BANKING AND INSURANCE

CAPITAL ADEQUACY RATIO AND

NPA NORMS

INTRODUCTION

• Capital adequacy is a measure of banks capital • It is expressed as a percentage of bank’s risk

weighted credit exposure. • This ratio protects depositors’ interests • It promotes the stability and efficiency of the

banking system• It is universally accepted measure of strength

of bank.

CAPITAL ADEQUACY RATIO – MEANING

• Capital adequacy ratio (CAR) is a measure of the amount of a bank’s capital expressed as a percentage of its risk weighted credit exposures.

• It is the ratio of capital fund to risk – weighted assets (CRAR). It is expressed in percentage terms.

• CAR= X 100

USES OF CAR

• It determines the capacity of the bank• Bank’s capital is the “cushion” for potential

losses, which protect the bank’s depositors or other lenders.

• CAR recognizes that assets can have different levels of risk

TYPES OF CAPITAL

TIER I CAPITAL – CORE CAPITAL• Paid up capital • Statutory reserves • Disclosed free reserves • Capital reserves • Equity investments in subsidiaries• Loses in current period and those brought forward

from previous years• Intangible assets

TIER II CAPITAL• undisclosed reserves and cumulative perpetual

preference shares.• Revaluation reserves.• General provisions and loss reserves upto a maximum

of 1.25% of the weighted risk assets.• Investment fluctuation reserves not subject to 1.25%

restriction.• Subordinate debt (long term unsecured loans0• Hybrid debt capital instruments (bonds)

• On balance sheet items -----e.g. cash, loans, investments and other assets

• Off balance sheet items------e.g. guarantees, letter of credit forward contracts etc.

RISK WEIGHTS FOR IMPORTANT ASSET __

Cash balance with RBI 0%Balance with other banks 20%Govt. approved securities 2.5%Secured loans to staff members 20%Housing finance loans to individuals secured by mortgage 75%Mortgage based securitizing of assets 77.5%Forex and gold open position 100%_central / state govt. Guaranteed Advances 0%_loans to PSUs 100%_other loans 100%_loans guaranteed by DICGC/ ECGC 50%_SSI advances up to CGF guarantee 0%_advances against term deposits, LIC policy , NSCs with adequate margin

0%

_ consumer credit 125%_exposure to capital market 125%_commercial real estate 150%

IMPLICATIONS OF NOT MEETING CAPITAL ADEQUACY NORMS

1. Credibility of banks will be adversely affected 2. Restrict the flexibility and expansion3. Fall in deposits4. Fall in profitability5. Decline in economic growth6. No satisfactory response from capital market

HOW TO IMPROVE CAR

1. Mergers 2. Better asset management 3. Improved recovery methods4. Recapitalisation by government5. Equity participation by employees6. Raising funds through capital market

NON PERFORMING ASSETS

a non performing asset is defined as a credit facility in respect of which the interest and/ or installment of principal has remained ‘past due’ for a specific period of time . In simple terms , an asset is tagged as non performing when it ceases to generate income for the lender

The prudential norms on income recognition issued by the RBI define NPA as

• Interest and/ installment of principal remain over due for a period of more than 180 days in respect of term loan

• The accounts remains out of order for a period of more than 180 days in respect of an overdraft

• The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted

• Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts

FACTORS RESPOSIBLE FOR EMERGENCE OF NPAs

1. Political interference2. Willful defaults3. Targeted lending4. Lack of monitoring 5. Tendency to hide

CLASSIFICATION OF LOAN ASSETS AS PER INCOME RCOGNITION

AND ASSET CASSIFICATION NORMS AND PROVISIONING AS AN 31.03.2002

A. ASSETS CLASSIFICATION “PAST DUE” CONCEPT

1. TERM LOANS INTEREST OR PRINCIPLAL REMAIN OVERDUE FOR MORE THAN 180 DAYS

2. CASH CREDIT/OVERDRRAFTS THE accounts that remains “out of order” for more than 180 days in respect of an

overdraft/ cash credit

3. BILLS PURCHASED AND DISCOUNTED THE BILLS REMAIN OVERDUE FOR MORE THAN 180 DAYS IN CASE OF BILLS

PURCHASED AND DECOUNTED

4. AGRICULTURAL LOANS INTEREST / PRINCIPAL REMAINS OVEERRDUE FOR TWO HARVEST ASON BUT FOR A PERIOD

NOT EXCEEDING TWO HALF YEARSS IN TH CASSE OF AN ADVANCE GRANTED FOR AGRRICULTURE PURPOSES

5.OTHER ACCOUNTS If amount to be received remains overdue for a period of more than 180 days

ASSETS CLASSIFICATION 1. STANDARD ASSETS THE ASSETS WHICH DOES NOT DISCLOSE ANY PROBLEM & WHICH DOE NOT CARRY MORE THAN

NORMAL RISK

2. SUB-STANDARD ASSETS assets which have been classified a NPAs for a period not exceeding 18 months

3.DOUBTFUL ASSETS assets which has remained NPAs for a period exceeding 18 months

4.LOSS ASSETS Assets where loss has been identified by the bank or internal o external auditor or during RBI

inspection but the amount has been written off. Such assets I considered uncollectable.

