistics -All Scheduled Total Commercial Advances Banks ...7 7.4 6. thus signifying a losing battle in containing this menace. concrete results are eluding. and the all India Financial Institutions..13.883 Crore..4% to 11. followed by the SBI group.

35 1999-2000 224818 33521 17399 13. Total Advances NPA (Amount in Crores) Year 1997-98 %-age of %-age of Gross Net Net NPA to NPA to NPA total net advances advances 113360 15522 6829 14. The gross NPA and net NPA for PSBs as at 31.2 % 1997-98 284971 45563 21232 16.1 % 1999-2000 380077 53033 26188 14. Comparative figures for PSBs.19 7.01 Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures.2 % 1998-99 325328 51710 24211 15..74% Table -3: NPA of State Bank Gross Group……………………………………….9% 2000-2001 442134 54773 27967 12.0 % 8.77 % 2000-2001 150390 20586 8125 12.02 8.I NPA There is neither reduction nor even containment of the threat.2%.80 2000-2001 264237 34609 16096 12.B.91 1998-99 188926 33069 15759 16.2001 are 12.99 7.TY B.39% and 6.4%and 6.73 % 6.88 8.57% 118959 18641 15.74 % % 1999-2000 129253 19773 7411 14. through subtle techniques.08 % 6. 52 . SBI Group and Nationalised Banks are as under.9 % 8.8 % 9. Total Advances NPA (Amount in Crores) Year Net NPA 6.67 7764 7.26 % Table -4: NPA of Nationalised Gross Banks………………………………………….00 % 7.98 % %-age of %-age of Gross Net NPA to NPA to total net advances advances 1997-98 166222 30130 14441 16.74% are higher than the figures for SCBs at 11. There is the practice of 'ever-greening' of advances.39 % 6. Table -2 : NPA of Gross PSBs…………………………………………………………… Total Advances NPA (Amount in Crores) Year Net NPA %-age of %-age of Gross Net NPA to NPA to total net advances advances 1996-97 244214 43577 20285 17.03.

217 Crore last year. 3.B. throwing prudential norms to the winds. or Rs 1.490 Crore in the previous year. while estimating NPAs of the Indian banking sector between 35% to 70% of its total outstanding credit.029. The worst "offender" is the public sector banking industry. The international rating agency Standard & Poor (S & P) conveys the gloomiest picture.89 per cent. whenever adequate current earnings were not available to meet provisioning obligations. its NPAs have gone up by Rs 1. as per the rating agency would be accounted as NPA if rescheduling and restructuring of loans to make them good assets in the book are not taken into account.862. Driven to desperation and impelled by the desire not to accept defeat. But the fact remains that the infection if left unchecked will eventually lead to what has been forecast by the rating agency. Classifying an account of a credit customer as `substandard' and other accounts of the same credit customer as `standard'. without actually providing.185 Crore from Rs 6. there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made. 52 . In fact. up to 35% of the total banking assets. This only shows that the problem has swelled to graver dimensions. Nineteen nationalised banks along with the State Bank of India and its seven associate banks have underestimated their NPAs by Rs 3. Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or `sub-standard' asset. The NPA statistics of the three leading Financial Institutions for the last two years are given in Table-5 IDBI tops the list by notching up bad loans worth Rs 7665 Crore by March 2000.146 Crore during the year ended March 2000 from Rs 16. This invests an urgency to tackle this virus as a fire fighting exercise.I NPA As per report appearing in a national daily the banking industry has underestimated its non-performing assets (NPAs) by whopping Rs.10 Crore as on March 1997. Essentially arising from the wrong classification of NPAs. classifying a `doubtful' asset as a `substandard' asset.929 Crore. Much of this. they have chosen to mislead and claim compliance with the provisioning norms.TY B. Financial institutions have not far lagged behind.29 Crore. Such deception of NPA statistics is executed through the following ways.412.29 Crore.    Failure to identify an NPA as per stipulated guidelines: There were instances of `sub-standard' assets being classified as `standard'. The industry is also estimated to have under-provided to the extent of Rs 1. However RBI has contested this dismal assessment. This practice can be logically explained as a desperate attempt on the part of the bankers. to Rs 18. NPAs of ten leading institutions have reported a rise of 11.

