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Non Performing Assets
NON PERFORMING ASSETS
INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING NORMS (IRAC NORMS) &
Asset Reconstruction Companies
Bank Credit (% to GDP)
Non Performing Assets
Non Performing Assets
Non Performing Assets
6 Non Performing Assets Banking .
.. etc Delay in releases Directed lending … Slow decision making process Etc etc etc ….Why Loan accounts go bad ? BORROWER-SIDE BANKER – SIDE Lack of Planning Diversion of Funds Disputes within… Defective Sanction No post-sanction No contribution … No modernisation … Improper monitoring Industrial Relations.. Natural Calamities . Banking . 7 Non Performing Assets supervision.
8. 3. 5. 6.Health Code System in Indian Banks during 1980’s 1. Satisfactory Accounts Irregular Accounts Sick-viable : Under Nursing Sick – Non-viable : Sticky accounts Advances Recalled Suit Filed Accounts Decreed Debts and Debts classified by the Bank as Bad/Doubtful Accounts 8 Non Performing Assets Banking . 4. 7. 2.
Doubtful Assets 3.Asset Classification – 4 way 1993 Standard Assets All regular loan accounts & investments (Performing Assets) Non-Performing Assets 1. Sub-Standard Assets 2. Loss Assets 9 Non Performing Assets Banking .
Performing Asset defined … An account (loan or investment) is classified as Performing Asset if it does not disclose any problems and carry more than normal risk attached to the business All loan facilities which are regular ! 10 Non Performing Assets Banking .
11 Non Performing Assets Banking . including a leased asset. becomes non-performing when it ceases to generate income for the bank.N P As : Definition An asset. A credit facility in respect of which the interest and/or installment of principal has remained “past due” for a specified time.
RBI followed 8 point Health Code Also called Non Performing Loans (NPLs) or Stressed Assets An advance where interest and / or instalment of principal remain ‘overdue’ for a period of more than 90 days in respect of Term Loan / OD / CC /BP / BD / other accounts – investments.Non Performing Assets In accounting. originally Bad & Doubtful Debts In 1980s. lease and hire purchase …. Sub-standard. export finance. educational loan. Etc. Doubtful and Loss Assets… 12 Non Performing Assets Banking . SSI/SME/ agricultural. housing loan.
… Seizure and disposal of assets thro’ auctions Criminal Action per Sec 138 of NI Act … Compromises – Interest reduction / waiver. CDR Asset Securitisation under SARFAESI Act … 13 Non Performing Assets Banking . Simple or Compound calculation Lok Adalat. Stock Statements Notices on due dates – Ordy. DRT / BIFR Awards. deferment.Recovery of Loans Field Visits. Regd. Winding Up Notices. OTS. Legal … Civil Procedure. Personal persuasion.
1994 4 quarters 3 quarters Mar 31. 1995 Mar 31. 1993 Mar 31. 2004 2 quarters 1 quarter only ??? 14 Non Performing Assets Banking .Def’n of NPAs Chronologically Mar 31.
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696 3.679 % 14.757 5.436 4.816 58.52.722 60.7 12.% NPAs to Total Advances (Rs in crores) Year 1998 1999 NPAs 50.962 Total Loans 3.840 63.4 2000 2001 (Source : Trends & Progress : RBI.99.75. 2001) 16 Non Performing Assets Banking .8 11.4 14.58.
etc. Cyclones. Fire Accidents.IRAC NORMS Master circular dated 17th July.. Superceded earlier master circular dated 22nd August. 2003. Natural Calamities – Floods. 2004. 17 Non Performing Assets Banking . Earth quakes. Status-quo of classification in respect of earth-quake affected accounts available upto 15/07/2004. Failure of Monsoon..
ASSET TYPE STANDARD ASSET / PERFORMING ASSET The account is standard / performing and does not carry more than the normal risk attached to the business. NON-PERFORMING ASSET (NPA) The asset ceases to generate income for the bank. 18 Non Performing Assets Banking .
Cash Credit / Overdrafts The account is treated as ‘out of order’ if : * Outstanding Balance remains continuously in excess of sanction limit/drawing power for 90 days or more. * Credits in the account are not sufficient to cover interest debited during the same period. * No credit continuously for 90 days or more as on the date of Balance Sheet.IDENTIFICATION OF NPA Account remains ‘out of order’ for 90 days or more. 19 Non Performing Assets Banking .
one harvest season for long duration crop. 20 Non Performing Assets Banking . Bill remains overdue for 90 days Agricultural Advances Interest and/or installment remains overdue for two harvest seasons for short duration crop.IDENTIFICATION OF NPA … Term Loans Bills Purchased and or more. loan Others Any amount to be received remains overdue for 90 days or more . Discounted Interest and/or instalment remains overdue for 90 days or more.
e.CLASSIFICATION NORMS Standard Asset The account is not non-performing. (w. 21 Non Performing Assets Banking . Sub-Standard Asset A sub standard Asset is one which has remained NPA for a period less than or equal 12 months.f. 31st March 2005) Loss Assets These are accounts. identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off.
