Professional Documents
Culture Documents
Index
SR.NO
PARTICULAR
1.
CHAPTER 1 : INTRODUCATION
2.
3.
MEANING
DEFINITION
CONCEPT
CHAPTER 2 : HISTORY
START
NARSIMHAM COMMITTEE
4.
5.
SYSTEM
CHAPTER 4 : CLASSIFICATIO
AS GENERAL
ASSETS
CHAPTER 5 :GUIDELINES
INTRODUCATION
PAGES
6.
BY RBI
CHAPTER 6 : NORMS
STANDARD ASSETS
DOUBTFUL ASSETS
LOSS ASSETS
OTHER
Introduction
Management of nonperforming assets poses a great challenge for banks world over. Banking
sector forms the backbone of many developing economies .If the banks fail to manage their nonperforming assets effectively then it leads to draining profitability and decreasing market
goodwill not only for the banks but for the country as a whole. According to definition of NPAs
the loan or lease that is not meeting its stated principal and interest payments. Banks usually
classify as nonperforming assets any commercial loans which are more than 90 days overdue and
any consumer loans which are more than 180 days overdue. More generally, an asset which is
not producing income .The structure of our Indian banking system is very complex and it has
evolved under the influence of many factors including political considerations. .1Structure of
Banking in Indi
The public sector banks and the private sector banks are the majority contributors to the total Net
NPAs of the scheduled commercial banks. As the banks are primarily into the business of
accepting deposits and lending money, the NPAs become the natural fall out of the business. It is
impossible completely avoid them but efforts can be taken in the direction of minimizing the
losses. On Performing assets or NPAs as we usually call them are nothing but the loans and
advances given by the banks which turn into bad debts due to various reasons. In other words it
can be said that when a bank gives a loan and is unable to recover the principal and the interest
amount on time the loan is said to have turned into a NPA. In short the time period of 90 days is
taken as the base and if the principal or interest payment is not received during this period the
asset is turned into an NPA. As interest on loan is one of the major source of income for the
banks, its collection becomes one of the priority tasks.
Some conceptD
Statue of Out of Order.
An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of
the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating
account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days
as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same
period, these accounts should be treated as 'out of order'.
Overdue
Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by
the bank.
3. SICK VIABLE: Advances to units which are sick but viable under nursing or revival
programs are under taken.
4. SICK NON VIABLE / STICKY: Advances where irregularities continue to persist and
there are no immediate prospects of regularization.
5. ADVANCES RECALLED: Advances where the recalled repayment is highly doubtful and
nursing is not considered worthwhile, includes accounts where decision has been taken to recall
the advances.D
6. SUIT FILE ACCOUNTS: Accounts where legal action or recovery proceedings have been
initiated.
7. DECREED DEBTS: Accounts for which decrees have been obtained.
8. BAD AND DOUBTFUL ACCOUNTS: The accounts in which the recoverability is in doubtful
due to shortfall in the value of the securities and inability / unwillingness of the borrower to
repay the banks dues partly or wholly
The NPA concept introduced by the Reserve Bank in the year 1992 is the outcome of the
Narsimham Committee recommendations on financial sector reforms. The Committee obtained
the policy of income recognition should be objective and based on record of recovery, rather than
any subjective consideration. The international practice is that an asset is treated as Nonperforming when interest is overdue for at least two quarters. According to the committee,
advances would be treated as non-performing assets, as on the balance sheet date.
In respect of term loans, interest remains past due for a period of more than 180 days. In
respect of overdraft and cash credit, account remains out of order for a period of more than 180
days.
In respect of bills purchased and discounted, the bill remains overdue and unpaid for a period
of more than 180 days.
In respect of other accounts, any amount to be received remains past due for a period of more
than 180 days.
An amount is considered post due when it remains outstanding 30 days beyond the due date.The
Reserve Bank of India examined the above criteria of the Committee in regard to classification
of advances as non- performing assets and credited to implement the same in a phased manner
beginning with accounting year 1st April 1992. The following was the basis for treating a credit
facility as non-performing
i) Term Loan
If interest remains past due for a period of
Specific period
4 quarters
1994
3 quarters
1995
2 quarters
Onwards
ii) Cash Credit and Overdrafts
If the accounts remains out of order for the period indicated as above.
iii) Bills Purchased / Discounted
If the bill remains overdue & unpaid for the periods specified here in above. iv) Other Accounts
If any amount to be received in respect of that facility remains past due for the periods specified.
