CA.CS.CMA.MBA: Naveen.

Rohtagi NMIMS SCHOOL OF LAW- Finance IV

NON PERFORMING ASSETS OF BANK

A.Definition: A non performing asset (NPA) is a loan or advance for which the principal or
interest payment remained overdue for a period of 90 days.

B.Classification of NPA: 

Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12
months.

2. Doubtful assets: An asset would be classified as doubtful if it has remained in the

substandard category for a period of 12 months.

3. Loss assets:  As per RBI, “Loss asset is considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted, although there may be some salvage
or recovery value.”

C. Provision of NPA

Provision of NPA
Loss Assets - outstanding 100%
Doubtful Assets (unsecured portion of 100%
outstanding)

Doubtful Assets (secured portion of 25% (up to 1 yr in doubtful category)

outstanding) 40% (more than 1 yr &upto 3 yr in doubtful
category)
100% (more than 3 yr in doubtful category)
Sub -Standard ( secured exposure  ) 15%
Sub -Standard ( unsecured exposure  25%

D. Gross NPA and Net NPA

Gross NPA: Gross NPA is the total amount of outstanding NPAs in the borrowal account,
excluding the interest receivable.  As per RBI regulation, once the account is classified as
NPA interest cannot be debited to the NPA account and apportions it as profit. Therefore,
banks will record the interest receivable from the NPA account in a separate book and
recover the same once the account is regularized by the borrower.

Net NPA: The Reserve Bank of India defines Net NPA as Gross NPA minus (i) to (iv) the
following- (i) Part payment received and kept in suspense account + (ii) DICGC/ECGC
claims received and held pending adjustment + (iii)Part payment received and kept in
suspense account + (iv) Total provisions held.
CA.CS.CMA.MBA: Naveen. Rohtagi NMIMS SCHOOL OF LAW- Finance IV

REASONS FOR NPA

A. Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
5. Businessfailures.
6. Diversion of funds for expansion\modernization\setting up new projects/helping or
promoting sister concerns.
7.Willful defaults, siphoning of funds, fraud, disputes, management disputes,
misappropriation etc.
8.. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,
delay in settlement of payments\ subsidiaries by government bodies etc.
B.External factors:

1. Sluggish legal system -

• Long legal tangles
• Changes that had taken place in labour laws
• Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power shortage, industrial
recession, excess capacity, natural calamities like floods, accidents.
5. Failures, non-payment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes etc.
Illustration 1
Calculate the interest income to be recognised for the year ending 31.03.2010 from the
following information:
Interest Total Interest Earned On NPA
₹ Earned Collected
₹ ₹
Interest on Cash Credit 2,820 820 400
Interest on Overdraft 750 450 100
Interest on Term Loans 2,540 750 250
CA.CS.CMA.MBA: Naveen. Rohtagi NMIMS SCHOOL OF LAW- Finance IV

Solution:
`
Interest on Cash Credit (2,820 - 820 + 400) = 2,400
Interest on Overdraft (750 - 450 + 100) = 400
Interest on Term Loan (2,540 - 750 + 250) = 2,040
4,840
Illustration 2
Calculate the interest income to be recognised for the year ending 31.03.2010 fin the following
information:
Interest Total Interest Earned but not collected
Collected ₹ on PA ₹ an NPA ₹
Interest on Cash Credit 2,000 400 420
Interest on Overdraft 300 100 350
Interest on Term Loans 2,000 40 500
Solution :
`
Interest on Cash Credit (2,000 + 400) = 2,400
Interest on Overdraft (300 + 100) = 400
Interest a Term Loan (2.000 + 40) = 2,040
4,840
Illustration 3
From the following information find out the amount of provisions to be shown in the Profit and
Loss Account of a Commercial Bank:
Assets ` (₹ in lakhs)
Standard 4,000
Sub-standard 2,000
Doubtful up to one year 900
Doubtful up to three years 400
Doubtful more than three years 300
Loss Assets 500

Solution:
Computation of Provision
Assets Amount % of Provision Provision
( ₹ in lakhs) (₹ in lakhs)
Standard 4,000 0.40 16
Sub standard 2,000 15 300
Doubtful up to one year 900 25 225
Doubtful up to three years 400 40 160
Doubtful More than three years 300 100 300
Loss 500 100 500
Total Provision required 1501
Note : Substandard assets and Doubtful assets are taken as fully secured.
 CA.CS.CMA.MBA: Naveen. Rohtagi NMIMS SCHOOL OF LAW- Finance IV

