INSTITUTE - USB

DEPARTMENT - BBA
Bachelor of Business Administration
Subject Name- Banking
Subject Code- BAT-212
Faculty Name – Gagandeep Kaur (E6452)

DISCOVER . LEARN . EMPOWER

Topic – Non Performing Assets
 Non Performing
Assets
Course Objective
To deepen insights into practical applications of
Banking in a dynamic business environment.

Course Outcome
CO Title Level
Number
CO1 Remembering
Conceptual knowledge about Banking
 
structure and Indian financial system
CO2 Understanding https://images.app.goo.gl/Y2kbsE8vi8Y1gu7x8
Comprehend the need, definition,  
functions and economic significance of
financial institutions and markets

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 DEFINITION OF NPAS
• A NPA is a loan or an advance where;
• Interest and/ or installment of principal remain overdue for a
period of more than 90 days in respect of a term loan,
• The account remains “out of order” in respect of an overdraft/
cash credit
• The bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted
• The installment or interest remains overdue for two crop
seasons in case of short duration crops and for one crop season
in case of long duration crops
NPA Identification – A Regular Exercise: -

• NPA identification is an ongoing process. An asset should be classified

as NPA within a month of its’ becoming NPA & provisions for NPA
should be done on quarterly basis rather than at year end only.
 CATEGORIES OF NPA

• Substandard Assets – Which has remained NPA for a period less than
or equal to 12 months.
• Doubtful Assets – Which has remained in the NPA for a period more
than 12 months
• Loss Assets – where loss has been identified by the bank or internal
or external auditors or the RBI inspection, salvage value of security is
negligible & the entire asset is proposed to be w/off after necessary
approvals
 PROVISIONING NORMS
Asset Particulars Provision
Classification Required %

Standard Direct Advances to Agriculture & SME Sectors 0.25

Commercial Real Estate Advances 1.00
All other Loans & Advances not included in above 0.40

Sub-standard Secured Exposure 15

Unsecured Exposure for Escrow A/cs available in 20
case of Infrastructure lending, infrastructure loan
accounts
Other Unsecured Exposure 25
 PROVISIONING NORMS
Asset Classification Particulars Provision Required %

Doubtful - Secured Unsecured

D1 (Upto 1 year) 25 100

D2 (One to Three years) 40 100
D3 (More than 3 years) 100 100

Loss Loss Asset 100

 FACTORS CONTRIBUTING TO NPAS

• Poor Credit discipline

• Inadequate Credit & Risk Management
• Diversion of funds by promoters
• Funding of non-viable projects
• In the early 1990s PSBs started suffering from acute capital
inadequacy and lower/ negative profitability. The parameters set for
their functioning did not project the paramount need for these
corporate goals.
• The banks had little freedom to price products, cater products to
chosen segments or invest funds in their best interest
 FACTORS CONTRIBUTING TO NPAS
• Since 1970s, the SCBs functioned as units cut off from international
banking and unable to participate in the structural transformations
and new types of lending products.
• Audit and control functions were not independent and thus unable
to correct the effect of serious flaws in policies and directions
• Banks were not sufficiently developed in terms of skills and expertise
to regulate the humongous growth in credit and manage the diverse
risks that emerged in the process
 FACTORS CONTRIBUTING TO NPAS

• Inadequate mechanism to gather and disseminate credit information

amongst commercial banks
• Effective recovery from defaulting and overdue borrowers was hampered
on account of sizeable overhang component arising from infirmities in the
existing process of debt recovery, inadequate legal provisions on
foreclosure and bankruptcy and difficulties in the execution of court
decrees.
 IMPACT OF NPAS ON OPERATIONS

• Drain on Profitability
• Impact on capital adequacy
• Adverse effect on credit growth as the banker’s prime focus becomes
zero percent risk and as a result turn lukewarm to fresh credit.
• Excessive focus on Credit Risk Management
• High cost of funds due to NPAs
 NPA MANAGEMENT – PREVENTIVE
MEASURES
• Formation of the Credit Information Bureau (India) Limited (CIBIL)
• Release of Wilful Defaulter’s List. RBI also releases a list of borrowers
with aggregate outstanding of Rs.1 crore and above against whom
banks have filed suits for recovery of their funds
• Reporting of Frauds to RBI
• Norms of Lender’s Liability – framing of Fair Practices Code with
regard to lender’s liability to be followed by banks, which indirectly
prevents accounts turning into NPAs on account of bank’s own failure
 NPA MANAGEMENT – PREVENTIVE
MEASURES
• Risk assessment and Risk management
• RBI has advised banks to examine all cases of wilful default of Rs.1
crore and above and file suits in such cases. Board of Directors are
required to review NPA accounts of Rs.1 crore and above with
special reference to fixing of staff accountability.
• Reporting quick mortality cases
• Special mention accounts for early identification of bad debts. Loans
and advances overdue for less than one and two quarters would
come under this category. However, these accounts do not need
provisioning
 NPA MANAGEMENT - RESOLUTION

• Compromise Settlement Schemes

• Restructuring / Reschedulement
• Lok Adalat
• Corporate Debt Restructuring Cell
• Debt Recovery Tribunal (DRT)
• Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR
• National Company Law Tribunal (NCLT)
• Sale of NPA to other banks
• Sale of NPA to ARC/ SC under Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act 2002
(SRFAESI)
 NPA MANAGEMENT - RESOLUTION
• Compromise Settlement Schemes
• Restructuring / Reschedulement
• Lok Adalat
• Corporate Debt Restructuring Cell
• Debt Recovery Tribunal (DRT)
• Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR
• National Company Law Tribunal (NCLT)
• Sale of NPA to other banks
• Sale of NPA to ARC/ SC under Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act 2002
(SRFAESI)
 Capital Adequacy Ratio (CAR)
• (CAR) is the ratio of a bank’s capital in relation to its risk-weighted
assets and current liabilities. It is decided by central banks and bank
regulators to prevent commercial banks from taking excess leverage
and becoming insolvent in the process.

In other words, it measures how much capital does a bank has with it
as a percentage of its total credit exposure. Bank regulators enforce
this ratio to ensure credit discipline in order to protect depositors and
promote stability and efficiency in the financial system.
 Capital Adequacy Ratio (CAR)
• The formula used to measure Capital Adequacy Ratio is = (Tier I + Tier
II + Tier III (Capital funds)) /Risk weighted assets)

• Here Tier I capital is a bank's core capital consisting of shareholders'

equity and retained earnings; while Tier II capital includes revaluation
reserves, hybrid capital instruments, and subordinated term debt. Tier
III capital consists of Tier II capital plus short-term subordinated loans.
The risk-weighted assets take into account credit risk, market risk and
operational risk.
 REFERENCES
• Reference Books
1.Indian Banking – S. Natarajan and Dr. R Parameswaran – S Chand
Company and Ltd.
2.Introduction to Banking - Vijayaragavan Iyengar – Excel books
• Reference Website
• https://testbook.com/blog/history-of-banking-in-india/
• https://www.thebalance.com/what-is-banking-3305812
• https://groww.in/blog/the-evolution-of-banking-in-india/

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 Summary
• The Banking System plays vital role in the economic
development of the country. The banking sector has shown
tremendous growth in Indian Financial System from 18
century to till date. The Indian banking system comprises of
large no. of banking institutions, as discussed in Structure of
Indian Banking System, providing financial services mainly
financial assistance to the public or business houses
especially to the weaker sections of the country.

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 THANK YOU

For queries
Email: gagandeep.usb@cumail.in