PROVISIONING NORMS1. LOSS ASSETS – 100%2. DOUBTFUL ASSETS – a)100%( to the extent not recovered) b) PERIOD FOR WHICH THE

ADVANCE HAS BEEN CONSIDERED AS DOUBTFUL

%AGE OF PROVISION

UP TO 1 YEAR 20%

1-3 YEARS 30%

<3 YEARS 50%

3. SUB-STANDARD ASSETS -10% OF TOTAL OUTSTANDING4. STANDARD ASSETS – MINIMUM .25%

REVESRAL OF INCOMEat the close of financial year if any advance became NPAs ,interest accrued & credited to the income account in thee corresponding accounting required to be reversed or provided for if

the same is not realised

Accounts with temporary deficiencies The classification of an asset a an NPA should be bad on the record of

recovery. we should not classify an advances account as NPA merely due to the

existence of some deficiencies which are temporary in nature

ACCOUNTS WHERE THERE ISS EROSION IN THE VALUE OF SECURITIESA NPA need not go through the various stages of classification in case of serious credit impairment and loss asset as appropriate. Erosion in the value of security can be reckoned a significant when the realisable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection ,as the case

may be.

LOANS WITH MORATORIUM FOR PAYMENT OF INTERESTWhen bank finance Is given for industrial or agriculture project

when moratorium is available for payment of interest, payment of interest becomes due only after the moratorium of gestation period Is over. Therefore, such amounts of interest do not become overdue and hence NPA.

PARTIAL RCOVERY ON NPAsin view of directives of the RBI to adopt a uniform and consistent policy to exercise the

right of appropriation of recovery in NPA account first towards outstanding then toward charge and finally towards unrecovered interest

ADVANCES GRANTED UNDER REHABILITATION PACKAGES APPROVED BY BIFR / TERM LENDING INSSSTITUTION

The provision would continue to be made in respect to the bank in respect of existing credit facilities sanctions to a unit under rehabilitation as per their classification as substandard or doubtful . Further, provision need not to be made for a period of one year form the date of disbursement in respect of additional facilities sanctioned under rehabilitation packages approved by BIFR/ TERM landing institution

ADVANCES AGAINST SECURITIES OF TERM DEPOSIT, INDIRA VIKAS PATRA, KISAN VIKAS PATRA, NSC, SURRENDER VALUE OF LIFE INSURANCE POLICY

These account s will not be treated as NPA and Provision are not required to be made in such accounts, even though interest thereon is a arrears for more than 180 days and above provided adequate margin is available in the account

STAFF ADVANCES In case of advances granted to staff members, where interest is payable after

recovery of principal, such advances should be classified as NPA only when there is

a default in payment of interest on due date of payment.

REVISED PRUDENTIAL NORMS ON NPAs

NON-PERFORMING ASSETSA NPA is a loan where ; • One interest remain overdue for a period of more than 90 days (term loan)• The account remain out of order (overdraft/cash credit)• The bill remained overdue for more than 90 days (bill purchased and

discounted) • The principle are interest remain overdue for one crop season for long

duration crop• The amount of liquidity facility remain outstanding for more than 90 days • In respect of derivative transactions, if remain unpaid for 90 days from due

date of payment • In case of interest payment, if interest due and charged during any quarter is

not serviced fully within 90 days from the end of the quarter.

3. INCOME RECOGNITION

• 1. INCOME RECOGNITION POLICY• 2. REVERSAL OF INCOME• LEASED ASSETS

ASSETS CLASSIFICATION(WITH PROVISIONS)

• SUB-STANDARD ASSETS-assets which remained NPA for period less than or equal to 12 months ( provision of 15% on outstanding amount)

• DOUBTFUL ASSETS – If it has remained in the substandard category for 12 months- a)100%( to the extent not recovered)

• b)

• LOSS ASSETS – where los has been identified by the bank or internal or external auditor or the RBI inspection but the amount ha not been written off wholly

PERIOD FOR WHICH THE ADVANCE HAS BEEN CONSIDERED AS DOUBTFUL

%AGE OF PROVISION

UP TO 1 YEAR 25%

1-3 YEARS 40%

<3 YEARS 100%

• STANDARD ASSETSADVANCES TO SECTORS %AGE OF PROVISION

AGRICULTURE & SMEs 0.25

COMMERCIAL REAL ESTATE 1.00

COMMERCIAL REAL ESTATE-RESIDENTIAL HOUSING SECTORS

0.75