Three Categories Category Period Doubtful .I Doubtful .CLASSIFICATION NORMS Doubtful Asset .II Doubtful .III Years 22 Non Performing Assets up to One Year Up to Three Years More than Three Banking .
23 Non Performing Assets Banking .25% on Standard Assets on Global loan portfolio basis SUB-STANDARD ASSET 10% of total outstanding 20% of total outstanding if loan is unsecured abinitio (new guidelines).PROVISIONING NORMS STANDARD ASSET 0.
24 Non Performing Assets Banking .PROVISIONING NORMS SUB-STANDARD (Cont’d) Banks are permitted to phase the additional provisioning upon reduction in transition period from 18 to 12 months Over a period of four years with minimum 20% each year (new guidelines) LOSS ASSET: 100% should be provided for out standing amount.
PROVISIONING NORMS DOUBTFUL ASSETS Period Provision (Secured +Unsecured) + 100% + 100% + 100% Upto 1 year 20% 1to 3 years 30% More than 3 years 100% (effective from 31st March 2005) Outstanding as on secured portion. 2012(75%). 31st March 2011(60%) . 2013(100%) 25 Non Performing Assets Banking .
In case of advances guaranteed by DICGC/ECGC. Non Performing Assets Banking 26 . Provision should be made only for balance in excess of the amount guaranteed by these corporations.PROVISIONING NORMS Provision Under Special circumstances Normal provision on Government guaranteed advances.
Income to be recognised subject to availability of margin. Advance against gold ornaments securities not exempt. IVPs. KVPs and Life Insurance Policies need not be treated as NPAs. NSCs.2. till security cover is sufficient to cover outstanding balance. / Government 27 Non Performing Assets Banking .IMPORTANT ASPECTS Exempted Circular) Category (Para 4.10 of Master Advances against term deposits.
IMPORTANT ASPECTS Classification of a Borrower (Para 4.6 of Master Circular) All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. 28 Non Performing Assets Banking .2. Exception: Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement. Obtain cross-branch confirmation for classification.
2.IMPORTANT ASPECTS Consortium Circular) Member Advances (Para 4. recovery or obtain an express consent from the Lead Bank.7 of Master banks shall classify the accounts according to their own record of recovery. Bank needs to arrange to get their share of Bank may obtain Lead Bank confirmation & cognizance of the same may be taken? Non Performing Assets Banking 29 .
(Not available for sole banking accounts) be same accounts.16 of Master Circular Banking .15 of Circular) Master CDR is an institutional mechanism for evolving financial solution. as for restructuring under CDR will applicable to otherwise restructured Accounting treatment Projects under implementation 30 Non Performing Assets Treatment to be in line with Para 4. Corporate Debt Restructuring (CDR) .(Para 4.2.20 Crores & above.2.Corporate Debt Restructuring. CDR will be available only in respect of multiple banking/syndication/consortium accounts with outstanding exposure of Rs.
Frequent Re-schedulement of Term Loans. Adjusting Loan of one borrower against other borrower. Conversion of Overdue Limits. 31 Non Performing Assets Banking facility / . Enhancement of Limit.GREENING ISSUES Sanction/extension of Additional Adhoc facility.
32 Non Performing Assets Banking .Priority Unrealised Expenses .in the absence of clear agreement between the Bank and the Borrower. an appropriate policy to be followed in uniform and consistent manner. When an account becomes non-performing. Unrealised Interest Amount of Principal Outstanding Clarification vide Master Circular . unrealised interest of the previous year to be derecognised/ reversed.INCOME RECOGNITION Income Recognition For NPA accounts income should be recognised on realisation basis. Adjustment of Recoveries .
Movement in Provision for NPAs.DISCLOSURE At Branch Level Auditor needs to report the compliance with IRAC norms of RBI with respect to classification & provisioning for NPA and income recognition in Long Form Audit Report (LFAR) of the branch. Provision for Standard Assets & NPAs. At Head Office Level Advances are disclosed net off NPA provisions & Interest Suspense. Non Performing Assets Banking Disclosure needs to be made as required in terms of . Movements in NPAs. Accounting policy for classification. provisioning & income recognition need to be disclosed. 33 the guidelines issued by the Reserve Bank of India in connection with Percentage of Net NPAs to Net Advances.
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Asset Reconstruction Companies 37 Non Performing Assets Banking .
Experience abroad Spain . 1989 Japan .Cash Purchase of Bad Loans1982 USA .Dep Guarantee Fund : 1977-80 Chile .Resolution Trust Corp’n.Coop Cr’ Purchasing Co 1993 Poland : Rescheduled Bad Loans : 1994 Eastern Europe : Govt Bonds : 1994 (Hungary) 38 Non Performing Assets Banking .
.SECURUM . Slovak.1988 Ghana .NPA Recovery Trust – 1989 Sweden . Tanzania .Asset Privatisation Trust Malaysia .Soft loans by Central Bank Colombia.January 1993 Uganda . Czech. etc too 39 Non Performing Assets Banking .Experience abroad..1995 Philippines .
