Assignment on Non Performing Assets in Banking Industry

Submitted To: Deepak Tandon

Submitted By: Aditya A. Dash

Introduction:
A Non Performing Asset is a term given to a loan account where the customer of the bank has defaulted in the payments of interest and the instalments. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

*With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be 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 for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Types of NPAs:
Standard Asset: The standard asset is the asset which carries the normal risk attached to the business and it continues for a period of 90 days. It is also known as performing assets. Provisioning Norm- 0.40% on standard assets 0.25% on direct advances to agriculture and SME 1.00% on personal loans, capital market exposures, residential houses beyond Rs. 20 lakhs and commercial real estate 40%

Sub-standard Asset: This asset would be classified as sub-standard if it remains NPA for less than or equal to 2 years. Provisioning Norm- 10% on total outstanding irrespective of security coverage/ guarantee. The unsecured portion will attract additional provision of 10 percent. Doubtful Asset: This asset would be classified as doubtful asset if it remains NPA for more than 2 years. Provisioning Norms- 100% shortfall in the securities and 20%/ 30%/ 50%/ 100% depending upon the age of the asset. Loss Asset: These assets are the NPAs which have negligible realizable value of security and the balance outstanding is 100%. Here the account can be written off by the banks and these assets are handed over to the recovery agents for sale.

Factors behind rise in NPA External Factors:

These are the factors that are not under control of any given banking institution: Ineffective recovery tribunal Wilful Defaults Natural calamities Industrial sickness Change on Govt. policies Lack of demand

Internal factors:
These are the factors that are in the control of the banking institution: Defective lending process Inappropriate technology Improper SWOT analysis Re-loaning process Absence of regular industrial visit Poor credit appraisal system Managerial deficiencies

Effects of NPAs on banks and financial institutions

1. 2. 3. 4. 5. Drain on profit Bad effect on goodwill Bad effect on equity value Excess focus Credit Risk Management High cost of funds due to NPAs

NPAs of Public Sector Banks:

(Amount in ` Million) Banks Gross NPAs As on March 31, 2012 Gross Advances (2) Gross NPAs to Gross Advances Ratio (%) (3)

(1) Public Sector Banks State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore SBI and its Associates 371560 16515 20074 15026 18878 14888 456940

7578886 499863 783115 406526 641418 560343 10470151

4.90 3.30 2.56 3.70 2.94 2.66 4.36

Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank IDBI Bank Limited Nationalised Banks $ Public Sector Banks Note : 1. Data are provisional. 2. $ Includes IDBI Bank Ltd. Source : Department of Banking Supervision, RBI.

20564 17980 38818 51697 12970 38901 72735 12742 9565 16715 35537 35805 7634 86899 30507 40197 54222 21764 17185 45514 667950 1124890

1075272 846840 2054536 1779502 569789 2224944 1506499 1008253 571592 863104 1274189 1130498 463686 2761077 1109533 1078399 1718496 638730 586710 1772092 25033740 35503890

1.91 2.12 1.89 2.91 2.28 1.75 4.83 1.26 1.67 1.94 2.79 3.17 1.65 3.15 2.75 3.73 3.16 3.41 2.93 2.57 2.67 3.17

NPAs for Private Sector Banks:

TABLE B7 : BANK WISE AND BANK GROUP-WISE GROSS NON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS NPA RATIO OF SCHEDULED COMMERCIAL BANKS 2012 (Contd.) (Amount in ` Million) Banks Gross NPAs (1) Private Sector Banks Catholic Syrian Bank Ltd City Union Bank Limited The Dhanalakshmi Bank Ltd Federal Bank Ltd ING Vysya Bank Ltd Jammu & Kashmir Bank Ltd Karnataka Bank Ltd Karur Vysya Bank Ltd Lakshmi Vilas Bank Ltd Nainital Bank Ltd Ratnakar Bank Ltd South Indian Bank Ltd Tamilnad Mercantile Bank Ltd Old Private Sector Banks Axis Bank Limited Development Credit Bank Ltd. HDFC Bank Ltd. ICICI Bank Limited Indusind Bank Ltd Kotak Mahindra Bank Ltd. 1829 1235 1043 13008 1495 5166 6847 3210 3077 310 331 2672 1775 41999 17202 2418 18149 92926 3471 6142 77677 122217 88041 388113 288335 335447 209494 242051 103283 19254 41570 274732 138964 2329177 1459049 54967 1909689 1923338 353164 394519 2.36 1.01 1.18 3.35 0.52 1.54 3.27 1.33 2.98 1.61 0.80 0.97 1.28 1.80 1.18 4.40 0.95 4.83 0.98 1.56 As on March 31, 2012 Gross Advances Gross NPAs to Gross Advances Ratio (%) (3)

(2)

Yes Bank Ltd. New Private Sector Banks Private Sector Banks Note : 1. Data are provisional. Source : Department of Banking Supervision, RBI.

