TASK-17

Non-Performing Asset (NPA)

Non-performing Asset, in simple words, if a bank gives a loan to a person on interest and if
the person is not giving the interest or returning the amount and, then normally after 90 days
the loan given will be not performing and it will become a non performing asset (NPA) for
the bank.

An asset becomes NPA when it ceases to generate income for the bank.

A non-performing asset is a loan or an advance where:

 Interest and/ or instalment of principal remain overdue for a period of more than 90
days in respect of a term loan,
 The account remains out of order in respect of an overdraft/cash credit,
 The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted.

Categories of NPA

 Sub-standard Assets: Sub-standard assets would be one, which has remained NPA for
a period less than or equal to 12 months.
 Doubtful Assets: Doubtful assets would be one, which has remained in the
substandard category for a period of 12 months.

Sub-categories:

 Doubtful up to 1 year
 Doubtful 1to 3years
 Doubtful more than 3 years
 Loss Assets: Loss assets would be one, where loss has been identified by the bank or
internal or external auditors or the RBI inspection, but the amount has not been
written off wholly.

Types of NPA

 Gross NPA: Gross NPA is an advance which is considered irrecoverable, for bank
has made provisions, and which is still held in banks' books of account. Gross NPAs
 are the sum total of all loan assets that are classified as NPAs as per RBI Guidelines
as on Balance Sheet date.
 Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the
provision regarding NPAs. Net NPA shows the actual burden of banks.

For examples, assume that the loan amount was Rs.100, and the bank is charging interest of
Rs.10. The borrower fails to repay the loan, when the borrower fails to repay the loan, the
gross NPA will become Rs.100, that is whatever the loan amount was there is termed as gross
NPA.

Net NPA is basically gross NPA minus certain deductions. Deductions are, the interest, say
the borrower would have paid Rs. 2 as intertest and the bank had also insured the loan and the
amount of insurance bank got in the entire process was Rs.5 and the provision done on the
assets by the bank was Rs. 15, so it total 2+5+15= Rs.22. So, in this case the net NPA is Rs.
78 (Rs.100 – Rs.22).

Causes for NPA

Few factors attributed for the cause of NPA are:

 Wilful default
 Economic crisis
 Lenient lending of loans
 Lending loans to western interest group

GROSS NPA

NPA
Mar-19 Mar-18 Mar-17
RATIOS:
Gross NPA-
1,72,750.36 2,23,427.46 1,12,342.99
SBI
Gross NPA-
13,353.45 11,990.14 9,865.14
INDIAN
Gross NPA-
39,224.12 47,468.47 34,202.04
CANARA
As we can see that SBI is the one who receives huge amount of NPA when compared to peer
companies among them Indian bank is doing well they are having few amount of NPA and
also CANARA bank is also having less NPAs.

Chart Title
12

10

NET NPA

NPA
Mar-19 Mar-18 Mar-17
RATIOS:
Net NPA-
65,894.74 1,10,854.70 58,277.38
SBI
Net
NPA- 6,793.11 5,959.57 5,606.57
INDIAN
Net
NPA- 22,955.11 28,542.40 21,648.98
CANARA
As we can see that SBI is the one who receives huge amount of NPA when compared to peer
companies among them CANARA bank is doing well, they are trying to reduce the NPAs
and also INDIAN bank is also having less NPAs but the rate of NPAs is increasing year by
year.
 Chart Title
90
78.73
80
68.13 65.72 66.17
70 64.27 61.53
60 58.06 55.62 58.14
50
40
30
20
10
0
2019 2018 2017

SBI CANARA INDIAN

% GROSS AND NET NPA

NPA
Mar-19 Mar-18 Mar-17
RATIOS:
% of Net
3.01 5.73 3.71
NPA-SBI
% of Net
NPA- 3.75 3.81 4.39
INDIAN
% of Net
NPA- 5.37 7.48 6.33
CANARA
% of Gross
7.53 10.91 6.9
NPA-SBI
% of Gross
NPA- 7.11 7.37 7.47
INDIAN
% of Gross
NPA- 8.83 11.84 9.63
CANARA
 Chart Title
12

10

As we can observe that SBI is the lowest NET NPA ratio when compared to peers and INDIN bank NET NPAs
are increasing year by year which is not a good sign for the company and CANARA bank is trying to recover the
NPAs which is a good for the company so as we can see from GROSS NPA we can tell that again INDIAN bank
is increasing year by year and CANARA bank is trying to recover their NPAs and for SBI they are trying to
decrease and they achieved it.

So finally we can conclude that from the above NET NPA & GROSS NPA we can buy canara bank and SBI
shares.

