15672 npa management

MANAGEMENT OF NON-PERFORMING ASSETS

BankingNon Performing Assets

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N P As : Definit ionAn asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

A credit facil i ty in respect of which the interest and/or instalment of principal has remained “past due” for a specified time.

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DEFINITION OF NPAsA 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 loanThe account remains “out of order” in respect of an overdraft/ cash creditThe bil l remains overdue for a period of more than 90 days in the case of bi l ls purchased and discountedThe installment or interest remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops


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Non Performing AssetsIn accounting, originally Bad & Doubtful DebtsIn 1980s, RBI followed 8 point Health CodeAlso called Non Performing Loans (NPLs)or Stressed Assets

An advance where interest and / or instalment of principal remain ‘overdue’ for a period of more than 90 days in respect of Term Loan / OD / CC /BP / BD / other accounts – investments, export f inance, SSI/SME/ agricultural, housing loan, educational loan, lease and hire purchase …. Etc.

Sub-standard, Doubtful and Loss Assets…


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ASSET TYPE STANDARD ASSET /

PERFORMING ASSETThe account is not non-performing and does not carry more than the normal risk attached to the business.

NON-PERFORMING ASSET (NPA)The asset ceases to generate income for the bank. (Para 2 of the Master Circular)


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IDENTIFICATION OF NPACash Credit / Overdrafts ⇒ Account remains

‘out of order’ for 90 days or more.

The account is treated as ‘out of order’ i f :

* Outstanding Balance remains continuously in excess of sanction l imit/drawing power for 90 days or more.

* No credit continuously for 90 days or more as on the date of Balance Sheet.

* Credits in the account are not suff icient to cover interest debited during the same period.


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IDENTIFICATION OF NPA …

Term Loans ⇒ Interest and/or instalment remains overdue for 90 days or more.

Bills Purchased and ⇒Bill remains overdue for 90 Discounted days or more. Agricultural Advances ⇒ Interest and/or installment

remains overdue for two harvest seasons for short

duration crop, one harvest season for long duration crop.

Others ⇒ Any amount to be received remains overdue for 90 days

or more .


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CLASSIFICATION NORMS

Standard Asset The account is not non-performing.

Sub-Standard Asset A sub standard Asset is one which has remained

NPA for a period less than or equal 12 months. (w.e.f. 31st March 2005)

Loss AssetsThese are accounts, identif ied by the bank or

internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off.


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CLASSIFICATION NORMS

Doubtful Asset - Three Categories Category Period

Doubtful - I up to One Year Doubtful - II Up to Three Years

Doubtful - III More than Three Years


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PROVISIONING NORMSSTANDARD ASSET• 0.25% on Standard Assets on Global

loan portfolio basis

SUB-STANDARD ASSET• 10% of total outstanding• 20% of total outstanding if loan is

unsecured ab initio (new guidelines)


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PROVISIONING NORMSSUB-STANDARD (Cont’d)

Banks are permitted to phase the additional provisioning upon reduction in transition period from 18 to 12 months Over a period of four years with minimum 20% each year (new guidelines)

LOSS ASSET:100% should be provided for


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PROVISIONING NORMSDOUBTFUL ASSETS

Period Provision (Secured +Unsecured)

Upto 1 year 20% + 100%1to 3 years 30% + 100%More than 3 years 100% + 100%(effective from 31st March 2005)

Outstanding as on 60%, 75%, 100% on secured portion.31st March 2004 2005 2006 2007


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PROVISIONING NORMSProvision Under Special circumstances• Normal provision on Government

guaranteed advances.

• In case of advances guaranteed by DICGC/ECGC, Provision should be made only for balance in excess of the amount guaranteed by these corporations.

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CATEGORIES OF NPASubstandard 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 monthsLoss 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.

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PROVISIONING NORMSStandard Assets – general provision of a minimum of 0.25% Substandard Assets – 10% on total outstanding balance, 10 % on unsecured exposures identif ied as sub-standard & 100% for unsecured “doubtful” assets.Doubtful Assets – 100% to the extent advance not covered by realizable value of security. In case of secured portion, provision may be made in the range of 20% to 100% depending on the period of asset remaining sub-standardLoss Assets – 100% of the outstanding

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FACTORS CONTRIBUTING TO NPAS

Poor Credit disciplineInadequate Credit & Risk ManagementDiversion of funds by promotersFunding of non-viable projects In the early 1990s PSBs started suffering from acute capital inadequacy and lower/ negative profitabil i ty. The parameters set for their functioning did not project the paramount need for these corporate goals.The banks had l it t le freedom to price products, cater products to chosen segments or invest funds in their best interest

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Since 1970s, the SCBs functioned as units cut off from international banking and unable to participate in the structural transformations and new types of lending products.Audit and control functions were not independent and thus unable to correct the effect of serious flaws in policies and directionsBanks were not suff iciently developed in terms of skil ls and expertise to regulate the humogeneous growth in credit and manage the diverse risks that emerged in the process

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Inadequate mechanism to gather and disseminate credit information amongst commercial banks

Effective recovery from default ing and overdue borrowers was hampered on account of sizeable overhang component arising from infirmities in the existing process of debt recovery, inadequate legal provisions on foreclosure and bankruptcy and diff icult ies in the execution of court decrees.

