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Scope of the Study Scope of the Study
  

Concept of Non Performing Asset


Impact of NPAs

    

Reasons for NPAs Preventive Measures Tools to manage NPAs

Scope of the Project Scope of the Project
       

Study of NPAs in Indian Banking sector Involves study of sector not particular bank focus on NPAs not Banking Sector will not inculd any amendment after Feb.2005

Introduction Introduction
NPA. The three letters Strike terror in banking sector and business circle today. NPA is short form of “ Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, no can not be then left is to look after the factor responsible for it and managing those factors.

Definitions: Definitions:
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained ‘past due’ for a specified period of time. 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 NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a nonperforming asset (NPA) shall be 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’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),  The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

Interest and/or instalment 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 purposes, and  Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004.

'Out of Order' status: 'Out of Order' status:
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 six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.

‘Overdue’: ‘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.

Types of NPA: T ypes of NPA:
A] A] B] B] A] A] Gross NPA Gross NPA Net NPA Net NPA Gross NPA: Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. It can be calculated with the help of following ratio: Gross NPAs Ratio Gross NPAs Gross Advances

B] Net NPA: B] Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. It can be calculated by following Net NPAs Gross NPAs – Provisions Gross Advances - Provisions

Income recognition - Policy Income reco gnition - Policy

The policy of income recognition has to be objective and based on the record

of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA.  However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.  Fees and commissions earned by the banks as a result of re-negotiations or

rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.  If Government guaranteed advances become NPA, the interest on such advances shouldnot be taken to income account unless the interest has been realised.

Reversal of income: Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as

at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.

I n r e s p e c t o f c o m m i s s i o n a n d h a v e a c c r u e d

N P A s , f e e s , s i m i l a r i n c o m e

t h a t

should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.  L e a s e d A s s e t s The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non-performing, and remaining unrealised, should be reversed or provided for in the current accounting period. The term 'net lease rentals' would mean the amount of finance charge taken to the credit of Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount of statutory depreciation and lease equalisation account.  A s p e r t h e ' G u i d a n c e N o t e o n A c c o u n t i n g f o r L e a s e s ' i s s u e d t h e

b y

Council of the Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be. Further, Lease Equalisation Account should be transferred every year to the Profit & Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head 'Gross Income'.

Appropriation of recovery in NPAs A ppropriation of recovery in NPAs
I n t e r e s t r e a l i s e d m a y b e t a k e n t o i n c a c c o u n t p r o v i d e d t h

o n o m e

N e




credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.  I n t h e a b s e n c e o f a c l e a r a g r e e m e n t b e t w e e n t h e b a n k t h e b o r r o w e r f o r

a n d

the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

Report on Non Performing Assets of Bank
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