It was also clarified that an account should be treated as out of order if the balance outstanding in
the account remains in excess of the sanctioned limit / drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned limit / drawing
power, but there are no credits continuously for six months as on the date of balance sheet, or
credits during the same period, these accounts should also be treated as NPA. Such accounts
should stagnant accounts with very little operations. Here drawing power in case of our Bank
may be construed as drawing limit and no credits continuously for six months as on the date of
balance sheet date would mean between 31st March and 30th September for the relative year i.e.
as on 31st March 1994, the six months prior to that would mean between 31st March 1993 and
30 September 1993.
Technical Aspects!
It was very easy for the banks to debit the interest amount to the loan account and credit the same to
income account without considering the fact whether the interest will be realized and there would be
return of principal amount. This practice of passing the entries in the books of accounts in respect of
interest accrued but not realized as income results in losing the value of assets. Thus such assets become
almost dead by not performing anything. Such non performing assets were accumulated to the large
extent and became unbearable. On one hand the books of accounts of the banks used to show huge profit
and on the other hand there was no realization of income because of such accounting system. This affects
the banking system adversely. Thus major element of the financial sector reform in India was introduced
in the form of prudential norms and regulations. These prudential norms and regulations are basically
aimed at ensuring the safety and soundness of the financial system, imparting of greater transparency and
accountability in operation and restoring creditability in Indian Financial System. Prudential norms serve
two primary purposes, which are:
(1) Bringing out the true position of a banks loan profitability
(2) Help arrest its deterioration
A proper system for
(1) Income recognition
(2) Classification of assets and
(3) Provisioning for bad debts on prudential basis is necessary if balance sheet of a bank is to reflect its
original financial health. The committee on financial system under Dthe chairmanship of Shri M.
Narsimham had examined this issue, recommended that a policy of income recognition should be
objective, and based on recovery rather than on any subjective consideration. Similarly, the classification
of assets which would ensure a uniform and consistent application of norms.
The recommendations of Shri M. Narsimham Committee regarding income recognition, asset
classification and provisioning were sought to be implemented by Reserve Bank of India in a phased
manner over a three year period from the year commencing from the year 1992-93. In this regard RBI
has issued a separate guideline for different category of commercial scheduled banks (in April 1992). All
financial institutions (in April 1992 with some modifications considering their functioning) NBFCs (in
June, 1994) RRBs (in March 1996) at the proper time with the adequate modification. In 1993 all the
primary co-operative banks have been told that they should comply with prudential norms and regulations
with income recognition, asset classification and provisioning with some modifications. Later on a high
power committee on Urban Co-operative banks constituted in May 1999 under the chairmanship of K.
Madhava Rao
NPA CLASSIFICATION
With effect from 31-03-2001, With a view to moving towards international best practices and to
ensure greater transparency, '90 days' overdue norms for identification of NPAs have been made
applicable from the year ended March 31, 2004. As such, with effect from March 31, 2004, a
non-performing asset shall be a loan or an advance where:
I. interest and/ or installment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii. The account remains out of order as indicated at paragraph 2.2 below, in respect of an
Overdraft/Cash Credit (OD/CC),
iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
iv. The installment of principal or interest thereon remains overdue for two crop seasons for short
duration crops,
V. the installment of principal or interest thereon remains overdue for one crop season for long
duration crops,
vi. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a
securitization transaction undertaken in terms of guidelines on securitization dated February 1,
2006.
vii. in respect of derivative transactions, the overdue receivables representing positive mark-tomarket value of a derivative contract, if these remain unpaid for a period of 90 days from the
specified due date for payment.
"An account should be treated as 'out of order' if the outstanding balance remains continuously in
excess of the sanctioned limit / drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit / drawing power, but there are no
credits continuously for 90 days or credits are not enough to cover the interest debited during the
same period, these accounts should be treated as 'out of order'".
Regular and ad-hoc credit limits need to be reviewed / regularized not later than three months
from the due date / date of ad-hoc sanction. In case of constraints such as non-availability of
financial statements and other data from the borrowers, the branch should furnish evidence to
show that renewal / review of credit limits is already on and would be completed soon. In any
case, delay beyond six months is not considered desirable as a general discipline. Hence, an
account where the regular / ad-hoc credit limits have not been reviewed or have not been
renewed within 180 days from the due date / date of ad-hoc sanction will be treated as NPA,
which period will be reduced to 90 days with effect from March 31, 2004.
Banks should ensure that drawings in the working capital accounts are covered by the adequacy
of current assets, since
current assets are first appropriated in times of distress. Considering the practical difficulties of
large borrowers, stock statements relied upon by the banks for determining drawing power
should not be older than three months. The outstanding in the account based on drawing power
calculated from stock statements older than three months would be deemed as irregular. A
working capital borrowable account will become NPA if such irregular drawings are permitted in
the account for a continuous period of 90 days (with effect from March 31, 2004).