Tax 40 Non Performing Assets Banking .Asset Reconstruction Companies Capital from Banks/Financial Inst’ns ARCs in private sector like an SPV Staff from Banks/Financial Inst’ns Issue Bonds in lieu of Assets taken over Guaranteed by Government of India Stamp Duty to be exempted On par with Venture Funds for Inc.
against right of ICICI Bank 41 Non Performing Assets Banking .. etc Challenged in Supreme Court by M/s. Mardia Chemicals Ltd.Developments in India Ordinance in June 2002 on Securitisation Law Enacted by Parliament in December 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) 2002 Powers to Lenders – To Seizure of Assets. Change of Management. Securitisation of Financial Assets.
3.Setting up of AR Companies in India 1. Deutsche and UTI Bk? Corp Bank. ING Vysya and Actis to start? 42 Non Performing Assets Banking . Asset Reconstruction Company India Ltd 2. 5. Stanchart. (ARCIL) – (SBI+ HDFC+ IDBI+ ICICI Bk) Asset Care Enterprise (ACE) – (IFCI + PNB) ARC to be floated by Kotak Mahindra Bank? ASREC – Andhra Bank. 4.
Definition of ARCs (RBI _ April 2003) A company which is set up with the objective of taking over distressed assets (Non Performing Assets) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable. 43 Non Performing Assets Banking .
if necessary by special legislation. Restructuring of weak banks to divest the bad loan portfolio — essential for a comprehensive restructuring strategy of weak banks.Objectives of ARCs in India To buy out troubled loans from banks and make special efforts at recovering value from the assets. 44 Non Performing Assets Banking . with special powers for recovery.
IDBI Ltd.. ICICI Bank Ltd.arcil.Mission Statement Vision Be a major contributor to the Indian economy by capturing value from the impaired assets Mission Maximise value through innovative resolution Establish fair and transparent business practices Facilitate development of market for distress debt 45 Non Performing Assets Banking .in Sponsored by SBI.ARCIL www.co. and Punjab National Bank Vision .
ARCIL : Shareholding Pattern 46 Non Performing Assets Banking .
47 Non Performing Assets Banking .
sell and realize such assets Right to take over the management of borrowers 60 days notice by lenders is adequate No appeal permissible unless borrowers deposit 50% amount due and approach DRT / DRAT Non Performing Assets 48 Banking . 2002 amended in Dec 2004 To set up Asset Reconstruction Companies Take possession of secured assets of borrowers Right to lease out.Developments in 2004 Revised Definition of NPA to 90 Days Banks managed to bring down NPAs < 3% SARFAESI Act.
360 1.25.76.NPAs in Banks : March 2005 (Rs in Cr) Banks Public (27) Private (29) Foreign (31) IDBI Bank 49 Non Performing Assets Total Assets 16.847 4.135 8.802 Gross Net NPAs NPAs 46.038 81.216 848 Banking .715 4.380 16.
.. Thailand. outside purview of BIFR. 20 crores facing problems of repayment . DRTs and other legal proceedings To consider all viable entities with dues above Rs.CDR mechanism Corporate Debt Restructuring mechanism Similar to UK. 50 Non Performing Assets Banking . Korea & Malaysia RBI guidelines to Banks and FIs in Aug’01 To ensure timely and transparent mechanism to restructure debts.
C I B I L.. Credit Information Bureau of India Ltd Exchange of Credit Info among Banks/FIs Unscrupulous borrowers cannot play one bank against another for credit facilities Set up in January 2001 by SBI + HDFC + Dun and Bradstreet Info Pvt Ltd + Trans Union International Inc – Rs 25 cr Capital Formal set up 2005 onwards . 51 Non Performing Assets Banking ..
000 crores Says unlocking value from NPAs will help banks meet additional capital requirements Gr NPAs in financial sector – Rs 1. 2006 Bad Loans cross 16% of India’s GDP ARCIL puts figure at Rs. 65. Bad Loans Written off by Banks Rs.000 crores.11.000 crores. 52 Non Performing Assets Banking .000 crs. 27.000 crores. Corporate Debt Restructring – Rs. 2. 77.Economic Times dt Jan 05.36. Restructured Standard Assets – Rs.
Banking – Asset Quality 53 Non Performing Assets Banking .
15 1.Gross NPAs as % of Total ASSETs BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs 54 20012 4.2003.13 2.34 3.56 1.76 2.20043 4 5 4.43 20056 1.96 Banking Non Performing Assets .50 3.60 4.21 4.73 3.96 0.30 3.41 2002.00 4.90 2.89 5.20 3.64 2.52 2.50 0.09 2.44 3.86 2.42 2.
51 2.93 2.28 1.20043 4 5 1.72 0.66 0.91 0.40 Banking Non Performing Assets .79 1.116 0.23 2.66 0.81 2002.20 1.42 20056 0.95 1.17 1.80 0.42 3.43 0.30 2.90 1.2003.39 0.10 0.10 0.Net NPAs as % of Total ASSETs BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs 55 20012 2.92 0.
Net NPAs as % of Total Assets Percentages 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs Years 56 Non Performing Assets Banking .
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