Non Performing Assets-Group 1

7/28/2019 Non Performing Assets-Group 1

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Non Performing AssetsShrawanthi Amruthwar-3

Arun Aggarwal-13

Aniket Kurup-22Shruti Pai-35


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A debt obligation where the borrower has

not paid any previously agreed upon interest and principalrepayments to the designated lender for an extended periodof time

An asset, including a leased asset, becomes non performing

when it ceases to generate income for the bank The nonperforming asset is therefore not yielding any

income to the lender in the form of principal and interestpayments

Non Performing Assets


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A Non-Performing Asset (NPA) is a loan or an advance where :-

1- Interest and/ or instalment of principal remain overdue for aperiod of more than 90 days in respect of a term loan,

2- The account remains out of order in respect of anOverdraft/Cash Credit (OD/CC),

3- The bill remains overdue for a period of more than 90 days inthe case of bills purchased and discounted,

4- The instalment of principal or interest thereon remainsoverdue for two crop seasons for short duration crops,

Current Guidelines of RBI


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5- The instalment of principal or interest thereon remains

overdue for one crop season for long duration crops, 6- The amount of liquidity facility remains outstanding

for more than 90 days, in respect of a securitisationtransaction undertaken in terms of guidelines onsecuritisation dated February 1, 2006.

7- In respect of derivative transactions, the overduereceivables representing positive mark-to-market valueof a derivative contract, if these remain unpaid for aperiod of 90 days from the specified due date forpayment.

Contd..


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Substandard Assets - A substandard asset is one, whichhas remained NPA for a period less than or equal to 12months.

Doubtful Assets - A doubtful asset is one, whichremained NPA for a period exceeding 12 months.

Loss Assets - A loss asset is one where loss has beenidentified by the bank or internal or external auditorsor the RBI

Classification of NPA


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PROVISIONS FOR NPA

Doubtful assetSecured portion

Unsecured portion100 percent of the extent to which the advance is not coveredby the realisable value of the security

Period for which the adv.has remained doubtful Provision requirement (%)Upto 1 year 25%1 to 3 year 40%

More than 3 years 100%


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Loss asset- If loss assets are permitted to remain inthe books for any reason, 100 percent of the

outstanding should be provided for. Sub-standard asset

Secured part - General provision of 15% on

total outstanding.Unsecured part- Additional provision of 10% i.e.,

a total of 25% on the outstanding balance.Infrastructure loans-20%


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Standard asseta) direct advances to agricultural and SMEs sectors at

0.25%

b) advances to Commercial Real Estate (CRE) Sector at1.00%

c) all other loans and advances are above or at 0.40%


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FACTORS CONTRIBUTING NPA

Inefficiency in management

Slackness in credit management and monitoring

Funding of non-viable projects

Faulty credit appraisal.

Mis-utilization of loans by the borrower


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IMPACT OF NPA

Drain on Profitability

Impact on capital adequacy

High cost of funds due to NPAs.

The assets and liability mismatch will widen

The economic value additions (EVA) by banks gets upset

since EVA = net operating profit minus cost of capital


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Prevention of NPAs

Appraisal techniques of bank to be sharpened

Strict due diligence to ensure that project is technicallyfeasible

Avoiding fixing of unrealistic payment schedule

Off site surveillance or Onsite inspection

Trying to look for early warning signals


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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 ofthe selling bank

The NPA must be held by the purchasing bank at leastfor a period of 15 months before it is sold to other

banks but not to bank, which originally sold the NPA. The bank may purchase/ sell NPA only on without

recourse basis


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Contd..

The NPA may be classified as standard in the books of

the purchasing bank for a period of 90 days from dateof purchase and thereafter it would depend on therecord of recovery with reference to cash flowsestimated while purchasing

If the sale is conducted below the net bookvalue, the short fall should be debited to P&Laccount and if it is higher, the excess provisionwill be utilized to meet the loss on account ofsale of other NPA.


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Restructuring and Rehabilitation

Banks are free to design and implement their own

policies for restructuring/ rehabilitation of theNPA accounts

Reschedulement of payment of interest and

principal after considering the Debt servicecoverage ratio, contribution of the promoter andavailability of security


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Corporate Debt Restructuring (CDR)

The objective of CDR is:

To ensure a timely and transparent mechanism for restructuring

of the debts of viable corporate entities To aim at preserving viable corporates affected

To minimize the losses to the creditors and other stakeholders

It is a voluntary non-statutory system based on Debtor-CreditorAgreement (DCA) and Inter-Creditor Agreement (ICA) and theprinciple of approvals by super-majority of 75% creditors (byvalue) which makes it binding on the remaining 25% to fall in linewith the majority decision

The scheme applies to accounts having multiple banking/

syndication/ consortium accounts with outstanding exposure ofRs.10 crores and above


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Contd..

The CDR system is applicable to standard and sub-standardaccounts with potential cases of NPAs getting a priority

Reference to CDR Mechanism may be triggered by:

Any or more of the creditors having minimum 20% share ineither working capital or term finance, or

By the concerned corporate, if supported by a bank/FI having

minimum 20% share as above Structure of CDR System:

CDR Standing ForumCDR Empowered GroupCDR Cell


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Conclusion

Management of NPA is need of the hour

To be effective, NPA management has to be an exercise pervadingthe entire bank from the Board down the last level

The course open to the banker is to ensure that an asset does notbecome NPA

If it does, banks should take steps for early recovery failing whichthe profitability of the bank will be eroded

That can trigger other problems to undermine the banks

financial condition

Non Performing Assets-Group 1

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