NON PERFORMING

ASSETS (NPA)
Non Performing Asset (NPA)

A nonperforming asset (NPA) refers to a classification for loans or advances that

are in default or in arrears. A loan is in arrears then principal or interest
 payments are late or missed. A loan is in default when the lender considers the
loan agreement to be broken and the debtor is unable to meet his obligations.
1.Nonperforming assets are listed on the balance sheet of a bank or other
financial institution. After a prolonged period of non-payment, the lender will
force the borrower to liquidate any assets that were pledged as part of the debt
agreement. If no assets were pledged, the lender might write-off the asset as a 
bad debt and then sell it at a discount to a collection agency.
Identifications of NPA’s

 Term Loan : Interest and /or installment of principal remain overdue for a
period of more than 90 days.
 Cash credit and Overdraft accounts : The account remained out of order for a
period of more than 90 days in resect of an over draft or cash credit accounts.
 Bills purchased and discounted :The bills remained overdue for a period of
more than 90 days in case of bills purchased and discounted.
 Agriculture advances : Interest and /or installment of principal remained
overdue for 2 harvest seasons but for a period not exceeding 2 and half years
in case of advance granted for agricultural purposes.
 Other accounts : Any amount to be received remained overdue for a period of
more than 90 days in respect of other accounts.
Classification of assets
Standard assets

 It carries not more than the normal risk attached to the business and is not an
NPA.
 Standard assets are the ones in which the bank is receiving interest as well as
the principal amount of the loan regularly from the customer. Here it is also
very important that in this case the arrears of interest and the principal
amount of loan do not exceed 90 days at the end of financial year.
 If asset fails to be in category of standard asset that is amount due more than
90days then it is NPA and NPAs are further need to classify in sub categories.
Sub-standard Asset

 A sub-standard asset is one which has remained NPA for a period less than or
equal to 12months from 31.3.2005.
 In such case the current net worth of the borrower/guarantor or the current
market value of the security charged is not enough to ensure recovery of the
dues to the banks in full.
 In other words, such an asset will have well defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not
corrected.
Doubtful Assets:

 With effect from 31.3.2005, an asset is to be classified as doubtful, if it has

remained NPA for a period exceeding 12 months. A loan classified as doubtful
has all the weaknesses inherent in assets that were classified as sub-standard,
with the added characteristics that the weaknesses make collection or
liquidation in full, - on the basis of currently known facts, conditions and
values- highly questionable and improbable.
Loss Assets

 An asset identified by the bank or internal/ external auditors or RBI

inspection as loss asset, but the amount has not yet been written off wholly
or partly. The banking industry has significant market inefficiencies caused by
the large amounts of Non Performing Assets (NPA)in bank portfolios,
accumulated over several years.
Prudential Norms in NPA :

 A loan asset of a bank is considered as a Standard Asset as long as the borrower is paying the
interest, instalments and other charges as and when debited to his account. A period of 30
days is generally allowed to the borrower to make such payments to the bank. In case the
borrower fails to pay or service the account within 30 days from the data of charging, the
borrowal account is termed as Irregular/Out of Order.
 An account remaining irregular continuously for 90 days is classified as Sub-standard/Non-
Performing Asset (NPA). Thus, in line with the international practices on prudential norms
for banks, an asset is defined as non-performing when it ceases to generate income for the
bank. Availability of security is never a criterion for deciding whether a loan asset is
performing or non-performing.
 In terms of the prudential norms, an overdue amount means any amount due to the bank
under any credit facility, which is not paid by the borrower on the due date fixed by the
bank. Further, any amount to be received for use of credit cards, debits in suspense
account, etc., from a customer and if it remains overdue for a period of more than 90 days,
the same is also to be treated as NPA.
Capital Adequacy Ratio (CAR)

 The CAR is the parameter to reflect the financial soundness of banks. Banks maintain
capital to cushion the risk of loss in value of exposure, businesses etc. so as to protect the
depositors and general creditors against losses. Bank has a well defined Internal Capital
Adequacy Assessment Policy (ICAAP) to comprehensively evaluate and document all risks
and substantiate appropriate capital allocation so as to evolve a fully integrated
risk/capital model for both regulatory and economic capital.
 The capital requirement is affected by the economic environment, the regulatory
requirement and by the risk arising from bank’s activities. The purpose of capital planning
of the bank is to ensure the adequacy of capital at the times of changing economic
conditions, even at times of economic recession. In capital planning process the bank
reviews:
  Current capital requirement of the bank.
  The targeted and sustainable capital in terms of business strategy and risk appetite.
  The future capital planning is done on a three-year outlook
Reasons behind rise in NPA

 Lack of proper pre-enquiry by the bank for sanctioning a loan to a customer.

 Non performance of the business or the purpose for which the customer has
taken the loan.
 Willful defaulter.
 Loans sanctioned for agriculture purposes.
 Change in govt. policies leads to NPA.
Effects of NPA On Banks & FI

 Restriction on flow of cash done by bank due to the provisions of fund made
against NPA.
 Drain of profit.
 Bad effect on goodwill.
 Bad effect on equity value.
Factors Impacting rise in NPAs

 Defective Lending process

 Inappropriate / non –use of technology like MIS , Computerization
 Improper SWOT analysis
 Inadequate credit appraisal system(Credit appraisal can be defined as the
assessment  of risk that impact the repayment of loan, i.e. this question is
important to the lending institution " would i get my money back?“)
 Managerial deficiencies
 Absence of regular industrial visits & monitoring
 Deficiencies in re-loaning process
 Alleged corruption
 Inadequate networking & linkages b/w banks
Wilful Default

 A "wilful default" would be deemed to have occurred if any of the following events is noted :-
 (a) The unit has defaulted in meeting its payment / repayment obligations to the lender even
when it has the capacity to honour the said obligations.
 (b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has
not utilised the finance from the lender for the specific purposes for which finance was availed of
but has diverted the funds for other purposes.
 (c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has
siphoned off the funds so that the funds have not been utilised for the specific purpose for which
finance was availed of, nor are the funds available with the unit in the form of other assets.
 (d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has
also disposed off or removed the movable fixed assets or immovable property given by him or it
for the purpose of securing a term loan without the knowledge of the bank/lender.
 (e) Routing of funds through any bank other than the lender bank or members of consortium
without prior permission of the lender;
Effect of NPA on Profitability of Bank or
FI
 Asset (Credit) contraction : The increased NPAs put pressure on recycling of
funds and reduces the ability of banks for lending more and thus results in
lesser interest income. It contracts the money stock which may lead to
economic slowdown
 Liability Management: In the light of high NPAs, Banks tend to lower the
interest rates on deposits on one hand and likely to levy higher interest rates
on advances to sustain NIM. This may become hurdle in smooth financial
intermediation process and hampers banks’business as well as economic
growth.
 Capital Adequacy: As per Basel norms, banks are required to maintain
adequate capital on risk-weighted assets on an ongoing basis. Every increase in
NPA level adds to risk weighted assets which warrant the banks to shore up
their capital base further
Contd…..

 Shareholders’ confidence: Normally, shareholders are interested to enhance

value of their investments through higher dividends and market capitalization
which is possible only when the bank posts significant profits through
improved business.
 Public confidence: Credibility of banking system is also affected greatly due
to higher level NPAs because it shakes the confidence of general public in the
soundness of the banking system.