If Government guaranteed advances become NPA, the interest on such advances should not be
taken to income account unless the interest has been realized. Advances against term deposits,
NSCs eligible for surrender, IVPs, KVPs and Life policies need not be treated as NPAs although
interest thereon may not have been paid for more than 90 days provided adequate margin is
available in the accounts. The investments are also subject to the prudential norms on income
recognition. Banks should not book income on accrual basis in respect of any security
irrespective of the category in which it is included, where the interest / principal is in arrears for
more than 90 days. The system of identification of NPA should be ongoing basis. Banks should
also make provisions for NPAs as at the end of each calendar quarter i.e as at the end of March /
June / September /December, so that the income and expenditure account for the respective
quarters as well as the P&L account and balance sheet for the year end reflects the provision
made for NPAs.Interest realized on NPAs may be taken to income account provided the credits in
the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the
borrower concerned. In the absence of a clear agreement between the bank and the borrower for
the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks
should adopt an accounting principle and exercise the right of appropriation of recoveries in a
uniform and consistent manner.
On an account turning NPA, banks should reverse the interest already charged and not collected
by debiting Profit and Loss account, and stop further application of interest. However, banks may
continue to record such accrued interest in a Memorandum account in their books. For the
purpose of computing Gross Advances, interest recorded in the Memorandum account should not
be taken into account. The treatment of an asset as NPA should be based on the record of
recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies
which are of temporary in nature such as non-availability of adequate drawing power, balance
outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the
limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is
in doubt, the asset should be treated as NPA. In respect of a borrower having more than one
facility with a bank, all the facilities granted by the bank will have to be treated as NPA and not
the particular facility or part thereof which has become irregular. However, in respect of
consortium advances or financing under multiple banking arrangements, each bank may classify
the borrowable accounts according to its own record of recovery and other aspects having a
bearing on the recoverability of the advances. Banks cant classify all the a/cs of a group (i.e.
Common management by one or more directors / partners having common in different firms) as
NPA on ground of any one facility being NPA. The classification of NPA is borrower wise and
not GroupWise. Asset classification of accounts under consortium should be based on the record
of recovery of the individual member banks and other aspects having a bearing on the
recoverability of the advances. Where the remittances by the borrower under consortium lending
arrangements are pooled with one bank and /or where the bank receiving remittances is not
parting with the share of other member banks, the account will be treated as not serviced in the
books of the other member banks, and therefore, be treated as NPA. The banks participating in
the consortium should, therefore, arrange to get their share of recovery transferred from the lead
bank or get an express consent from the lead bank for the transfer of their share of recovery, to
ensure proper asset classification in their respective books.
, was set up to review the performance of Urban Co-operative Banks and to make necessary
changes to strengthen this sector. There was a need for structural reforms in the complete set up
of the co-operative banks.
ASSETS CLASSIFICATION
RBI serves as the regulatory body over all the banks and according to guidelines issued by it
the banks have to classify their assets into 4 categories:
The assets of the banks which dont perform (that is dont bring any return) are called NonPerforming Assets (NPA) or bad loans. Banks assets are the loans and advances given to
customers. If customers dont pay either interest or part of principal or both, the loan turns into
bad loan. According to RBI, terms loans on which interest or installment of principal remain
overdue for a period of more than 90 days from the end of a particular quarter is called a Nonperforming Asset. However, in terms of Agriculture / Farm Loans; the NPA is defined as under:
For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan
(installment /interest) is not paid for 2 crop seasons, it would be termed as a NPA.
For Long Duration Crops, the above would be 1Crop season from the due date.
For the evaluation of bank performance, it is important to identify the quality of assets of the
bank. In the light of Narasimham Committee recommendations, the Reserve Bank of India has
redefined the non-performing assets and advised all commercial banks in public sector, old and
new private sector banks, development banks and the cooperative banks, to classify their
advances into four broad categories i.e. Standard, Substandard, Doubtful and Loss assets. The
standard assets are treated as performing assets and the remaining three categories are treated as
non-performing assets. With reference to master circular No. DBOD. No. BP. BC.
17/21.04.048/2009-10 dated July 1, 2009 banks are required to classify nonperforming assets
further into the following three categories based on the period for which the asset has remained
nonperforming and the reliability of the dues:
1. Substandard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for
a period less than or equal to 12 months. In such cases, the current net worth of the borrower/
guarantor or the current market value of the security charged is not enough to ensure recovery of
the dues to the banks in full. In other words, such an asset will have well defined credit
weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.
2. Doubtful Assets:
With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in
the substandard category for a period of 12 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as substandard, with the added characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently known
facts, conditions and values highly questionable and improbable.