when the first Series of Banking Reforms were introduced.2001 IDBI 57099 56477 7665 13. the working position of the State-owned 52 .3.I NPA IFCI followed with NPAs of Rs 4.3.03. How RBI Describes this New Development in its Web Site In the peak crisis period in early Nineties.6 2782 05.8 Emergence of NPA as an Alarming Threat to Nationalised Banks NPA is a brought forward legacy accumulated over the past three decades. Table 5 NPA Statistics of the three Major Term Total Loans Total Loans NPA Lending Institutions as 31.2001.2000 31. But despite this extravagance the malaise remained invisible to the public eyes due to the practice of not following transparent accounting standards. but this does not justify relegating banking goals and fiscal discipline to the background.9 ICICI 52341 57507 3959 07.2001 31. This artificially conveyed picture of 'all is well' with PSBs suddenly came to an end when the lid was open with the introduction of the prudential norms of banking in the year 199293.3.3.4 8363 13. It is not wrong to have pursued social goals.TY B.3.3.7 3897 20. but it reported fall of Rs 134 Crore from the previous year's level of Rs 4.2000 at 31.103 Crore.B.2 IFCI 19841 18715 4103 20.2000 31.2001 31.959 Crore from Rs 3. (Amount in Crores) Name of FI NPA-% age NPA NPA-% age 31. when prudent norms of banking were forsaken basking by the halo of security provided by government ownership. ICICI's NPAs went up to Rs 3. bringing total transparency in disclosure norms and 'cleansing' the balance sheets of commercial banks for the first time in the country.623 Crore in the previous year.237 Crore. but keeping the balance sheets opaque.

In the first post-reform year. but still continuing to have accumulated losses of prior years carried forward in their balance sheets Banks which are still in the red. Commenting on this situation the Reserve Bank of India in its web-site has pointed out as under: "Till the adoption of prudential norms relating to income recognition. i. i.TY B. the profitability of the PSBs as a group turned negative with as many as twelve nationalised banks reporting net losses.e. showing losses in the past and in the present. the outer time limit prescribed for attaining capital adequacy of 8 per cent. 1992-93.I NPA banks exhibited the severest strain. . eight public sector banks were still short of the prescribed. asset classification.B..e." Consequently PSBs in the post reform period came to be classified under three categories as    52 Healthy banks (those that are currently showing profits and hold no accumulated losses in their balance sheet) Banks showing currently profits. provisioning and capital adequacy. By March 1996. twenty-six out of twenty-seven public sector banks were reporting profits (UCO Bank was incurring losses from 1989-90).

stock statements relied upon by the banks for determining drawing power should not be older than three months. Whether an account will become an NPA if the review/renewal of regular/ad-hoc credit limits are not done when due? What should be periodicity of review/renewal to decide the present status of an account? Regular and ad-hoc credit limits need to be reviewed/regularized not later than three months from the due date/date of ad-hoc sanction. since current assets are first appropriated in times of Distress. Considering the practical difficulties of large borrowers. The outstanding in the account based on drawing power calculated from stock statements older than three months would be deemed as irregular.I NPA CLARIFICATION ON CERTAIN FREQUENTLY ASKED QUESTIONS Whether a working capital account will become an NPA if the stock statements are not submitted regularly? What should be the period for which the stock statements can be in arrears before the account is treated as an NPA? Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets. Hence. In any case. In case of constraints such as non-availability of financial statements and other data from the borrowers. an account where the regular/ad-hoc credit limits have not been reviewed or have not been renewed within 180 days from the 52 . A working capital borrower account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days (with effect from March 31.B.TY B. the branch should furnish evidence to show that renewal/review of credit limits is already on and would be completed soon. 2004). delay beyond six months is not considered desirable as a general discipline.

TY B. at times. In such cases. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection.B. as the case may be. Whether it will be in order to treat a borrower account as 'standard'. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. the banks submit that. Classification of NPAs where there is a threat to recovery How should the instructions on classification of NPAs straightaway as doubtful or a loss asset be interpreted and what can be termed as a 'significant credit impairment'? An NPA need not go through the various stages of classification in case of serious credit impairment and such assets should be straightway classified as a doubtful/loss asset as appropriate. which period will be reduced to 90 days with effect from March 31. the borrower has deposited adequate funds with the consortium leader/member of the consortium and the bank's share is due for receipt. Where the account indicates inherent weakness on the basis of the data available. will it be in order for the member bank to classify the account as 'standard' in its books? 52 . but has been regularized near the balance sheet date? The asset classification of borrower accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Classification of credit facilities under consortium In certain cases of consortium accounts. 2004. though the record of recovery in the account with a member bank may suggest that the account is a NPA. if it has been irregular for a major part of the year. In other genuine cases.I NPA due date/date of ad-hoc sanction will be treated as NPA. the account should be deemed as a NPA. the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularization of the account to eliminate doubts on their performing status.

