A Presentation oN

NON-PERFORMING ASSETS

PRESENTED TO: PRESENTED BY

Prof. Haresh Barot Vishnu Patel (113)
Vijay Makvana(59)
Apurva Kataria (57)
 Contents

Meaning of NPA
Classification of NPA
Factors contributing to NPA
Impact of NPA on Operations
Reasons for an account becoming NPA
Preventive Measures
NPA Management-Resolution
Conclusion

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 NPA –Meaning
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 bill remains overdue for a period of more than
90 days in the case of bills purchased and discounted
The installment or interest of principal remains
overdue for two crop seasons in case of short
duration crops and for one crop season in case of
long duration crops

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 Definition of NPA

 An asset, including a leased asset, becomes non performing

when it ceases to generate income for the bank
 NPA is defined as an advance for which interest or
repayment of principal or both remain outstanding for a period
of more than one quarters.
 An asset is classified as Non-performing Asset (NPA) if due
in the form of principal and interest are not paid by the
borrower for a period of 90 days.

The level of NPA acts as an indicator showing that the bankers

credit risks and efficiency of its allocation of resource.
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 Classification of NPA
NPA is an asset or account of a borrower, which is
classified by a bank or financial institution based on
the strength and on collateral securities into sub-
standard asset, doubtful asset and loss asset .
 Standard assets-These are loans which do not have any
problem and has less risk
 Substandard Assets – Which has remained NPA for a period
less than or equal to 12 months.
 Doubtful Assets – Which has remained in the sub-standard
category for a period of 12 months
 Loss Assets – where loss has been identified by the bank or
internal or external auditors or the RBI inspection but the
amount has not been written off wholly.
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 Factors contributing to NPAs
Diversion of funds by promoters
Poor Credit discipline
Inadequate Credit & Risk Management
Business failure,
Deficiencies on the part of banks
Funding of non-viable projects
Government policies
Absence of written policies
Recession, input and power shortage, price escalation,
accidents, natural calamities, external problems in other
countries leading to non –payment of over dues.
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Cont…

Time and cost over run during project implementation

stage.
Delay in finalization of rehabilitation package by the
board of Industrial and Reconstruction (BIFR).
Excessive reliance on collateral, absence of follow up
action by banks, poor control on loan documentation
Inadequate mechanism to gather and disseminate credit
information amongst commercial banks
The lack of co-ordination between the financial
institutions and commercial banks, which provide long-
term needs of industry that, enables the industry to
misuse the funds.
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 Impact of NPAs on Banking Operations
Drain on Profitability
Banks profitability is affected adversely because of the
providing of doubtful debts and consequent to writing it off
as bad debts.
Return on investments (ROI) is reduced.
The capital adequacy ratio is disturbed as NPAs are entering
into its calculation.
The assets and liability mismatch will widen.
The economic value addition (EVA) by banks gets upset
because EVA is equal to the net operating profit minus cost
of capital and
It limits recycling of the funds.
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 General reasons for an account becoming NPA
Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. In-ability of the corporate to raise capital through the issue of equity or
other debt instrument from capital markets.
5. Business failures.
6. Diversion of funds for expansion\modernization\setting up new projects\
helping or promoting sister concerns.
7. Willful defaults, draw off funds, fraud, disputes, management disputes,
mis-appropriation etc.,
8. Deficiencies on the part of the banks viz. in credit appraisal, monitoring
and follow-ups, delay in settlement of payments\ subsidiaries by government
bodies etc.,

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External factors:
1. Sluggish legal system -
Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation,
power shortage, industrial recession, excess capacity, natural
calamities like floods, accidents.
5. Failures, non payment\ over dues in other countries, recession in
other countries, externalization problems, adverse exchange rates
etc.
6. Government policies like excise duty changes, Import duty
changes etc.,
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 Other Causes
a) Failure to bring in Required capital
b) Too ambitious project
d) Unwanted Expenses
e) Over trading
f) Imbalances of inventories
g) Lack of proper planning
h) Dependence on single customers
i) Lack of expertise
j) Improper working Capital Mgmt.
k) Mis-management
l) Diversion of Funds
m) Poor Quality Management
n) Heavy borrowings
o) Poor Credit Collection
p) Lack of Quality Control
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 NPA Management – Preventive measures
Formation of the Credit Information Bureau (India)
Limited (CIBIL)
Release of Willful 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
Credit assessment and Risk management
RBI has advised banks to examine all cases of willful
default of Rs.1 corer 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.
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 NPA Management - Resolution
Compromise Settlement Schemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Proceedings under the Code of Civil Procedure
Board for Industrial & Financial Reconstruction
(BIFR)/ AAIFR
National Company Law Tribunal (NCLT)
Sale of NPA to other banks

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 Compromise Settlement Schemes
Banks are free to design and implement their own
policies for recovery and write off incorporation
compromise and negotiated settlements with board
approval

Specific guidelines were issued in May 1999 for one

time settlement of small enterprise sector.

Guidelines were modified in July 2000 for recovery of

NPAs of Rs.5 crore and less as on 31st March 2007.

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 Restructuring and Rehabilitation

Banks are free to design and implement their own

policies for restructuring/ rehabilitation of the NPA
accounts

Reschedulement of payment of interest and principal

after considering the Debt service coverage ratio,
contribution of the promoter and availability of
security

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 Lok Adalats
Small NPAs up to Rs.20 Lacs
Speedy Recovery
Veil of Authority
Soft Defaulters
Less expensive
Easier way to resolve

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 Sale of NPA 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
 The bank may purchase/ sell NPA only on without recourse basis
 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.

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 CONCLUSION
The Indian banking sector is facing a serious problem
of NPA. The extent of NPA is comparatively higher
in public sectors banks. To improve the efficiency
and profitability, the NPA has to be scheduled and
percentage should be reduced.

Various steps have been taken by government to

reduce the NPA. It is highly impossible to have zero
percentage NPA. But at least Indian banks can try
competing with foreign banks to maintain
international standard
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 THANK
YOU

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