3. Loss Assets:
A loss asset is one 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. In other words, such an asset
is considered uncollectible and of such little value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery value.D
The major reasons identified behind the increase in NPAs are listed as under:
1. Will full default on the grounds of borrower.
2. Political interferences in the working of banks.
3. Loopholes in scrutinizing the applications before sanctioning the loans.
4. Death of the borrower.
5. Natural calamities.
6. Non- performance of the business for which loan was take
7. Corruption.
The above mentioned list definitely not exhaustive In nature and many efforts are being taken in
this Regards to find maximum possible reasons behind The problem. This leaves grounds for
researchers to explore the area in detail and come up with findings and solutions to help the
banking sector face the challenge of rising NPAs.
Broadly speaking, classification of assets into above categories should be done taking into
account the degree of well-defined credit weaknesses and the extent of dependence on collateral
security for realization of dues. Banks should establish appropriate internal systems to eliminate
the tendency to delay or postpone the identification of NPAs, especially in respect of high value
accounts. The banks may fix a minimum cut off point to decide what would constitute a high
value account depending upon their respective business levels. The cutoff point should be valid
for the entire accounting year. Responsibility and validation levels for ensuring proper asset
classification may be fixed by the banks. The system should ensure that doubts in asset
classification due to any reason are settled through specified internal channels within one month
from the date on which the account would have been classified as NPA as per extant guidelines.
Permitted in the account for a continuous period of 90 days even though the unit may be working
or the borrower's financial position is satisfactory. Regular and ad hoc credit limits need to be
reviewed/ regularized not later than three months from the due date/date of ad hoc sanction. In
case of constraints such as non-availability of financial statements and other data from the
borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is
already on and would be completed soon. In any case, delay beyond six months is not considered
desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have
not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be
treated as NPA.
Up gradation of loan accounts classified as NPAs
If arrears of interest and principal are paid by the borrower in the case of loan accounts classified
as NPAs, the account should no longer be treated as nonperforming and may be classified as
standard accounts. With regard to up gradation of a restructured/ rescheduled account which is
classified as NPA, contents of paragraphs 5.9.13 and 5.9.14 will be applicable.5.9.4 Accounts
regularized near about the balance sheet dateThe asset classification of borrower accounts where
a solitary or a few credits are recorded before the balance sheet date should be handled with care
and without scope for subjectivity. Where the account indicates inherent weakness on the basis of
the data Davailable, the account should be deemed as a NPA. In other genuine cases, the banks
must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner
of regularization of the account to eliminate doubts on their performing status.
Asset Classification to be borrower-wise and not facility-wise
i) It is difficult to envisage a situation when only one facility to a borrower/one investment in any
of the securities issued by the borrower becomes a problem credit/investment and not others.
Therefore, all the facilities granted by a bank to a borrower and investment in all the securities
issued by the borrower will have to be treated as NPA/NPI and not the particular
facility/investment or part thereof which has become irregular.(one a/c npa, all a/c npa)
ii) If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in
a separate account, the balance outstanding in that account also should be treated as a part of the
borrowers principal operating account for the purpose of application of prudential norms on
income recognition, asset classification and provisioning.
iii) The bills discounted under LC favoring a borrower may not be classified as a Nonperforming
advance (NPA), when any other facility granted to the borrower is classified as NPA. However,
in case documents under LC are not accepted on presentation or the payment under the LC is not
made on the due date by the LC issuing bank for any reason And the borrower does not
immediately make good the amount disbursed as a result of discounting of concerned bills, the
outstanding bills discounted will immediately be classified as NPA with effect from the date
when the other facilities had been classified as NPA.
iv) The overdue receivables representing positive mark-to-market value of a derivative contract
will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In case the
over does arising from forward contracts and plain vanilla swaps and options become NPAs, all
other funded facilities granted to the client shall also be classified as non-performing asset
following the principle of borrower-wise classification as per the existing asset classification
norms. Accordingly, any amount, representing positive mark-to-Dmarket value of the foreign
exchange derivative contracts (other than forward contract and plain vanilla swaps and options)
that were entered into during the period April 2007 to June 2008, which has already crystallized
or might crystallize in future and is / becomes receivable from the client, should be parked in a
separate account maintained in the name of the client / counterparty. This amount, even if
overdue for a period of 90 days or more, will not make other funded facilities provided to the
client, NPA on account of the principle of borrower-wise asset classification, though such
receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC
norms. The classification of all other assets of such clients will, however, continue to be
governed by the extant IRAC norms.
v) If the client concerned is also a borrower of the bank enjoying a Cash Credit or Overdraft
facility from the bank, the receivables mentioned at item (iv) above may be debited to that
account on due date and the impact of its non-payment would be reflected in the cash credit /
overdraft facility account. The principle of borrower-wise asset classification would be
applicable here also, as per extant norms.
vi) In cases where the contract provides for settlement of the current mark-to-market value of a
derivative contract before its maturity, only the current credit exposure (not the potential future
exposure) will be classified as a non-performing asset after an overdue period of 90 days.
vii) As the overdue receivables mentioned above would represent unrealised income already
booked by the bank on accrual basis, after 90 days of overdue period, the amount already taken
to 'Profit and Loss a/c' should be reversed and held in a 'Suspense a/c' in the same manner as is
done in the case of overdue advances.
