NON PERFORMING ASSETS

(NPA)

 A Non-Performing Asset (NPA) is defined as a credit facility in

respect of which the interest and/or instalment of principal has
remained ‘past due’ for a specified period of time.

 In simpler terms, an asset is tagged as non performing when it

ceases to generate income for the lender.
How can a asset be
declared as an NPA ?

 A Non-Performing Asset (NPA) is defined as a credit facility in

which the interest and/or instalment of Bond finance principal
has remained ‘past due’ for a specified period of time.

 Once the borrower has failed to make interest or principle

payments for 90 days the loan is considered to be a non-
performing asset.

 The authorities decided to adopt the ‘90 days’ overdue’ norm

for identification of NPA, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a non-performing
asset (NPA)is a loan or an advance where;
 Interest and/or installment of principal remain overdue for a period of
more than 91 days in respect of a term loan,

 The account remains ‘out of order’ for a period of more than 90 days,
in respect of an Overdraft/Cash Credit (OD/CC),

 Any amount to be received remains overdue for a period of more

than 90 days in respect of other accounts,

 Non submission of Stock Statements for 3 Continuous Quarters in case

of Cash Credit Facility,

 No active transactions in the account (Cash Credit/Over

Draft/EPC/PCFC) for more than 91days.
 Provisioning norms for NPA
3 Major types of NPA :

 Substandard Assets : The account holder comes in this category

when they do not pay three installments continue for 90 days
and upto 1 year.

 For this category, bank has made 10% provision of funds out of
their profit to meet the losses generated from NPA.
 Doubtful NPA : Under doubtful NPA, three sub – categories falls
as under :

1. D1 : i.e. up to 1 year : 20% provision is made by the banks,

2. D2 : i.e. 1 to 3 year : 30% provision is made by the banks and,
3. D3 : i.e. More than 3 year : 100% provision is made by the banks.

 Loss Assets : under this, 100% provision is made. When account

holder comes in this category their account can be written off
by the banks.

After this the assets are handed over to recovery

agents for sale.
What do you think are the
reasons behind NPA ?

 Lack of proper pre-enquiry by the bank for sanctioning a loan to a

customer.

 Non performance of the business or the purpose for which the

customer has taken the loan.

 Loans sanctioned for agriculture purposes.

 Willful defaults, fraud, disputes, misappropriation of funds etc.

 Inability of the corporate to raise capital through the issue of equity

or other debt instrument from capital markets.
 Diversion of funds for expansion/modernization/setting up new
projects.

 Other due and beyond control reason such as, shortage of raw
material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like
floods, accidents etc.

 Improper SWOT Analysis and poor appraisal system by the

financial institutions contributes a huge in the NPA.
Types of NPA
Gross NPA :

 Gross NPAs are the sum total of all loan assets that
are classified as NPAs as per RBI guidelines as on
Balance Sheet date.

 Gross NPA reflects the quality of the loans made

by banks. It consists of all the non standard assets
like as sub-standard, doubtful, and loss assets.
Net NPA :

 Net NPAs are those type of NPAs in which the bank has
deducted the provision regarding NPAs.
 Net NPA shows the actual burden of banks.

 Net NPA =

Gross NPA – Provision for BDDR

How Gradually The NPA
Rise
Legal measure for the
problem of NPA
 The problems of NPA have been receiving greater attention
since 1991 in India. The Narasimham Committee recommended
a number of steps to reduce NPA.
 Major steps taken to solve the problems of Non-Performing
Assets in India :-

Debt Recovery Tribunals (DRTs)

Debt Recovery Tribunals (DRTs) were established. There are 22
DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient
to solve the problem all over the country (India).
Where a bank or financial institution has to recover any debt
from any person, it makes an application called Original
Application (OA) to the Tribunal against such person.
 The provisions of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 shall not apply where the amount
of debt due to bank or financial institution or to a consortium of
banks or financial institutions is less than 10 lakhs rupees or such
other amount, being not less than 1 lakh rupees, as the Central
Government may, by notification, specify.

Securitisation Act 2002

This act enables the banks to issue notices to defaulters who
have to pay the debts within 60 days. The Securitisation Act
further empowers the banks to take over the possession of the
assets and management of the company. The lenders can
recover the dues by selling the assets or changing the
management of the firm. This act applies only to the loans
amounted more than 10 lakhs.

This act consists a huge number of wide aspects.

Lok Adalats
Lok Adalats have been found suitable for the recovery of small
loans. The Honourable Supreme Court also observed that loans,
personal loans, credit card loans and housing loans with less
than Rs.10 lakhs can be referred to Lok Adalats. According to
RBI guidelines issued in 2004-05. They cover NPA up to Rs. 5
lakhs, both suit filed and non-suit filed are covered. Lok Adalats
avoid the legal process.

Compromise Settlement
Compromise Settlement Scheme provides a simple mechanism
for recovery of NPA. Compromise Settlement Scheme is applied
to advances below Rs. 10 Crores. It covers suit filed cases and
cases pending with courts and DRTs (Debt Recovery Tribunals).
Cases of Willful default and fraud were excluded.
Credit Information Bureau
A good information system is required to prevent loans from
turning into a NPA. If a borrower is a defaulter to one bank, this
information should be available to all banks so that they may
avoid lending to him. A Credit Information Bureau can help by
maintaining a data bank which can be assessed by all lending
institutions.