PROVISION COVERAGE RATIO

PCR% 2019 2018 2017

SBI 78.73 66.17 61.53
CANAR
68.13 58.06 55.62
A
INDIAN 65.72 64.27 58.14
 Chart Title
90
78.73
80
70 68.13 65.72 66.17 64.27 61.53
60 58.06 55.62 58.14
50
40
30
20
10
0
2019 2018 2017

SBI CANARA INDIAN

Analysis:

Comparing all the three banks on their Provision Coverage Ratio, SBI as we can see has
higher mount of provision compared to Indian and Canara Bank. As the provision coverage
ratio (PCR) gives an indication of the provision made against bad loans from the profit
generated. A higher ratio means the bank can withstand future losses better, including
unexpected losses beyond the loan loss provision. The banks with more businesses require
more PCR in order to be on the safer side.

In general, Public sector banks' provision coverage ratio -- which measures the provisioning
for bad loans -- has gone up from less than 50 per cent in 2015 to 66.85 per cent as of
September 2018, reflecting improvement in their financial health.

As we can see that SBI is the highest PCR collection and then CANARA bank is doing good
in receiving PCR with high margin which is beneficial for the company and INDIAN bank is
fluctuating so we can conclude that we can by SBI or CANARA bank shares when compare
to peers.

CAPITAL ADEQUACY RATIO

CAR% 2019
2018 2017
SBI 12.72 12.6 13.11
CANAR
11.9 13.22 12.86
A
 INDIAN 13 13 14

Chart Title
14.5
14
14
13.5 13.22
13 13 13.11
13 12.86
12.72 12.6
12.5
12 11.9

11.5
11
10.5
2019 2018 2017

SBI CANARA INDIAN

Analysis:
As far as CAR is concerned, we can say that Indian Bank has slightly higher side compared
to remaining banks. The capital adequacy ratio also known as capital to risk-weighted assets
ratio, measures a bank's financial strength by using its capital and assets. It is used to protect
depositors and promote the stability and efficiency of financial systems around the world.
The bank has a high capital adequacy ratio is usually considered to be safer.

The capital adequacy ratio (CAR) is a measure of how much capital a bank has available,
reported as a percentage of a bank's risk-weighted credit exposures. The main purpose is to
establish that banks have enough capital on reserve to handle a certain amount of losses,
before being at risk for becoming insolvent.

If bank has more NPA then it will have more risk towards CAR weights thus bank will
hesitate to give more loans. As per Basel norms, banks are required to maintain adequate
capital on risk-weighted assets on an ongoing basis. Every increase in NPA level adds to risk
weighted assets which warrant the banks to shore up their capital base further.

CANARA BANK NPAs

2019---In terms of RBI guidelines, the banks are permitted to amortise the provision towards
fraud cases in the quarters beginning from the date of detection of fraud and where the
provision is made in two different financial years, the un-provided amount has to be charged
to Other Reserve. During the quarter ended 31st March 2019, 6 fraud accounts were detected,
amounting of Rs.704.06 crores wherein Bank is required to provide Rs. 429.87 crores, in
addition to the provision of Rs. 274.19 crores already provided up to 31-12-2018. The total
amount provided during the quarter is Rs. 107.47 crores, representing 25 % of the provision
to be
made. Further, the remaining unamortised provision amount is debited to Other Reserves,
which will be amortised during first three quarters of next financial year. The unamortized
provision on such accounts is Rs. 322.40 crores and this unamortized amount is reckoned for
calculation of Provision Coverage Ratio.

Banks are required to disclose the divergences in asset classification and provisioning
consequent to SEBI's annual supervisory process in their notes to accounts to the financial
statements, wherever either or both of the following conditions are satisfied: (a) the additional
provisioning for NPAs assessed by RBI exceeds 10 per cent of the reported profit before
provisions and contingencies for the reference period and (b) the additional Gross NPAs
identified by RBI exceed 15 per cent of the published incremental Gross NPAs for the
reference period. In our Bank divergences are within threshold limit specified above, hence
no disclosure on divergence in asset classification and provisioning for NPAs is required with
respect to RBI's annual supervisory process of fy2018.

Considering the ageing provision of NPA, extent of fresh slippages and consequent
provisioning requirements, the existing additional provision held for NPA amounting to `500
crore over and above the IRAC norms are utilized towards current year provision for NPA on
account of improvement in PCR from 58.06% as at 31.03.2018 to 68.13% as at 31.03.2019.

2018--- the provisioning requirements in respect of NCLT accounts is reduced from 50% of
secured portion to 40% of secured portion as at March 31, 2018. However, Bank has not
availed the relaxation permitted and continue to provide @ 50% instead of provisioning @
40%

 In view of fraud reported during the year in certain banks in respect of one Gems and
Jewellery borrower group accounts, the Bank has classified these accounts as Non-
Performing Asset and provided fully.
2017---during the year the Bank has made certain modifications in the additional
provisioning for non-performing advances by dispensing with additional provisioning for
category II of doubtful advances. Consequently, the Bank is holding such additional
provision of Rs.500 Crore (previous year Rs. 1486 Crore) for non-performing advances over
and above the minimum provision prescribed under IRAC norms of RBI

SBI

2019-- for the accounts covered under the provisions of Insolvency and Bankruptcy Code
(IBC), the Bank is holding total provision of Rs. 34,554 Crores (89.66% of total outstanding)
as on March 31, 2019. In case the additional provisioning for NPAs assessed by RBI exceeds
10% of the reported profit before provisions and contingencies and/or additional Gross NPAs
identified by RBI exceeds 15% of published incremental Gross NPAs for the reference period
then banks are required to disclose divergences from prudential norms on income
recognition, asset classification and provisioning.