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IMPACT OF NPAS ON OPERATIONS

Drain on Profitabil i tyImpact on capital adequacyAdverse effect on credit growth as the banker’s prime focus becomes zero percent risk and as a result turn lukewarm to fresh credit.Excessive focus on Credit Risk ManagementHigh cost of funds due to NPAs

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CURRENT STATUS OF NPASAll SCB’s average Net NPA Ratio for 2005-06 is 1.22 (As per RBI’s Statistics)The banks have been able to report lower NPA percentage mostly by providing against or writ ing off NPAs. The provision to certain extent was facil i tated by higher profits on account of treasury managementThe better Net NPA ratio was also facil i tated by higher credit off take result ing in larger asset portfolio/ book size.

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NPA MANAGEMENT – PREVENTIVE MEASURES

Formation of the Credit Information Bureau (India) Limited (CIBIL)Release of Wilful Defaulter’s List. RBI also releases a l ist of borrowers with aggregate outstanding of Rs.1 crore and above against whom banks have fi led suits for recovery of their fundsReporting of Frauds to RBINorms of Lender’s Liabil i ty – framing of Fair Practices Code with regard to lender’s l iabil i ty to be followed by banks, which indirectly prevents accounts turning into NPAs on account of bank’s own failure

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Risk assessment and Risk management RBI has advised banks to examine all cases of wilful default of Rs.1 crore and above and fi le suits in such cases. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to f ixing of staff accountabil i ty.Reporting quick mortality casesSpecial mention accounts for early identif ication of bad debts. Loans and advances overdue for less than one and two quarters would come under this category. However, these accounts do not need provisioning

NPA MANAGEMENT – PREVENTIVE MEASURES

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NPA MANAGEMENT - RESOLUTION

Compromise Sett lement SchemesRestructuring / ReschedulementLok AdalatCorporate Debt Restructuring CellDebt Recovery Tribunal (DRT)Proceedings under the Code of Civil ProcedureBoard for Industrial & Financial Reconstruction (BIFR)/ AAIFRNational Company Law Tribunal (NCLT)Sale of NPA to other banksSale of NPA to ARC under Securit ization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SRFAESI)Liquidation

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Compromise Settlement Schemes

Banks are free to design and implement their own policies for recovery and write off incorporation compromise and negotiated sett lements with board approvalSpecific guidelines were issued in May 1999 for one t ime settlement of small enterprise sector. Guidelines were modified in July 2000 for recovery of NPAs of Rs.5 crore and less as on 31 s t March 2007.

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Restructuring and Rehabil i tation Banks are free to design and implement their own policies for restructuring/ rehabilitation of the NPA accounts

Reschedulement of payment of interest and principal after considering the Debt service coverage ratio, contribution of the promoter and availability of security

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Lok Adalats Small NPAs up to Rs.20 LacsSpeedy RecoveryVeil of AuthoritySoft DefaultersLess expensiveEasier way to resolve

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Corporate Debt Restructuring The objective of CDR is to ensure a timely and transparent mechanism for restructuring of the debts of viable corporate entit ies affected by internal and external factors, outside the purview of BIFR, DRT or other legal proceedingsThe legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA). All participants in the CDR mechanism must enter the ICA with necessary enforcement and penal clauses. The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with outstanding exposure of Rs.10 crores and above. The CDR system is applicable to standard and sub-standard accounts with potential cases of NPAs getting a priority.Packages given to borrowers are modif ied time & againDrawback of CDR – Reaching of consensus amongst the creditors delays the process

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DRT Act DRT has powers to grant injunctions against the

disposal, transfer or creation of third party interest by debtors in the properties charged to creditor and to pass attachment orders in respect of charged propertiesIn case of non-realization of the decreed amount by way of sale of the charged properties, the personal properties if the guarantors can also be attached and sold.However, realization is usually t ime-consumingSteps have been taken to create additional benches

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SALE OF NPA TO OTHER BANKS A NPA is eligible for sale to other banks only if i t has remained a NPA for at least two years in the books of the sell ing bankThe 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 classif ied as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasingThe bank may purchase/ sell NPA only on without recourse basisIf the sale is conducted below the net book value, the short fal l should be debited to P&L account and if i t is higher, the excess provision wil l be uti l ized to meet the loss on account of sale of other NPA.

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SARFESI Act 2002 SARFESI provides for enforcement of security interests in movable (tangible or intangible assets including accounts receivable) and immovable property without the intervention of the courtThe bank and FI may call upon the borrower by way of a written legal notice to discharge in full his l iabil i t ies within 60 days from the date of notice, fail ing which the bank would be entit led to exercise all or any of the rights set out under the Act.Another option available under the Act is to takeover the management of the secured assetsAny person aggrieved by the measures taken by the bank can proffer an appeal to DRT within 45 days after deposit ing 75% of the amount claimed in the notice.

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NEGOTIATION PROCESS FOR SETTLEMENT OF

NON PERFORMING ASSETS

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Factors Affecting the Acceptance of Proposal by Bank

Bank’s Documentation.Security value. Realizable sale value.Bank’s abil i ty to sell.Abil i ty & Source of the borrower.Abil i ty & Source of the guarantor.Vulnerabil i ty of the borrower/guarantor.Time frame.Strength and Zeal of bank's f ield staff.What message is bank sending out (No in a fraud case.)Banks Policy.Success rate.

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Preparation Stage Thorough study of the caseFind out our strengths and weaknesses in the case.Find out the vulnerable point/weaknesses of the borrower.Follow-up with the Borrower and Guarantors.Visit factory/Collaterals/residence.Find out properties not charged to the bank.Indicate that Bank is wil l ing to compromise.

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15672 npa management

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