D
Norms for Provisioning on Loans & Advances:In conformity with the prudential norms, provisions should be made on the nonprescribed
categories as detailed above.
Standard Assets
(a) From the year ended March 31, 2000, the banks should make a general provision of a
minimum of 0.25 per cent on standard assets.
(b) However, from the year ended March 31, 2007, Tier II banks will be subjected to higher
provisioning norms on standard asset as under:
(i) The general provisioning requirement for standard advances shall be0.40 per cent from the
present level of 0.25 percent. However, direct advances to agricultural and SME sectors which
are standard assets, would attract a uniform provisioning requirement of 0.25 per cent of the
funded outstanding on a portfolio basis, as hitherto.D
(ii) For personal loans, loans and advances qualifying as capital market exposures and
commercial real estate loans, loans and advances to systemically important NBFCs-ND
provisioning requirement would be 2.0%.
(c) The provisioning towards standard assets need not be netted from gross advances but
shown separately as Contingent Provision against Standard Assets under Other Funds and
Reserves in the Balance Sheet.
(d) In case banks are already maintaining excess provision than what is required/prescribed by
Statutory Auditor/RBI Inspection for impaired credits under Bad and Doubtful Debt Reserve,
additional provision required for Standard Assets may be segregated from Bad and Doubtful
Debt Reserve and the same may be parked under the head Contingent Provisions against
Standard Assets with the approval of their Board of Directors. Shortfall if any, on this account,
may be made good in the normal course.
(e) The above contingent provision will be eligible for inclusion in Tier II capital.Substandard
Assets general provision of 10 per cent on total outstanding should be made without making any
allowance for DICGS/ECGC guarantee cover and securities available.
Doubtful Assets
(a) Provision should be for 100 per cent of the extent to which the advance is not covered by the
realizable value of the security to which the bank has a valid recourse should be made and the
realizable value is estimated on a realistic basis.
(b) In regard to the secured portion, provision may be made on the following basis, at the rates
ranging from 20 per cent to 100 per cent of the secured portion depending upon the period for
which the asset has remained doubtful:D
Tier I Bank
Period for which the advance has
remained in doubtful
category#
Provision requirement
Up to one year
20 per cent
30 per cent
Tier II Bank
20 per cent
30 per cent
The provision on standard assets must not be reckoned for arriving at net NPA.
The provision towards standard assets need not be netted from gross advances shown
separately as contingent provisions against standard assets under Other Liabilities and
Provisions Other Funds and Reserves (item. 2(viii) of Capital and Liabilities) in the
Balance Sheet.
In respect of the advances covered by ECGC / DICGC guarantee banks were advised that
in the case of advances guaranteed by ECGC / DICGC, provision should be made only
for the Balance in excess of the amount guaranteed by these corporations. From the year
1995-96 and onwards, banks should deduct realizable value of security from outstanding
balance before the ECGC / DICGC guarantee is offset for example, the following method
should be adopted to find out the provisioning requirement in respect of doubtful
assets:D
Outstanding balance.
: Rs.10 lakh
D ECGC / DICGC cover.
: 60%
D Period for which the advanced has remained doubtful : more than 3 year
Value of Security.
: 3 lakh
CALCULATION OF PROVISION:Outstanding balance
D Less: Value of security held.
D Balance.
D Less: ECGC / DICGC cover(60% of Bal.).
D Bal. of amount required provisioning.
D Provision for unsecured portion
100% after adjusting the guarantee cover
D Provision for secured portion (50)
: Rs.10 lakhs
: Rs 03 lakhs
: Rs 07 lakhs
: Rs. 4.2 lakhs
:Rs.2.8 lakhs
: Rs.2.8 lakhs
:Rs. 1.5 lakhs
:Rs. 4.3 lakhs
Advances against the gold ornaments government securities and all other kind of securities are
not exempted from provisioning requirements. The RBI in its circular dated 2nd July, 1996 has
advised the banks to classify on performing assets into sub - standard, doubtful and loss assets
before finalizing the accounts as at 31st March and submit the copy of a statement to the Reserve
Bank of India, duly certified by the statutory auditor of the bank who have been appointed to
audit the annual accounts of the banks.