TY B. How to determine when the account in which such dues is parked has become an NPA? 52 . as NPAs have since been revised w. to ensure proper asset classification in their respective books. banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. therefore. 2004. irrespective of whether the borrower's credit facilities are regular or not. Appropriation of recoveries What is the practice to be adopted by banks regarding appropriation of recoveries in NPA accounts? In the absence of a clear agreement between the bank and the borrower for the purpose.I NPA Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Whether the same norm can be extended to floriculture and allied agriculture activities like poultry. arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery. animal husbandry. be treated as NPA. Overdoes in other credit facilities There are instances where banks park the dues from a borrower in respect of devolved letters of credit and invoked guarantees in a separate account. September 30.? As indicated in Para 2.1. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks.f.3. and therefore. Activities allied to agriculture Our existing guidelines stipulate that advances granted for agricultural purposes may be treated as NPA if interest and/or installments towards repayment of principal remains unpaid for two harvest seasons but for a period not exceeding two half years. The banks participating in the consortium should. the account will be treated as not serviced in the books of the other member banks.B.e. etc. the norms for classifying direct agricultural advances (listed in Annex 1).

It is. Can uniform guidelines be prescribed for adoption in this area. or fully provided for by the bank. the existence of security should be ignored and the asset should be straightaway classified as loss asset. advised that if the debts arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account. (b) Collaterals such as immovable properties charged in favor of the bank should the Board of Directors. as assessed by the bank/ approved values / RBI is less than 10 per cent of the outstanding in the borrower accounts. asset classification and provisioning. 52 .I NPA A number of banks adopt the practice of parking the dues of the borrower in respect of devolved letters of credit and invoked guarantees in a separate account which is not a regular sanctioned facility. However.TY B. in order to enhance the reliability on stock valuations.B. Treatment of loss assets An NPA account will be classified as a loss asset only when there is no security in the account or where there is considerable erosion in the realizable value of the security in the account. at least for large value accounts? With a view to bringing down divergence arising out of difference in assessment of the value of security it has been decided that in cases of NPAs with balance of Rs. therefore. stock audit at annual intervals by external agencies could be considered in case of larger advances. This renders application of the prudential norms for identification of NPAs difficult. The cut off limit and the names of the external agencies may be finalized by the Board. What can be termed as’considerable’ erosion for the account to be classified as a loss asset? If the realizable value of the security. the balance outstanding in that account also should be treated as a part of the borrower's principal operating account for the purpose of application of prudential norms on income recognition. Valuation of Security A major source of divergence in provisioning requirement was the realizable value of the primary and collateral security. It may be either written off after obtaining necessary permission from the competent authority as per the Co-operative Societies Act/Rules. As a result these are not reflected in the principal operating account of the borrower.10 lakh and above: (a) The current assets and their valuation are looked into at the time of Statutory Audit/Concurrent audit.

52 . (iii) Any entity not registered with the Bank under Section 3 of the Act may conduct the business of securitization or asset reconstruction outside the purview.I NPA Registration and matters incidental thereto (i) Every Securitization Company or Reconstruction Company shall apply for registration in the form of application specified vide notification No. (b) A Securitization Company or Reconstruction Company. can undertake both securitization and asset reconstruction activities.DNBS. which has obtained a Certificate of Registration from the Bank under Section 3 of the Act and not commenced business as on the date of the Notification shall commence business within six months from the date of Notification. provided that on the application by the Securitization Company or Reconstruction Company.TY B. 2003 and obtain a certificate of registration from the Bank as provided under Section 3 of the Act. the Bank may rant extension for such further period. (a) A Securitization Company or Reconstruction Company shall commence business within six months room the date of grant of Certificate of Registration by the Bank.1/CGM(CSM)-2003. dated March 7. not exceeding one year in aggregate from he date of grant of Certificate f Registration. (ii) A Securitization Company or Reconstruction Company. which has obtained a certificate of registration issued by the Bank under Section 3 of the Act.B.

assessment of existing product line and portfolio based on the risk-return profile andprevious experience of the bank to update negative. Sector wise/industry wise diversification of credit portfolio with regard to macro economic scenario and the performance/prospects/outlook of the sector/industries. the bank shall assess. approving and managing credit risks. .TY B. induct and develop through training and work experience. Based on the credit expansion plans. discretionary and open list of the bank. Npa should e as minimum as it can be. In a phased manner.B. Compliance with all the statutory and regulatory stipulations/requirements shall be strictly ensured in credit operations of the bank. The sugertion for decreasing npa are as follows :        52 Identification of new avenues. selective deployment of credit on isk-return scale to maintain the earning/spread risk diversification of the bank with sub plr polocies for maintaining and improving credit portfplio quality of the bank. Export sector plays pivotal role in the country’s economy and the bank’s thrust on export credit will be maintained/fine-tuned with specific references to the gold card scheme in vogue and new potential export avenues. all credit exposures shall be covered under credit rating framework of the bank. With robust interest rate policy in place.I NPA CONCLUSION:Npa are usually not good for the banks. adequate number of credit officers for assessing.