As per the Supreme Court (SC) – ”Liquidity of finances and flow of money is
essential for any healthy and growth oriented economy. But certainly, what must be
kept in mind is that the law should not be in derogation of the rights which are
guaranteed to the people under the Constitution. The procedure should also be
fair, reasonable and valid, though it may vary looking to the different situations
needed to be tackled and object sought to be achieved.”
 WHY IT MATTERS?
Here is the impact of the NPAs:

 it will bring a scarcity of funds in the Indian security markets. Few

banks will be willing to lend if they are not sure of the recovery of
their money.

 The shareholders of the banks will lose a lot of money as banks

themselves will find it tough to survive in the market.

 The price of loans, i.e. the interest rates will shoot up badly. Shooting
of interest rates will directly impact the investors who wish to take
loans for setting up infrastructural, industrial projects etc.
 All of this will lead to a situation of low off take of funds from the
security market. This will hurt the overall demand in the Indian
economy. And, finally it will lead to lower growth rates and of
course higher inflation because of the higher cost of capital.

 This trend may continue in a vicious circle and deepen the crisis.

 Total NPAs have touched figures close to the size of UP budget.

Imagine if all the NPA was recovered, how well it can augur for
the Indian economy.
DEBT RECOVERY
MANAGEMENT IN BANKS
 A company or agency that is in the business of recovering money
that is owed on delinquent accounts.

 Many debt collectors are hired by companies/Banks to which

money is owed by debtors, operating for a fee or for a percentage
of the total amount collected.

 Some debt collectors are debt buyers; these companies purchase

debt at a fraction of its face value and then attempt to recover the
full amount of the debt.

 The Bank may utilize the services of recovery agencies for

collection of dues and repossession of securities. Recovery
agencies will be appointed as per regulatory guidelines issued in
this regard.
 The name and address of all Recovery Agencies on the Bank’s
approved panel will be placed on the Bank’s website for
information.

 Only recovery agencies from the approved panels will be

engaged by the Bank. Employees of the recovery agencies, after
completing the mandatory Debt Recovery Agent (DRA) training,
will be issued valid ID cards authorising them to collect dues from
the Bank's customers.

 In case the Bank engages service of such recovery/enforcement/

seizure agencies for any recovery case, the identity of the agency
will be disclosed to the borrower. The recovery agents engaged
by the Bank will be required to follow a code of conduct
governing their dealings with customers
 Examples: •ARCIL (India’s first and largest asset reconstruction
company (ARC))
 • Reliance Asset Reconstruction Company Limited
Debt Recovery Procedure by
The

Agents

Contact with an
Contact with a Contact your
overdue
friendly payment customer with a
payment
reminder final notice
reminder

Send a formal Repossession Valuation & Sale

letter of demand of Security of Property
Recent Facts and Figures
on NPA
Gross NPAs OF Public and Private Sector
Banks During June 30, 2016

Source: RBI; Parliament Questions.

 As of June 2016, the total amount of Gross Non-Performing Assets (NPAs)
for public and private sector banks is around Rs. 6 lakh crore.

 The amount of top twenty NPA accounts of Public Sector Banks stands at
Rs. 1.54 lakh crore.

 The ratio of NPAs to total advances given by a bank is a commonly used

indicator reflecting the health of the banking system.

 According to the latest information collated by the government,

stressed assets which includes both non-performing assets as well as
restructured loans of banks stood at Rs 9.64 lakh crore as on December
31, 2016.

 Since its inception, ARCIL has resolved over Rs.780 billion worth of Non-
Performing Assets (NPAs) acquired from Indian banks and Financial
Institutions.
 The SARFAESI Act allows banks and other financial institutions to
auction residential and commercial properties when borrowers
default on their payments. This helps the banks to reduce their NPA by
recovery and reconstruction. Under this Act, 64,519 properties were
seized or taken possession off by the banks in 2015-16.

 In the current financial year, as of June, the number stands at 33,928.

 In absolute terms, State Bank of India has the highest value of Gross
NPA around Rs. 93,000 crores. Punjab National Bank (Rs. 55,000 crores)
and Bank of India (Rs. 44,000 crores) comes next.

 Basic Metal and Metal Products sector is the worst performing in terms
of NPA ratio. As of June 2016, govt data show that a third of all
outstanding advances (Rs. 4.33 lakh crore) given to the sector turned
to NPA (Rs. 1.49 lakh crore).
 Despite the Reserve Bank of India (RBI) announcing numerous
restructuring schemes, the bad loans have risen up from Rs
261,843 crore by 135 per cent in last two years.

RBI has came up with a notification titled “Revised Prompt

Corrective Action (PCA) framework for banks.” The revised
framework would apply to all banks operating in India including
small and foreign banks. The new set of provisions had been
came into effect from April 1 based on the financials of banks
as of March 2017. The revised framework will override the
existing PCA framework. The revised framework will be again
reviewed after three years.
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