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Article Review Article Review

on on Non Performing Asset Non Performing Asset

IN Banks IN Banks

By:- TRIPTI MISHRA

SRIKANT GUPTA

C POORNIMA

Sec B

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• 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 inrespect of a term loan,

– The account remains “out of order” in respectof an overdraft/ cash credit

– The bill remains overdue for a period of morethan 90 days in the case of bills purchased

and discounted– The installment or interest remains overdue for

two crop seasons in case of short durationcrops and for one crop season in case of long

duration crops

What is NPA

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• Standard assets- These are loans which do nothave any problem are less risk.

• Substandard Assets – Which has remained NPAfor a period less than or equal to 12 months.

• Doubtful Assets – Which has remained in the

sub-standard category for a period of 12months

• Loss Assets – where loss has been identified bythe bank or internal or external auditors or the

RBI inspection but the amount has not been

CATEGORIES OF NPA

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• Drain on Profitability

• Impact on capital adequacy

• Adverse effect on credit growth as the banker’sprime 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

•

IMPACT OF NPAs ON OPERATIONS

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•

•

Management of Non-Performing Assets inBanks with special reference toJharkhand

BY:- Santanu Das

•

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Review

• The Credit-Deposit Ratio in Jharkhand is almost half that as compared to the ratio on All India basis and

there has been a stagnation in the figure.

• In 2001 total cr., to SBI is Rs 1000 Cr increased to 1080in 2005, increase of 8%.

•

For the Nationalised Banks the corresponding figuresare Rs 1440 Cr and Rs 1000 Cr, a decrease of 31%.

• In agriculture sector, it is observed that for SBI andAssociates the credit sanctioned increased from Rs

140 Cr to Rs 200 Cr, an increase of 43%.• For Nationalised Banks the corresponding figures are Rs

160 Cr to Rs 360 Cr, an increase of 125%.

•

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• 30 September 2006, the total quantity of bad loanswas Rs 1520 Cr in East Singbhum and Rs 930 Cr in the Dhanbad district.

• If all the districts are taken then this figure stood atRs 4070 Cr.

• The bad loans in East Singbhum was about 37.3% &23% in the Dhanbad district which constitute 60%

of total bad loans.• The total number of defaulting companies in East

Singbhum is 13 followed by 10 in Ranchi, 7 inBokaro and 6 in Dhanbad.

• The total bad loans of State Bank of India was Rs2660 Cr which is about 65% of total bad loans &corresponding figure of number of defaultingcompanies was about 72%.

•

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Graph Showing Generation Of NPA

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•

MC is the Marginal Cost to the banks, AC is theAverage Cost, i is the interest rates on loans.

Point B represents the cost of funds and the shadedportion is the profit. To maximize profits, a purely

competitive bank issues loans such that the MC of anadditional loan equals the MR from loans. The MR issimply the market interest rate. Profits are maximizedwhen MC equals interest rate. Therefore, it is evident

that profits can be maximized if more and more loansare extended at a given rate of interest. This mayresult in poor assessment of the borrower leading tofresh generation of NPAs.

di i i

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Credit Deposit Ratio

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District-wise bad loans

S l f NPA t Oth B k

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• A NPA is eligible for sale to other banks only if it hasremained 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 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 book value, theshort fall should be debited to P&L account and if itis higher, the excess provision will be utilized to meetthe loss on account of sale of other NPA.