Loss Assets
(a) The entire assets should be written off obtaining necessary approval from the competent
authority and as per the provisions of the Co-operative Societies Act/Rules. If the assets are
permitted to remain in the books for any reason, 100 per cent of the outstanding should be
provided for.
(b) (b) In respect of an asset identified as a loss asset, full provision at 100 per cent should be
made if the expected salvage value of the security is negligible.
(c)
(d) FLOATING PROVISIONS:(e) Some of the banks make floating provisions over and above specific provisions made in
respect of accounts identified as NPAs. The floating provision, wherever available, could be
set off against provisions made as per above stated provisioning guidelines.
(f)
(g) OTHER PROVISIONAL NORMS:-[CLARIFICATIONS FOR PRUDENTIAL NORMS]
(h) (1) Treatment of NPAs of Agricultural Advances:
(i) Where natural calamities impair the repaying capacity of agricultural borrowers, primary
(urban) co-operative banks, as a relief measure may deside on their own to:
(j) (a) Convert the short term production loan into a term loan or reschedule the repayment
period, and
(b) Sanction fresh short term loans. In such cases of conversation or re-schedulement, the
term loan as well as fresh short term loan may be treated as current dues and need not be
classified as non-performing asset (NPA). The asset classification of these loans would,
therefore, be Dgoverned by the revised term and conditions and these would be treated as NP
under the extant norms applicable for classifying agricultural advances as NPAs.
(2) Net worth of borrower / guarantor or value of security:
It is clarified that availability of security or net worth of borrower / guarantor should not be taken
into account for the purpose of treating an advances as NPA or otherwise, as income recognition
is based on record of recovery.
(3) Projecting Financing:
In the case of bank finance given for industrial projects where moratorium is available for
payment of interest, payment of interest becomes due only after the moratorium or gestation
period is over. Therefore, such amounts of interest do not become overdue and hence NPA, with
reference to the date of debit of interest. They become overdue after due date for payment of
interest, if uncollected.
For the banks RBI has issued guidelines for sanctioning the loans. Banks have to compulsorily
follow these guidelines but sometimes the banks have to act under the political pressure and
relativism. The banks sanction the loans to such less creditworthy borrowers. The amounts of
such loans are not recovered and consequently the NPA is created. Generally such cases happen
more in cooperative banks.
Unhealthy Competition:
Sometimes the businessmen enter into cut throat competition. When they enter into price base
competition, they suffer a loss. Because of such loss they are not capable to repay the amount of
loan. This results into NPAs in Banks.D
priority sector and non-priority sector. This is enough evidence that RBI itself accepts that there
are more chances of NPAs in priority sector.D
The non-performing asset is like termite which eats the whole financial system. If this termite is
not controlled, it will be dangerous for the financial system. The government has taken several
policy decisions and has prepared several strategies to control the high rate of NPAs in the
banking sector. But these steps have not created desired effect on the rate of NPAs. Here are
some suggestions for reducing nonperforming assets. If these suggestions are implemented
effectively, they will be helpful for reducing NPAs with immediate effect.
Generally the assets that are kept as security are auctioned to recover the amount of default. But
there are no bidders to purchase such moveable or immovable property due to the fear of the
defaulters. Because of this the bank can not realize the full amount of default. In such case the
bank should assign such case to a special group of auctioneer that will find out an appropriate
bidder so that the full amount of default can be realized by selling the securitized property held
with the bank.
Constant touch with persons trading with the borrower:
To know about the creditworthiness of the borrower and to obtain market report yin regard to his
trade dealings and solvency, the bank should keep a touch with the persons trading with the
borrower. By this the bank can take immediate steps as and when some negative information
about the borrower is received from the market.
Setting up of credit investigation and information agency:
The banks should establish an agency which is assigned the duty to investigate about the
creditworthiness of the borrowers. The information obtained by such agency should be easily
accessible by all the bankers. This will be helpful in the selection of borrowers. Before
sanctioning the loan, such agency should be contacted to obtain the information about the
creditworthiness of the borrowers. This will reduce the chances of wrong selection of borrower.
Legislative changes:
The government should pass some legislation in the direction of effective recovery of
outstanding loans. By passing the legislation, recovery tribunals, recovery cell, lok-adalatas etc.
should be given more authority and they should be made autonomous institutions. If they have
more power to recover the outstanding loans, they can take immediate and effective steps for the
recovery. This kind of institutions will be helpful for the banks to make the legal recovery of
outstanding loans.
