Non Performing Assets

Project #2 INDIAN FINANCIAL SYSTEM

Submitted by - Group IV

Contents
What is NPA? Why to measure NPA? Classification of NPAs Management of NPA NPAs in India Suggestions

NPA- Definition
Definition:
Non performing Assets (NPA) as per Prudential norms on income recognition, asset classification and Provisioning on Advances issued by RBI An asset including a leased asset, becomes an NPA when it ceases to generate income for the bank. An NPA is a loan or an advance where; The interest and/or installment of principal remain overdue for a period of more than 90 days in respect of 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 of principal or interest thereon remain overdue for 2 crop seasons for the short duration crops. An installment of the principal or the interest, thereon remain overdue for 1 crop season for long duration crops. The amount of liquidity facility remains outstanding for more than 90 day, in respect of securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.

Why Measure NPA?

NPAs
result in reduced interest income require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and limit recycling of funds, set in asset-liability mismatches, etc.

Categories of NPA:
The RBI has issued guidelines to banks for classification of assets into four categories. Standard assets: (Not NPAs) These are loans which do not have any problem are less risk. Substandard assets: These are assets which come under the category of NPA for a period of less then 12 months. Doubtful assets: These are NPA exceeding 12 months Loss assets: These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI.

Tools for NPA Management by Banks

One Time Settlement/Compromise Scheme to be used by Banks for NPA for lump sum settlement upto 10 crore Lok Adalats help banks to settle disputes in doubtful and loss category over Rs. 20 Lakhs outstanding Debt Recovery Tribunal to decide on cases of Rs. 10 Lakhs & above. Corporate Debt Restructuring (CDR) for restructuring corporate debts over 20 crores Criminal suits against Willful Defaulter of Rs. 1 Crore and above. Ban on further financing by banks or FIs. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 for realisation of dues without intervention of courts & Tribunals Set up Asset Reconstruction Companies to take over/sale or lease of borrower business/ reschedule debts/ settlement of dues by borrowers. Credit Information Bureau of India (CIBIL) for providing credit data of borrowers to Banks, NBFCs, FIs

Factors responsible for NPAs in India

Internal Diversion of funds Business failure Inefficiency in management Slackness in credit management and monitoring Lack of co-ordination among leaders External Recession Input/Power shortage Price escalation Exchange price fluctuation Accidents and natural calamities

Trends of NPA across Banks 29 11 3.02 55 Public Sector Banks Private Sector Banks Foreign Banks FIs

% of Gross NPAs

Suggestions
Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility(Currently being done as per BASEL II ) Banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement. Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with the use of their strength and weakness There should be proper monitoring of the restructured accounts because there is every possibility of the loans slipping into NPAs category again.(9) Proper training is important to the staff of the banks at the appropriate level with ongoing process. That how they should deal the problem of NPAs, and what continues steps they should take to reduce the NPAs.