•

Sale of NPA to Other Banks

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Dec 09 Dec 10

Opening NPA 1020.35 1372.3Reduction 445.58 537.29

Cash Recovery 197.26 191.95

Up-Gradation 144.97 166.16Write- off 103.35 179.18

Slippages 491.84 650.28

Closing NPA 1066.61 1485.29

NPA of United Bank of India

In crores

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Particular Dec 09 SecurityAvailable

% Security Dec 10 SecurityAvailable

% of security

Total NonPerformingAssets/SecurityAvalable

1066.61 978.99 91.8% 1485.29 1153.38 77.7%

Sub-standard 346.87 332.79 95.9% 523.54 484.34 92.5%

Doubtful 716.36 646.2 90.2% 755.24 699.04 88.6%

Loss 3.38 NIL 00.0% 206.51 NIL 00.0%

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P ti NPA

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–

–

–DRT Act

–Proceeding under Code of

Civil Procedure–BIFR AND AAIFR

–NATIONAL COMPANY LAWTRIBUNAL

–SARFESI Act 2002

Prevention o NPA

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DRT Act

The banks and FIs can enforce their securities by initiating recoveryproceeding under the Recovery if Debts due to Banks and FI act,1993 (DRT Act) by filing an application for recovery of dues beforethe Debt Recovery Tribunal constituted under the Act.On adjudication, a recovery certificate is issued and the sale iscarried out by an auctioneer or a receiver.DRT has powers to grant injunctions against the disposal, transfer or creation of third party interest by debtors in the properties charged tocreditor and to pass attachment orders in respect of chargedpropertiesIn case of non-realization of the decreed amount by way of sale of the charged properties, the personal properties if the guarantors canalso be attached and sold.However, realization is usually time-consumingSteps have been taken to create additional benches

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Proceeding under Code of Civil Procedure

• For claims below Rs.10 lacs, the banks and FIs can initiateproceedings under the Code of Civil Procedure of 1908, asamended, in a Civil court.

• The courts are empowered to pass injunction orders restraining thedebtor through itself or through its directors, representatives, etcfrom disposing of, parting with or dealing in any manner with thesubject property.

• Courts are also empowered to pass attachment and sales orders for subject property before judgment, in case necessary.

• The sale of subject property is normally carried out by way of open

public auction subject to confirmation of the court.• The foreclosure proceedings, where the DRT Act is not applicable,

can be initiated under the Transfer of Property Act of 1882 by filinga mortgage suit where the procedure is same as laid down under theCPC.

•

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BIFR AND AAIFR

• BIFR has been given the power to consider revival andrehabilitation of companies under the Sick IndustrialCompanies (Special Provisions) Act of 1985 (SICA),which has been repealed by passing of the Sick IndustrialCompanies (Special Provisions) Repeal Bill of 2001.

•

The board of Directors shall make a reference to BIFR within sixty days from the date of finalization of the dulyaudited accounts for the financial year at the end of which the company becomes sick

• The company making reference to BIFR to prepare ascheme for its revival and rehabilitation and submit the

same to BIFR the procedure is same as laid down underthe CPC.

• The shelter of BIFR misused by defaulting and dishonestborrowers

• It is a time consuming process

•

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•

• In December 2002, the Indian Parliament passed the Companies Actof 2002 (Second Amendment) to restructure the Companies Act,1956 leading to a new regime of tackling corporate rescue and

insolvency and setting up of NCLT.• NCLT will abolish SICA, have the jurisdiction and power relating to

winding up of companies presently vested in the High Court andjurisdiction and power exercised by Company Law Board

• The second amendments seeks to improve upon the standards to beadopted to measure the competence, performance and services of a bankruptcy court by providing specialized qualification for theappointment of members to the NCLT.

• However, the quality and skills of judges, newly appointed or existing, will need to be reinforced and no provision has beenmade for appropriate procedures to evaluate the performance of

judges based on the standards

NATIONAL COMPANY LAW

TRIBUNAL

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SARFESI Act 2002

• SARFESI provides for enforcement of security interests inmovable (tangible or intangible assets including accountsreceivable) and immovable property without theintervention of the court

• The bank and FI may call upon the borrower by way of a

written legal notice to discharge in full his liabilities within60 days from the date of notice, failing which the bank would be entitled to exercise all or any of the rights set outunder the Act.

• Another option available under the Act is to takeover themanagement of the secured assets

• Any person aggrieved by the measures taken by the bank canproffer an appeal to DRT within 45 days after depositing75% of the amount claimed in the notice.

•

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