NPAs

 An asset, including a leased asset, becomes nonperforming when it ceases to generate income
for the bank.

Technical definition by RBI on NPA on different cases

NPA is a loan or an advance where…

 Interest and/ or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan.
 The account remains ‘out of order’ 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.
 The instalment of principal or interest thereon remains overdue for two crop seasons for short
duration crops.
 The instalment of principal or interest thereon remains overdue for one crop season for long
duration crops.
 The amount of liquidity facility remains outstanding for more than 90 days, in respect of a
securitisation transaction undertaken in terms of guidelines on securitisation dated February 1,
2006.
 In respect of derivative transactions, the overdue receivables representing positive mark-to-
market value of a derivative contract, if these remain unpaid for a period of 90 days from the
specified due date for payment.
Classification
Statistics

Public vs pvt vs fb

Sectorwise npa
Bankwise npa

Countrywise npa
Reasons for npa
1. External Factors
a. Ineffective recovery tribunal

b. Wilful Defaults

c. Natural calamities

d. Industrial sickness, slow growth

e. Lack of demand

f. Change on Govt. policies

g. over optimism about economy

h. Lack of morale to repay due to write offs (esp agriculture)

h. MUDRA (not all MSME started are successful)

i. Power sector (3.6T npa)

j. Infrastructure projects (returns from it is after many years – IL & FS)

k. wrong mergers (air india)

l. Companies with dwindling debt repayment capacity were raising more & more debt from
the system.

2. Internal Factors
a. Defective Lending process

b. Inappropriate technology

c. Improper SWOT analysis

d. Poor credit appraisal system

e. Managerial deficiencies

f. Absence of regular industrial visit

g. Lack of actions against diversification of funds

h. Lack of coordination among lenders

EFFECTS
Economy and industry
 Stress in banking sector causes less money available to fund other projects,
therefore, negative impact on the larger national economy.
 Redirecting funds from the good projects to the bad ones.
 As investments got stuck, it may result in it may result in unemployment.
 In the case of public sector banks, the bad health of banks means a bad return for
a shareholder which means that the government of India gets less money as a
dividend. Therefore it may impact easy deployment of money for social and
infrastructure development and results in social and political cost.
 NPAs related cases add more pressure to already pending cases with the
judiciary.
 Increase in Current Account Deficit: It is the main cause of the increase in
current account deficit and interest rates, CRR, SLR are directly affected by the
system.
 Shareholders Confidence: Higher NPA loses the confidence of shareholders.
 Public confidence: Credibility of banking system is also affected greatly due to higher
level NPAs because it shakes the confidence of general public in the soundness of the
banking system.
 Credit to MSME decreases
 Manufacturing profitability decreases

Banks
 Higher interest rates by the banks to maintain the profit margin.
 Balance sheet syndrome of Indian characteristics that is both the banks and the
corporate sector have stressed balance sheet and causes halting of the investment-led
development process.
 Effect on Borrowers: High NPA not only affect the serious borrowers but also affect
borrowers with good credit scores.
 Profitability: NPAs put detrimental impact on the profitability as banks stop to earn
income on one hand and attract higher provisioning compared to standard assets on the
other hand. On an average, banks are providing around 25% to 30% additional provision
on incremental NPAs which has direct bearing on the profitability of the banks.
 Asset (Credit) contraction: The increased NPAs put pressure on recycling of funds and
reduces the ability of banks for lending more and thus results in lesser interest income. It
contracts the money stock which may lead to economic slowdown.
 Liability Management: In the light of high NPAs, Banks tend to lower the interest
rates on deposits on one hand and likely to levy higher interest rates on advances to
sustain NIM. This may become hurdle in smooth financial intermediation process and
hampers banks’business as well as economic growth.
 Miss out BASEL norms
HISTORY of RESOLUTION
a. DRT, 1993
b. Credit Information Bureau, 2000
c. Lok adalats , 2001
d. Compromise settlements, 2001
e. SARFAESI Act, 2002
f. ARC
g. Corporate Debt Restructuring,2005
h. 5:25 rule, 2014
i. Joint Lenders Forum,2014
j. Mission Indradhanush, 2015
k. SDR, 2015
l. AQR, 2015
m. S4A, 2016
n. IBS, 2016
o. Public ARC vs Pvt ARC, 2017
p. Bad banks, 2017
q. Project SASHAKT
r. FEO Bill
s. PCA for banks
WAY AHEAD
Prevention is always better than cure
A. Preventive Management:
1. Early Warning Signals

a. Financial warning signals

• Persistent irregularity in the account

• Default in repayment obligation
• Devolvement of LC/invocation of guarantees
• Deterioration in liquidity/working capital position
• Substantial increase in long term debts in relation toequity
• Declining sales
• Operating losses/net losses
• Rising sales and falling profits
• Disproportionate increase in overheads relative to sales
• Rising level of bad debt losses Operational warningsignals
• Low activity level in plant
• Disorderly diversification/frequent changes in plan
• Nonpayment of wages/power bills
• Loss of critical customer/s
• Frequent labor problems
• Evidence of aged inventory/large level of inventory

a. Management related warning signals

. Lack of co-operation from key personnel

• Change in management, ownership, or key personnel
• Desire to take undue risks
• Family disputes
• Poor financial controls
• Fudging of financial statements
• Diversion of funds

a. Bank related warning signals

• Declining bank balances/declining operations in theaccount

• Opening of account with other bank
• Return of outward bills/dishonored cheques
• Sales transactions not routed through the account
• Frequent requests for loan
• Frequent delays in submitting stock statements, financialdata, etc. Signals relating to
external factors
• Economic recession
• Emergence of new competition
• Emergence of new technology
• Changes in government / regulatory policies
• Natural calamities

2. Prepare Watch-list/Special Mention Category list

3. Efficient top management – free from political interference, experts who know
both banking and law
4. Technical expertise for project appraisal
5. Realistic repayment schedule
6. For diversification – make top management responsible
 7. Timely visits to borrowers business units (MSME)
8. Finance large projects not just by psbs but also pvt bonds
9. BBB should train CGMs from all psbs in globally acclaimed institutes to
create a pipeline for future heads in psbs and also to address the knowledge
gap in key functioning areas of banks

B. Curative Management:
1. Circulation of Information of Defaulters
2. Recovery Action against Large NPAs (can be with haircuts)
3. Creating a vibrant market for distressed debt assets / securities in India offering a
trading platform for Lenders
4. To evolve and create significant capacity in the system for quicker resolution of NPAs
by deploying the assets optimally
5. Corporate Debt Restructuring (CDR)

CDR system in the country will have a three-tier structure:

A. CDR Standing Forum - CDR Standing Forum will be a self-empowered body,
which will lay down policies and guidelines, guide and monitor the progress of corporate
debt restructuring.

B. CDR Empowered Group - The CDR Empowered Group would be mandated to look
into each case of debt restructuring, examine the viability and rehabilitation potential of the
Company and approve the restructuring package within a specified time frame
C. CDR Cell - The CDR Standing Forum and the CDR Empowered Group will be
assisted by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of
the proposals received from borrowers / lenders, by calling for proposed rehabilitation plan
and other information and put up the matter before the CDR Empowered Group, within one
month to decide whether rehabilitation is prima facie feasible, if so, the CDR Cell will
proceed to prepare detailed Rehabilitation Plan with the help of lenders and if necessary,
experts to be engaged from outside.If not found prima facie feasible, the lenders may start
action for recovery of their dues.