NON PERFORMING ASSETS

Rohan Mohanty Hitesh Nanda Rohit Sharma Sonali Sharma Vikram Jhalani Prateek Bhansali

WHAT IS NPA ?
Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the guidelines issued by The Reserve Bank of India. 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' for a period of more than 90 days, in respect of an Overdraft/Cash Credit.

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A loan granted for a crop will be treated as NPA, if the installment of principal and/or interest thereon remains overdue for two crop seasons, beyond due date.

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 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.

FACTORS CONTRIBUTING TO NPA

Poor Credit discipline Inadequate Credit & Risk Management Funding of non-viable projects Inadequate mechanism to gather and disseminate credit information amongst commercial banks Audit and control functions were not independent and thus unable to correct the effect of serious flaws in policies and directions

IMPACT OF NPA ON OPERATIONS

Drain on Profitability Impact on capital adequacy Adverse effect on credit growth as the bankers 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

RBI GUIDELINES FOR NPA

These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling NPA, from/ to other banks/FIs/NBFCs. The guidelines can be divided into 3 groups: I. Procedure for purchase/ sale of non performing financial assets by banks, including valuation and pricing aspects.
II.

Prudential norms for purchase/ sale of non performing financial assets

Disclosure requirements

III.

PROCEDURE FOR PURCHASE/SALE OF NPA

The Bank should ensure that purchase sale of NPA is done according to policy approved by the board. While laying the policy the board shall satisfy itself that the bank have adequate skills to purchase NPA and deal with that in an efficient manner. The estimated cash flows are normally expected to be realized with in three years and not less than 5% of cash flows should be realized in each half year.

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A bank may self purchase NPA from other banks only if it is ready to bear the entire risk associated with it. Banks which have sold NPA do not have any involvement in the NPA. Each bank will have its own assessment of the value offered by the purchasing bank and decide weather to accept or reject it.

DISCLOSURE REQUIREMENTS
Banks which purchase NPA from other banks shall be required to make the following disclosures in the Notes on Accounts to their Balance sheets: Details of non-performing financial assets purchased: (Amounts in Rupees crore) 1. (a) No. of accounts purchased during the year (b) Aggregate outstanding 2. (a) Of these, number of accounts restructured during the year (b) Aggregate outstanding

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B. Details of non-performing financial assets sold: (Amounts in Rupees crore) 1. No. of accounts sold 2. Aggregate outstanding 3. Aggregate consideration received C. The purchasing bank shall furnish all relevant reports to RBI, CIBIL etc. in respect of the nonperforming financial assets purchased by it.

SARFAESI ACT, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely: Securitisation Asset Reconstruction Enforcement of Security without the intervention of the Court.

SUGGESTIONS
It is recommended that the proper documentation and verification to be made before sanctioning the loan. Empowering staff to make decisions related to sanctioning of loans. Strict measures have to be taken while issuing or sanctioning the loan. The measures can include verification of job and salary slips, verification of securities. Bank should give more thrust on vehicle and housing loan instead of personal loan because NPAs rate in personal loan is more Bank should give more thrust on Constant dialogue with borrower for compromise/ recovery of critical amount to reduce NPAs level in the bank .

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Bank have good opportunity to expand short term advances in agriculture where share of NPAs minimum in this category.

To continue a system of incentives related to performance of the managers should be devised and proper rewards should be given to the bank staff for their performance in recovering the loans.
To reduce political interference. Bank should prefer compromise option if defaulter is not willful and its good opportunity for bank to take advantage of time value of money. Avoid disbursement of loan to customer whose account is NPA from More than 3 year. Finding out the technical feasibility and economic viability of the project.