2004.Defining NPA« As from 01.04. NPA shall be an advance where       Term Loans: Interest and or instalment of principal remain over due for a period of more than 90 days Overdraft and Cash Credit accounts: The account remains out of order for a period of 90 days Bill: The bill remains overdue for more than 90 days Other Accounts: Any amount to be recovered remains overdue for 90 days in respect of other accounts Agricultural Accounts: Short Duration Crops will be treated as NPA if installment remains unpaid for 2 crop-seasons beyond the due date Long Duration Crops ± 1 crop season Exhibiting potential credit risk through early warning signals .

Early Warning Signals Transaction Related           Persistent irregularity in the account Defaults in repayment obligations Frequent demands for adhoc limits from the party Rejection of products in the market Idle machineries Decline in number of shifts/workers Inventory pile up Delays in receivables collection Increased dependence on job works Technological obsolescence Activity Related .

but amount not written off fully *changed to 12 months wef 31st March.Asset Classification Standard Asset Sub ± standard asset   Classified as NPA for a period not exceeding 18 months* If renegotiated or rescheduled. 2005 . to be continued as sub standard for at least 1 year Doubtful Asset ± NPA for more than 18 months * Loss Asset ± Loss identified by internal or external auditors.

SUMMARY OF %AGES Standard Accounts: General Provision Standard Accounts: Direct Agriculture & SME Substandard Secured Substandard Un-Secured Doubtful ± upto 12 months Doubtful ± 1 ± 3 years Doubtful ± more than 3 years Loss Account 0.40% 0.25% 10% 20% 20% 30% 100% 100% .

legal and recovery costs Reduces profitability substantially Affects the morale of the employees and decision making for fresh loans suffer .NPA ± Defined Non Performing Assets or a problem loan can be defined as ³a loan where the lender has some doubts or is experiencing difficulties in obtaining repayments and. irrespective of the time frame . the outcome could be a loss of capital. Impact of NPAs       NPAs do not generate income They require provisions Borrowing cost of resources locked in NPAs Enhances administrative.

The cost of poor quality loans is shifted to bank customers through higher spreads .Consequences of NPAs Direct    It affects profitability of the unit substantially Affects banks¶ credibility and render raising of fresh capital from the market difficult Recycling of funds get blocked Indirect    Reduction in lending rate is made difficult Affect risk taking ability which ultimately affect competitiveness of the branch unit Lack of market competitiveness results in slump in credit expansion.

REASONS FOR NPA (Bank specific) Poor Credit Management      Faulty lending policy/Absence of written policies/lower entry point norms/bench mark ratios Absence of portfolio concentration limits-industry/region specific Excessive centralization or decentralization of lending authority Poor industry analysis A perfunctory financial analysis of borrowers Poor Loan Review System      Inadequate monitoring and follow up Misuse of authority He is an alright guy syndrome Complacency and casual attitude on the part of operating staff Inadequate expertise in the sector financed .

Internal ± Borrower specific        Management Inefficiency Diversion of funds and misutilisation of funds Faculty project planning resulting in time/cost over run or wrong technology Product failing to capture market Strained labour relations Willful default Product obsolescence .

Prognosis ² Strategies Preventive Detective Corrective .

PREVENTIVE NPA Management Policy Basic Tenets of Policy         Seeks to lay down bank¶s policy on management and recovery of NPA¶s Stresses on proactive initiatives to prevent fresh NPAs by prescribing time norms for detection of early warning signals for taking corrective action Effective market intelligence Periodic dialogue with the borrower Scrutiny of financial statements Control over excess drawings/overdrafts Periodical evaluation of securities Continuous watch over management of borrowing company .

DETECTIVE-WARNING SIGNALS          Look for pressure on the accounts Unauthorized excesses Turnover increasing/decreasing Hard-core borrowing appearing on current accounts Unpaid cheques in or out Frequent requests by the borrower for increase in facilities Idle assets (effect on capital employed) Hard core increase in average debit balance Delays in realization of bills receivables .

particularly timing and amounts and get agreements in writing. if possible then and there Take firm control of the position .CORRECTIVE      Discuss with the customer about the problems Collect as much information as possible about the unit discreetly Carry out a SWOT analysis of the account Visit business premises and check the security and examine as to whether additional security shall be available Set objectives for the way forward. any plans for repayment . and commitment to. investigate as to what went wrong with the original proposal of the borrower and as to where his calculations and actions have gone wrong Obtain borrower¶s understanding of. If commitments are not met. take speedy and firm action   .

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