Illustration 4
From the following information compute the amount of provision to be made in Profit &
Loss A/c of a commercial Bank:
Assets ₹ in Lakhs
Standard Assets 7,000
Sub-Standard Assets (fully secured) 3,000
Doubtful:
a) Doubtful upto one year (Realizable Value of Security ₹ 500 Lakhs) 1,000
b) Exceeding one year but less than three year (Realizable value of Security ₹ 500
300) Loss Assets
1,000
(TYBMS NOV 2016 Mumbai university )

Solution : Computation of Provision

Assets Amount % of Provision Provision
1.Standard 7,000 0.40 28
2.Sub-Standard 3,000 15 450
3.Doubtful (less than one year)
On Secured Portion 500 25 125
On Unsecured Portion 500 100 500
4.Doubtful (more than one year less than three years)
On Secured Portion
On Unsecured Portion 300 40 120
5. Loss assets 200 100 200
Total Provision 1,000 100 1,000
2,423

Advance covered by ECGC/DICGC guarantee: In the case of advance classified as doubtful and
guaranteed by ECGC/DICGC, provision should be made only for the balance in excess of the
amount guaranteed by the Corporation. Further while arriving at the provision required to be made
for doubtful assets, realisable value of the securities should first be deducted from the outstanding
balance in respect of the amount guaranteed by the Corporation and then provision made as
illustrated hereunder:
 CA.CS.CMA.MBA: Naveen. Rohtagi NMIMS SCHOOL OF LAW- Finance IV

Outstanding Balance Rs 4 Lakhs

ECGC Cover 50 percent
Period for which the advance has remained doubtful More than 2 years remained doubtful (as on March
31, 2013)
Value of security held (excludes worth of Rs.) Rs. 1.50 lakhs
Example

Provision required to be made

Outstanding Balance Rs. 4.00 lakhs
Less: Value of security held Rs. 1.50 lakhs
Unrealised balance Rs. 2.50 lakhs
Less: ECGC Cover (50% of unrealised balance) Rs.1.25 lakhs
Net Unsecured balance Rs. 1.25 lakhs
Provision for unsecured portion of advance Rs.1.25
(@ 100 percent of unsecured portion)
Provision for secured portion of advance (as on March Rs.0.60 lakhs
31, 2013)
(@ 40 per cent of unsecured portion)
Total provision to be made Rs. 1.85 lakhs (as on March 31,2013)

Formula to calculate provision

`
Amount outstanding xx
Less Realisable value of security xx
Unsecured portion xx
A. Provision for unsecured portion 100% xx
B. Provision for secured portion 25% / 40% / 100% / xx
(depending upon the period for which advance is considered doubtful)
Total Provision (A + B) xx
Less ECGC / DICGC cover (% limited to) xx
Total Provision required xx
CA.CS.CMA.MBA: Naveen. Rohtagi NMIMS SCHOOL OF LAW- Finance IV

Illustration 5
From the following information find out the amount of provisions required to be made in the
Profit and Loss Account of a Commercial bank for the year ended 31st March 2010. The below
advance has remained doubtful for more than 3 years.

Term Loan Export Loan

Balance Outstanding on 31.03.2007 ₹ 35 lakhs ₹ 30 lakhs
DICGC/ECGC cover 40% 50%
Securities held ₹15 lakhs ₹ 10 lakhs
Realisable value of Securities ₹ 10 lakhs ₹ 8 lakhs
Solution:

Term Loan Export Loan

(₹ in Lacs) (₹ in Lacs)
Balance outstanding 35 30
Less : Realisable value of security 10 8
25 22
Less: DICGC/ ECGC 10 (11)
(25x 40%) (22x 50%)
Unsecured 15 11
Provision unsecured (100%) 15 11
Provision secured (100%) 10 8

Total provision required 25 19

Note: The asset is a doubtful asset as it has remained NPA for a period exceeding 12 months.
Illustration 6
Calculate the provision required to be made in respect of advance.
Term Loan ₹ 30 lakhs
ECGC Cover 30%
Security ₹ 10 lakhs
(Realisable value is 80%)
Period for which advance has remained doubtful for 2 years

Solution:
₹ in lakhs
Term Loan Outstanding 30.00
Less: Security (80% of 10 lakhs) 8.00
22.00
Less: ECGC Cover (30% of 22 lakhs) 6.60
CA.CS.CMA.MBA: Naveen. Rohtagi NMIMS SCHOOL OF LAW- Finance IV

Balance (Unsecured) 15.40

Unsecured Portion Provision @ 100% 15.40
Secured Portion Provision @ 40% of 8 lakhs 3.20
Total Provision required to be made 17.80