839 141147 183146

380550 6475275 8804453

0.22 2.18 2.08

NPAs for Foreign banks:

TABLE B7 : BANK WISE AND BANK GROUP-WISE GROSS NON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS NPA RATIO OF SCHEDULED COMMERCIAL BANKS - 2012 (Concld.) (Amount in ` Million) Banks As on March 31, 2012 Gross NPAs (1) Foreign Banks Ab Bank Limited Abu Dhabi Commercial Bank Ltd American Express Banking Corp. Antwerp Diamond Bank Nv BNP Paribas Bank of America N.t. and S.a. Bank of Bahrain & Kuwait B.s.c. Bank of Ceylon Bank of Nova Scotia Barclays Bank Plc Chinatrust Commercial Bank Citibank N.a Commonwealth Bank of Australia Credit Agricole Corporate and Investment Bank Credit Suisse Ag 31 234 996 275 7 315 15 96 5472 163 8464 9 684 2924 14800 9700 62075 61833 6573 824 66152 90788 2918 475257 899 19196 2500 1.07 1.58 10.27 0.44 0.01 4.79 1.86 0.15 6.03 5.58 1.78 0.05 Gross Advances (2) Gross NPAs to Gross Advances Ratio (%) (3)

DBS Bank Ltd. Deutsche Bank Ag Firstrand Bank Ltd Hongkong and Shanghai Banking Corpn.ltd. Jpmorgan Chase Bank National Association JSC VTB Bank Krung Thai Bank Public Company Limited Mashreq Bank Psc Mizuho Corporate Bank Ltd Oman International Bank S.a.o.g. Shinhan Bank Societe Generale Sonali Bank Standard Chartered Bank State Bank of Mauritius Ltd The Bank of Tokyo-mitsubishi Ufj Ltd The Royal Bank of Scotland N.v. UBS AG United Overseas Bank Ltd Sberbank Rabobank International National Australia Bank Industrial and Commercial Bank of China Australia and New Zealand Banking Group Lim Foreign Banks All Scheduled Commercial Banks Note : 1. Data are provisional. Source : Department of Banking Supervision, RBI.

2147 1349 7201 269 63 12 8 32122 210 3465 62922

129815 126724 2416 360121 45562 788 94 523 35879 41 9146 10576 195 583960 8266 64525 127877 6312 3513 455 13187 2347096

1.65 1.06 2.00 0.59 0.18 0.11 3.84 5.50 2.54 2.71 2.68 2.94

1370957 46655438

SARFAESI Act 2002:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act empower banks and financial institutions to recover their non performing assets without the intervention of court. The act provides for three different methods for recovery of NPAs and they are: Securitisation Asset Reconstruction Enforcement of Security without intervention of court The provisions of the act are applicable only for NPA loans outstanding above Rs. 1 lakh. NPA loan accounts where the amount is less than 20% of the principal and the interest are not eligible to be dealt under the act. If the borrower fails to repay the debt and defaults the banks can: a) take possession of the secured assets of the borrower, including transfer by the way of lease, assignment or sale, for realizing the secured assets. b) takeover the management of business of the borrower including the right of transfer by the way of lease, assignment or sale for realizing the secured assets. c) appoint any person to manage the secured assets possession of which is taken by the secured creditor. d) require a person, who has acquired any of the secured assets from the borrower and from whom money is due to the borrower, to pay the secured creditor so much of the money as if sufficient to pay the secured debt.

Debt Recovery Tribunal

It is a special court established by the government for the purpose of recovery by the financial institutions and the banks. The judges of the court are the retired judges of the high court. In this court only recovery cases of 10 lakh and above can be filed.

Sale of NPAs to other banks:

A NPA is eligible for sale to other banks only if it has remained a NPA for at least two years in the books of the selling bank The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banks but not to bank, which originally sold the NPA. The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasing If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.

References:
*http://en.wikipedia.org/wiki/Non-performing_asset http://www.thehindu.com/opinion/columns/Chandrasekhar/how-safe-are-indiasbanks/article4042975.ece

http://rbi.org.in/Scripts/PublicationsView.aspx?Id=14709