Commercial Banking : NPAs

Banking

Non Performing Assets

NON PERFORMING ASSETS INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING NORMS (IRAC NORMS) &
Asset Reconstruction Companies

Banking

Non Performing Assets

Why Loan accounts go bad ?

        

BORROWERBORROWER-SIDE Lack of Planning Diversion of Funds Disputes within No contribution No modernisation Improper monitoring Industrial Relations.. Natural Calamities ...

  

  

BANKER SIDE Defective Sanction No post-sanction postsupervision, etc Delay in releases Directed lending Slow decision making process Etc etc etc .
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Banking

Non Performing Assets

Asset Classification 4 way - 1993



Standard Assets
All regular loan accounts & investments (Performing Assets)

NonNon-Performing Assets
1. Sub-Standard Assets Sub2. Doubtful Assets 3. Loss Assets

Banking

Non Performing Assets

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 !

Banking

Non Performing Assets

N P As : Definition


An asset, including a leased asset, becomes non-performing when it nonceases to generate income for the bank. bank. A credit facility in respect of which the interest and/or instalment of principal has remained OVERDUE for a specified time. time.
Non Performing Assets 7

Banking

Recovery of Loans


    

 

Field Visits, Personal persuasion, Stock Statements Notices on due dates Ordy, Regd, Legal Civil Procedure, Winding Up Notices, Seizure and disposal of assets thro auctions Criminal Action per Sec 138 of NI Act Compromises Interest reduction / waiver, deferment, Simple or Compound calculation Lok Adalat, DRT / BIFR Awards, OTS, CDR Asset Securitisation under SARFAESI Act
Banking Non Performing Assets 8

ASSET TYPE
STANDARD ASSET / PERFORMING ASSET
The account is not non-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.
Banking Non Performing Assets 9

IDENTIFICATION OF NPA
Cash Credit / Overdrafts Account remains out of order for 90 days or more. 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. No credit continuously for 90 days or more as on the date of Balance Sheet. Credits in the account are not sufficient to cover interest debited during the same period.

Banking

Non Performing Assets

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IDENTIFICATION OF NPA
Term Loans Interest and/or instalment remains overdue for 90 days or more. Bill remains overdue for 90 days or more. Interest and/or installment remains overdue for two harvest seasons for short duration crop, one harvest season for long duration crop. Any amount to be received remains overdue for 90 days or more .
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Bills Purchased and Discounted Agricultural Advances

Others

Banking

Non Performing Assets

CLASSIFICATION NORMS
Standard Asset The account is not non-performing. Sub-Standard Asset
A sub standard Asset is one which has remained NPA for a period less than or equal 12 months. (w.e.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.
Banking Non Performing Assets 12

CLASSIFICATION NORMS
Doubtful Asset - Three Categories Category Doubtful - I Doubtful - II Doubtful - III
Banking

Period up to 1 Year >1year but Up to 3 Years >3 Years

Non Performing Assets 13

PROVISIONING NORMS (As per annual policy 2011-12) 2011STANDARD ASSET



   

0.25% on Standard Assets on Global loan portfolio basis for Agriculture and SME advances 1% for Commercial Real Estate 0.40% for other remaining advances (except below) 2% for Restructured accounts for 1st two years 2% Upgraded NPA to Std restructured accounts for the period of one year
Non Performing Assets 14

Banking

PROVISIONING NORMS
SUB-STANDARD ASSET  15% of total outstanding  20% in case of Infrastructure Projects  25% of total outstanding if loan is unsecured ab initio (Annual Policy Guidelines 2011-12)

Banking

Non Performing Assets

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PROVISIONING NORMS
DOUBTFUL ASSETS
Period Provision (Secured +Unsecured) + 100% + 100% + 100%

Upto 1 year 25% 1to 3 years 40% More than 3 years 100% (effective for the Fin. Yr. 2011-12)

LOSS ASSET: 100% should be provided for

Banking Non Performing Assets 16

PROVISIONING NORMS
Provision Under Special circumstances  Normal provision on Government guaranteed advances.


In case of advances guaranteed by DICGC/ECGC, Provision should be made only for balance in excess of the amount guaranteed by these corporations.
Banking Non Performing Assets 17

IMPORTANT ASPECTS
Exempted Category Master Circular) (Para 4.2.10 of
 Advances against term deposits, NSCs, IVPs, KVPs and Life Insurance Policies need not be treated as NPAs, till security cover is sufficient to cover outstanding balance.  Income to be recognised availability of margin.

subject

to /

 Advance against gold ornaments Government securities not exempted.

Banking

Non Performing Assets

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IMPORTANT ASPECTS
Classification of a Borrower
(Para 4.2.6 of Master Circular)


All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. Obtain cross-branch confirmation for classification Exception: Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement.

 

Banking

Non Performing Assets

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IMPORTANT ASPECTS
Consortium Advances (Para 4.2.7 of Master Circular)
 Member banks shall classify the accounts according to their own record of recovery. recovery.  Bank needs to arrange to get their share of recovery or obtain an express consent from the Lead Bank. Bank.  Bank may obtain Lead Bank confirmation & cognizance of the same may be taken?
Banking Non Performing Assets 20

GREENING ISSUES
Sanction/extension of Additional Adhoc facility. Enhancement of Limit. Conversion of Overdue Limits. Frequent Re-schedulement of Term Loans. Adjusting Loan of one borrower against other borrower.
Banking Non Performing Assets 21

facility /

INCOME RECOGNITION
Income Recognition
For NPA accounts income should be recognised on realisation basis. When an account becomes non-performing, unrealised interest of the previous year to be derecognised/ reversed.

Adjustment of Recoveries - Priority

Unrealised Expenses Unrealised Interest Amount of Principal Outstanding Clarification vide Master Circular - in the absence of clear agreement between the Bank and the Borrower, an appropriate policy to be followed in uniform and consistent manner.

Banking

Non Performing Assets

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Asset Reconstruction Companies

Banking

Non Performing Assets

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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, etc Challenged in Supreme Court by M/s. Mardia M/s. Chemicals Ltd., against right of ICICI Bank Ltd.
Banking Non Performing Assets 24

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 remake those assets saleable
Non Performing Assets 25

Banking

Objectives of ARCs in India



To buy out troubled loans from banks and make special efforts at recovering value from the assets, if necessary by special legislation, with special powers for recovery. recovery. Restructuring of weak banks to divest the bad loan portfolio essential for a comprehensive restructuring strategy of weak banks. banks.
Non Performing Assets 26

Banking

CIBIL www.cibil.com
  

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 ...
Banking Non Performing Assets 27