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Non Performing Assets (NPA)

The document discusses non-performing assets (NPAs) in the Indian banking system. It defines NPAs and outlines the different categories of assets based on their performance - standard, sub-standard, doubtful, and loss assets. Gross and net NPAs are also defined. The rise of NPAs can be attributed to both internal and external factors. Banks employ both preventive and curative strategies to manage their NPAs, such as restructuring loans, pursuing debt recovery, and using asset reconstruction companies. Tables show trends in NPAs for public sector banks, private banks, and all scheduled commercial banks from 2006-2007 to 2010-2011.

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NPA Management
Fig 1: Asset Classification Assets Performing Assets Standard Assets Non Performing Assets (NPA) Sub -Standard Assets Doubtful Assets Loss Assets
Performing Asset • An account does not disclose any problems and carry more than normal risk attached to the business • All loan facilities which are regular !
non Performing Assets • Non Performing Asset means a loan or an account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.
introduction • Earlier assets were declared as NPA after completion of the period for the payment of total amount of loan and 30 days grace. • In present scenario assets are declared as NPA if none of the installment is paid till 180 days i.e. six months in respect of a term loan.
introduction With effect form March 31, 2004 a non-performing asset (NPA) shell 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,
cAtegories of nPA  Standard Assets : Arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year  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 more than 12 months • D1 i.e. up to 1 year : 20% provision is made by the bank • D2 i.e. up to 2 year : 30% provision is made by the bank • D3 i.e. up to 3 year : 100% provision is made by the bank  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.
reAsons behind rise in nPA • Lack of proper pre-enquiry by the bank for sanctioning a loan to a customer. • Non performance of the business or the purpose for which the customer has taken the loan. • Willful defaulter. • Loans sanctioned for agriculture purposes. • Change in govt. policies leads to NPA.
EffEcts of NPA oN bANks & fI • Restriction on flow of cash done by bank due to the provisions of fund made against NPA. • Drain of profit. • Bad effect on goodwill. • Bad effect on equity value.
fActors ImPActINg rIsE IN NPAs External factors : • Ineffective legal framework & weak recovery tribunals • Lack of demand / economic recession or slowdown • Change in Govt. policies • Wilful defaults by customers • Alleged political interferences
fActors ImPActINg rIsE IN NPAs Internal factors : • Defective Lending process • Inappropriate / non –use of technology like MIS , Computerization • Improper SWOT analysis • Inadequate credit appraisal system • Managerial deficiencies • Absence of regular industrial visits & monitoring • Deficiencies in re-loaning process • Alleged corruption • Inadequate networking & linkages b/w banks
Why LoAN AccouNts go bAd ? BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within No contribution No modernization Improper monitoring Industrial Relations Natural Calamities BANKER – SIDE Defective Sanction No post-sanction supervision, etc Delay in releases Directed lending Slow decision making process
tyPEs of NPA • Gross NPA : Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. • Gross NPAs Gross NPAs
• Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Net NPAs Gross = __NPAs – Provisions__ Gross Advances - Provisions
Causes • • • • • • • NPA arises due to a number of factors or causes like:Speculation : Investing in high risk assets to earn high income. Default : Willful default by the borrowers. Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business. Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies. External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.
sbI • State Bank of India Net NPAs : Rs 12,347.90 crore Gross NPAs : Rs 25,326.29 crore • The gross non-performing assets (NPAs) of public sector banks increased by 20 per cent during June-September 2011. • Standard & Poor's, which had in September downgraded standalone ratings of State Bank of India, said high credit risks in the Indian banking sector reflects that the country has a weak payment culture and legal system that often result in low recoveries and delayed settlement of foreclosures.
ICICI Bank • 2. ICICI Bank • Net NPAs: Rs 2,407.36 crore Gross NPAs: Rs 10,034.26 crore • ICICI Bank has the highest NPAs among private sector banks. ICICI Bank has slightly improved its net bad debts to 0.90 per cent from 0.91 per cent in the earlier quarter. • Indian banks face challenges like increase in interest rates on saving deposits, a tighter monetary policy, restructured loan accounts and increasing infrastructure loans.
