Non Performing Asset
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An asset or a/c of borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India. An asset which does not yield any income to the bank in the form of principal and interest payments.

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€ Banks usually classify as non performing assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. The success of a bank depends upon the methods of managing NPAs and keeping them within a tolerance level. € € . Banks need to monitor standard assets to arrest any a/c becoming a NPA.

If no assets were pledged. the lenders might writeoff the asset as a bad debt and then sell it at a discount to a collections agency. the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. . After a period of non-payment.Eg:    A loan in default would be considered nonperforming.

301 17.810 .march 2010 BANK Public Sector Banks Private Sector Banks Foreign Banks Total NPA ( Amount in crore ) 57. 384 7. 125 Total 81.Magnitude of NPA The magnitude of NPA as at end.

.Factors contributing to NPAs The underlying reasons for NPAs in India can be classified into Internal factors ii. External factors iii. Other factors i.

1) Internal Factors 1. Funds borrowed for a particular purpose but not use for the said purpose. 4. Diversion of funds for expansion / diversification / modernisation or for taking up new projects. Diversion of funds for assisting or promoting associate concerns. 2. Time or cost overrun during the project implementation stage. 3. .

6. fraud. management disputes. failure in marketing etc. Slackness in credit management and monitoring. Inefficiency in management of business. disputes. mis-appropriation etc. Poor recovery of receivables. 7.5. 10. Willful defaults. 8. 9. . Business failures due to product failure. Inappropriate technology or problems related to modern technology.

4. Input or power shortage. 2. . Exchange rate fluctuations. Price escalation of inputs. Recession in the economy as a whole.2) External Factors 1. 3.

policies relating to excise and import duties. 6. Changes in govt. . Scarcity of raw material.5. pollution control orders etc. power and other resources. 7. Accidents and natural calamities.

. 3.3) Other Factors 1. Sudden crashing of capital markets and the failure to raise adequate funds. Dependence on single customers. Poor monitoring of credits and the failure to recognise early warning signals shown by standard assets. Wrong selection of borrowers. 5. 4. Promoters over optimism in setting up large projects. 2.

9.¶s directives rather than commercial imperatives. Granting of loans for certain sectors on the basis of govt. 7. using loans granted for short term for long term transactions. Mismatch of funding ie.6. . Lack of proper planning. 8. Commitment of wilful defaults sensing that the legal recourse available to collect debts is very slow.

 .Early warning signals  Those which clearly indicate or show some signs of credit deterioration in the loan a/c. They indicate potential problems involved in the accounts so that remedial action can be can be initiated immediately.

Classification of Early Warning Signals a) b) c) d) e) Financial signals Operational signals Managerial signals Banking signals External signals .

. ii. iii. Declining sales compared to previous period. Financial Warning Signals Default in repayment. Deterioration in working capital position or in liquidity.a) i. Continuous irregularity in the a/c. iv.

vi.v. Raising level of bad debt losses. vii. Incurring operating losses or net losses. viii. Raising sales but falling profits. Substantial increase in long.term debts. .

v. iv. . Frequent labour problems. vi. iii. Evidence of over stocking and aged inventory.payment of electricity. Loss of important customers.b) i. Poor diversification and frequent changes in plan for expansion or diversification or modernisation. wages etc. Operational Warning Signals Underutilization of plant capacity. Non. ii.

Undertaking of undue risks.c) i. Change in management or ownership pattern or key personnel. ii. . iv. Lack of cooperation from key personnel. iii. Managerial Warning Signals Diversion of funds and poor financial controls.

Opening of accounts with other banks. Reduction of operations in the a/c or reduction of bank balances. . Banking Signals Frequent request for further loans. iii. iv.d) i. ii. Delays in servicing of interest.

Not routing sales transactions through account.submission of periodical statements. Dishonour of cheques or return of bills sent for collection. vii. viii.v. vi. Frequent excess in the a/c. Delays in submitting stock statements and other data or Non. .

vi.e) i. iv. Natural calamities. Weakening of industry characteristics. External Warning Signals Economic recession. v. . ii. Introduction of new technology. iii. Changes in govt. policies. Emergence of new competition.

Management of NPAs a) b) c) d) e) Ensuring that loans are diversified across several customer segments. . Introducing risk management techniques to ensure better quality of loans. Reducing operating expenses by upgrading bank technology. Improving the quality of credit monitoring system. Monitoring early warning signals and taking remedial action.

f) g) h) i) j) Adopting credit rating system to identify. Knowing a clients profile thoroughly. Appraising credit proposals professionally and insisting on timely delivery of credit. measure and monitor the credit risk. Reducing the impact of operational risks. Putting certain borrowal a/cs under watch list which shows certain distress signals. .

Legal remedies.legal remedies.Remedies available Non. . I. II.

Goods pledged may be sold without the intervention of court. mergers and takeovers.I. The debts can be assigned in favour of an agency which may collect debt for a service charge.legal remedies Compromise.    Non. .

a) b) c) Legal remedies Filing civil suits for the recovery of debts or for the enforcement of the security. Referring the cases to Debt Recovery Tribunals and Debt Recovery Appellate Tribunal set up under the Recovery of Debts due to Banks and Financial Institutions Act. 1993. Filing suits under State Recovery Acts for the recovery of debts.II. .

mediation. compromise or amicable settlement. Resolving large loans via debt recovery mechanisms.d) e) f) Referring cases to Lokadalats constituted under the Legal Services Authorities Act. Proceeding against default borrower under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI ACT) 2002. like Corporate Debt Restructuring mechanism. 1987 to resolve disputes by conciliation. .

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