Accordingly, no separate disclosure is made in respect of divergence for the financial year
2017-18 as the same is not beyond the above-mentioned thresholds.

The bank has made a provision of Rs. 3,984 Crores (Total Rs. 5,643.41 Crores) for the year
ended March 31, 2019 towards arrears of wages due for revision i.e. November 1, 2017.

2018---Non-Performing Assets of Rs. 23,239.13 Crores have been duly classified and
additional provision there against amounting to Rs. 5,720.66 Crores has been made, as
detailed below For Table, kindly refer Corporate Announcements.

The bank has made an adhoc provision of Rs. 1,659.41 Crores towards arrears of wages due
for revision w.e.f November 1, 2017

2017---In accordance with RBI instruction, the Bank has made a provision of 7.5%
amounting to INR 856 crores against outstanding in the long term food credit advance to a
State Government the classification of standard assets affected due to demonetization from
standard to substandard has been deferred up to 31.03.2017. The effect of this on quantum of
Non performing advances is INR 1608.94 crore.

The disclosures relating to the divergence for the financial year 2015-16, in respect of
provisions made by the bank against non-performing assets (excluding provisions made
against standard assets]is not applicable to the Bank.

The Bank has fully amortised the loss in respect of sale of assets to ARCs in the current and
previous years. The aggregate unamortized amount of such losses as on March 31, 2017 is
NIL (Previous year INR 1131.01 crore).

INDIAN BANK

2019--- for the accounts covered under the provisions of Insolvency and Bankruptcy Code
(IBC), the Bank is holding total provision of Rs.83.07 crore as on March 31, 2019.
The Bank has opted to spread the provisioning for MTM losses on investments held in AFS
and HFT categories for quarters ending December 31, 2017, March 31, 2018 and June 30,
2018. Provisioning has been spread equally over four quarters beginning from the quarter in
which the loss was incurred. As on 31.03.2019, there is no unamortized balance in respect of
provisioning.
During the year ended, the bank appropriated the recovery of Rest. 94.61 crore in a fully
provided NPA account in accordance with the resolution plan approved vide order of the
National Company Law Tribunal (NCLT). Based on a legal opinion obtained and pending
issuance of final order on the appeal filed, the amount recovered was considered as part of
NPA recovery.

RBI permitted banks to continue the exposure to MSME borrowers to be classified as

standard assets where the dues between September 2017. In addition to the above, based on
RBI Circular dated January 1, 2019 the Bank has restructured MSME accounts as detailed
below: 2017 and December 31, 2018 are paid not later than 180 days or less from their
respective original due dates. Accordingly, the Bank has retained advances of Rs. 38.29 crore
as standard asset as on March 31,2019. In accordance with the provisions of the circular, the
Bank has not recognized Interest income of Rs. 1.86 crore and is maintaining a standard asset
provision of Rs. 1.91 crore @ 5% as on March 31, 2019 in respect of such accounts.
Bank has treated these accounts as standard assets as on 31.03.2019 and maintained provision
on such Standard asset @ 5.25% amounting to Rs.47.20 crore.

Divergence in Asset Classification and Provisioning for NPAs in compliance to Risk

Assessment Report (RAR) of RBI for the year 2017-18 are reported as under:

2018--Review made by the bank on reasonable certainty of availability of future taxable

income on which timing differences arising on account of provision for bad and doubtful
debts and provision for restructured standard advances, that can be realized and accordingly
during the year 2017-18, the bank has recognized Deferred Tax Asset of Rs.614.46 Crore on
the above timing.
2017--Divergence in Asset Classification and Provisioning for NPAs in compliance to Risk
Assessment Report (RAR) of RBI for the year 2016-17 are reported as under:
S. No. Particulars Rs. in Crore
1 Gross NPAs as on March 31,2017 as reported by the Bank 9865.14
2 Gross NPAs as on March 31,2017 as assessed by RBI 10408.94
3 Divergence in Gross NPAs (2-1) 543. 80
4 Net NPAs as on March 31, 2017 as reported by the Bank 5606.57
5 Net NPAs as on March 31, 2017 as assessed by RBI 5619.60
6 Divergence in Net NPAs (5-4) 13.04
7 Provisions for NPAs as on March 31, 2017 as reported by the Bank 3788.92
8 Provisions for NPAs as on March 31, 2017 as assessed by RBI 4298.62
9 Divergence in Provisioning (8-7) 509.70
10 Reported Net Profit after Tax (PAT) for the year ended March 31, 2017 1405.68
11 Adjusted (notional) Net Profit after Tax (PAT) for the year ended March 31, 2017 after
taking into account the divergence provisioning 856.68.