NET NON PERFORMING ASSETS YEARS 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 SBI 7.31 7.30 6.07 7.33 6.65 5.33 5.63 4.5 3.48 2.65 1.87 1.32 PNB 10.21 10.38 9.57 8.96 8.52 6.69 5.32 3.86 0.98 0.2 0.29 0.28 ICICI 3.69 3.22 1.14 2.88 1.53 3.36 5.48 5.21 2.21 1.65 0.72 0.78 UTI 5.33 3.66 5.63 6.32 4.71 2.39 3.46 2.39 1.29 1.39 0.98 0.72 SCB 3.30 2.88 2.42 NA 2.04 1.53 3.46 2.39 1.29 1.39 0.98 0.87
GROSS & NET NPA OF COMMERCIAL BANKS (in Rs. Crores)
GROSS &NET NPA (as percentage of total assets)
Non Performing Assets Substandard Assets Doubtful Assets Loss Assets
 Sub-Standard Assets: An asset which has remained NPA for a period less than or equal to 12 months.  Doubtful Assets: An asset that has remained in the substandard category for a period of 12 months.  Loss Assets: An asset 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.
• • • • • • Standard Assets Direct advances to agriculture and SME at 0.25%, CRE at 1% Other loans and advances at 0.40% Substandard Asset A general provision of 15% on total outstanding The ‘unsecured exposures’ which are ‘substandard’ to attract additional provision of 10%, i.e., a total of 25% on the outstanding balance.
• Doubtful Assets • 100% of the extent to which the advance is not covered by the realisable value of the security • For the secured portion, provision to be made as follows, depending upon the period for which the asset has remained doubtful
• Loss Assets • Write Off or provision of 100% of outstanding
NPA MANAgeMeNt StrAtegieS • Indian Banks are pursuing variety of strategies to control NPAs, which can be studied under two broad categories as under : – a. Preventive Management – b. Curative Management
NPA MANAgeMeNt StrAtegieS a. Preventive Management -  It is rightly said that prevention is better than cure. • Developing ‘Know Your Client’ profile (KYC • Monitoring Early Warning Signals  • Installing Proper Credit Assessment and Risk Management Mechanism • Reduced Dependence on Interest • Generating Watch-list/Special Mention Category
NPA MANAgeMeNt StrAtegieS b. Curative Management • Re-phasement of loans • Pursuing Corporate Debt Restructuring (CDR • Encouraging rehabilitation of potentially viable units • Encouraging acquisition of sick units by healthy units • Entering compromise schemes with borrowers / Entering one time settlement
NPA MANAgeMeNt StrAtegieS • Using Lok Adalats for compromise settlement for smaller loans in “doubtful” and “loss” category. • Using Securitization & SARFAESI Act • Using Asset Reconstruction Company (ARC) • Approaching Debt Recovery Tribunals (DRTs). • Recovery Action against Large NPAs • Circulation of Information of DefaultersStrengthening Database of Defaulters
S No SCBs FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.5 2.3 2.3 2.4 2.3 2 Net NPAs (%) 1.0 1.0 1.1 1.1 0.9 3 Fresh NPA Generation Rate (%) 1.7 1.8 2.1 2.2 2.0 4 Net NPAs/Net Worth (%) 9.2 7.8 8.6 9.1 10.0
S No Private Banks FY 2007-08 2008-09 2009-10 2010-11 2006-07 1 Gross NPAs (%) 2.1 2.4 2.9 2.7 2.3 2 Net NPAs (%) 0.9 1.1 1.3 1.0 0.6 3 Net NPAs/Net Worth (%) 7.8 6.1 7.5 5.3 3.2
S No PSBs FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.7 2.2 2.0 2.2 2.3 2 Net NPAs (%) 1.1 1.0 0.9 1.1 1.1 3 Net NPAs/Net Worth (%) 12.1 11.2 11.4 13.5 13.4