Interest discounts for prompt repayments:
To reduce the NPAs, the bank should start some schemes under which the defaulters are given a
special interest discount if they make the prompt repayment of the outstanding amount. This step
may be helpful to recover the outstanding amount from those defaulters who have sense of
market credit.
Asset Reconstruction Fund:
The NPAs of weak banks may be transferred to state owned asset reconstruction fund (ARF),
managed by an independent private sector firms. The ARF will buy the NPAs from the weak
banks at a price it decides. Its objective will be to make profits out of deals. It is just like
business buying impaired loans, recovering them and in the process, making profits.17
rehabilitation program runs smoothly, it may be necessary to make provisions even after one year
for additional facilities provided statutory auditors are also satisfied about the progress of
rehabilitation program. If the unit becomes viable, the entire outstanding (including existing
facilities) will become standard assets. Although rehabilitation of sick unit is a long drawn
procedure, it may be encouraged where units are potentially viable and the management is
reliable. However, non-viable sick units should be liquidated to get funds for recycling without
avoidable loss of time in decision making.
3. Acquisitions of sick units by healthy units:
If healthy unit acquires a sick unit, the outstanding loan amount of sick unit may be transferred to
the healthy unit the entire NPA may be even wiped off. Therefore, banks should encourage
merger/acquisition of sick units wherever they feel it may reduce the NPAs. Banks may even
help the sick units to get stable buyers, if a part of the consideration is to be received by the sick
unit is likely to be used for liquidating the NPA. Banks should make a comparative study of
gains of merger/acquisition and sacrifice to be made by them to clinch the deal.
4. Compromise the borrowers:
A compromise may be called a negotiated settlement in which the borrower agrees to pay a
certain amount to the banker after getting certain concession. A large number of compromise
proposal are being approved by banks with a view to reducing the NPAs and recycling the funds
instead of resorting to expensive recovery proceedings spread over a long period. However a
compromise proposal should not be approved without proper scrutiny. Banks should try to
recover their dues to the maximum extent possible at minimum expenses. While entering into the
compromise proposals, following points should be taken into consideration:
(a) A bank keeping in view the guidelines given in its Loan Recovery Policy should accept
compromise proposal.D
(b) Where security is available, its realizable value should be assessed taking into consideration
its location, present condition, marketable title and possession.
(c) Worth of the guarantor, if any, should be assured. Many a times banks may be able to recover
the amount with the help of guarantee available.
(d) Borrowers creditability and his paying ability should be assured if recovery is to be made in
installments as per the compromise proposal.
(e) Staff accountability should be examined expeditiously and completed within a time frame.
(g) All compromise proposal approved by any functionary should be promptly reported to the
next higher authority for post facto security.
!5. Calling up the advances and filing of civil suits:
It is not possible to receive a unit or enter into a reasonable settlement with the borrower, it is
better to recall the advances at an early stage instead of waiting for a long time which may result
in deterioration of the security available. Further, if it is not possible to sell the security without
obtaining courts order, civil suits may be filed against such borrowers who are not likely to
come to reasonable settlement. Banks should not feel that their job over by filing the court case.
Banks should revise the list of approved advocates from time to time keeping in view their
performance. Advocates who do not perform well should not be given new cases.D
6. Approaching debt recovery tribunal:
An act has been passed by parliament for setting up Debt Recovery Tribunal for expeditious
adjudication and recovery of debts due to banks and financial institutions. The provisions of this
act titles as the recovery of debts due to banks and financial institutions act, 1993, are
applicable where the amount of debt due to any bank of financial institutions of to a consortium
of banks or financial institutions is not less than Rs. 10 lakhs. The Central Government have,
however, been empowered to reduce the lower limit of Rs. 10 lakhs but not below Rs. 1 lakh by
issuing notification. The Debt Recovery Tribunals are being setup in various states and an
Appellate Tribunal has also been set up at Bombay to hear the appeals against the decision of the
Debt Recover Tribunals. However, a provision has been which may discourage un necessary
delay in settlement of case. It is hoped that establishment of debt recovery tribunal may not only
facilitate quick decisions but also induce borrowers to enter into settlements with the banks.
7. Recovery of advances given under Government sponsored Programs:
Banks should take advantage of the legislation enacted by State Government for specially
recovery of banks overdue. They should promptly file cases against willful defaulters with the
concerned authorities of the State Government. While filing the cases, they may ensure that
necessary details and settlements are submitted. Representative of the banks should also attend
the courts on fixed dates. The matters relating to recovery of advances should be discussed into
State Level Bankers meeting and necessary help for recovery should be obtained from the State
Government authorities. Sometimes, it may be useful to organize Recovery Camp for effecting
speedy recovery of the banks dues. A list of defaulters may be for each village before organizing
the Recovery Camp with which Recovery Officers, Block Department officers, Dataries, Gram
Savakis, etc. may be closely associated. Banks in rural areas should take full advantage of non
public business working days for recovery of advances. If necessary, branch wise analysis of
overdue in a particular branch, proper monitoring of overdue from rural branches is also essential
to reduce the outstanding advances.D
8. Settlement of claims with DICGC / ECGC:
If DICGC / ECGC claims are available, banks should submit their proposal for the same with
necessary details. Proper follow up with DICGC / ECGC is necessary for settlement of claims
and reducing the NPAs to certain extent.
maximum advantage. It is advisable to take the help of outsiders such as local panchayat
officials, regional bank managers and similar other person. Such camps should be widely
publicized to ensure maximum recovery of loans.
Redesigning unpaid loan installments:
The bank should make an effort to redesign the loan repayment schedule for those borrowers
who are unable to repay the loans. The banks can reduce the amount of installment and can
extend the time for repayment of the loan. This will convince the borrowers that they can repay
the loan. The banks need to be sympathetic to the sincere borrowers.
! One-time settlement/Compromise scheme:
The bank can start compromise schemes or one-time settlement schemes for the recovery of
loans. The RBI in consultation with the government of India has issued the guidelines for such
one-time settlement/compromise scheme for the dues of commercial banks up to Rs. 10,
00,000.19
Rehabilitation of sick units:
The banks should identify sick units in SSI as well as in medium and large scale industry. The
banks should introduce rehabilitation package for such sick units according to RBI guidelines.
While introducing such rehabilitation package, the bank should keep in mind that the causes of
sickness should be genuine and the project should be viable in terms of debt-service coverage
ratio.
Filing of civil suits or legal actions for recovery:
Where the compromise proposals given by the banks are not accepted by the borrowers, it is
better for the banks to file the civil suits instead of waiting for the long time. The bank should
start immediate actions against such borrowers because there are chances of their willful
default.20
Asset Reconstruction Companies (ARC):
The Committee on Banking Sector Reforms (CBSR) Report suggest remedies to recover the
NPAs as well their subsequent transfer as asset through Asset Reconstruction Companies. The
most effective way of removing NPAs from the books of the weak banks would be to move these
out to a separate agency which will buy the loans and make it own efforts for their recovery. The
ARCs efforts are profit oriented and its aim is to recover from the acquired assets more than the
price paid for it. These companies are to be registered with the RBI with a minimum capital base
of Rs.2, 00,00,000.D
Lok adulates:
Lok adulates are voluntary agencies created by state governments to assist in matters of loan
compromise. Lok adalats work out an acceptable compromise and issue a recovery certificate
which shortens the period of obtaining a court decree. The government should make an effort to
give wide publicity to the scheme, besides educating the bankers and borrowers about Lok
adalats. Lok adalats have been set up for the recovery of dues in accounts falling in the doubtful
and loss categories with outstanding balance up to Rs.5,00,000 by way of compromise
settlements. Government has recently revised the monetary ceiling of cases to be referred to Lok
adalats organized by civil courts from Rs.5,00,000 to Rs.20,00,000. RBI has issued guidelines to
commercial banks advising them to make use of Lok adalats.22
SARFAESI Act:
SARFAESI is the preferred route for finding solution to NPA. There was no legal provision for
facilitating securitization of financial asset of the bank and financial institutions or power to take
possession of securities and sell them. This resulted in slow recovery of defaulting loan and
mounting levels of NPA of bank and financial institutions and a need was felt for keeping pace
with changing commercial practice and financial sector reforms. Keeping with this, an enabling
legislative and regulatory framework was put in place with the enactment of the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The
primary objective of the act is reduction of NPA levels of banks or financial institutions and
unlocking value from distressed asset in the banking and financial system.23
Debt Recovery Tribunal (DRT):
The government of India passed the recovery of Debts due to Banks and Financial Institutions
(amendment) Act, 2000. This act has helped in strengthening the functioning of DRTs.
Provisions for placement of more than Done recovery officer, power to attach defendantDs
property or asset before judgment, penal provision for disobedience of tribunalDs order or for
breach of any terms has provided necessary strength to DRTs.
Corporate Debt Restructuring (CDR):
Corporate Debt Restructuring mechanism has been introduced in the year 2001. The aim is to
provide a timely and transparent system for restructuring of the corporate debt of Rs.20,
00,00,000 and above with the banks and financial institutions. The CDR process enables the
companies to restructure their dues and reduce the incidence of fresh NPAs. It reforms the loan
servicing obligation of the borrower and gives some concession in the interest rate.
Revenue Recovery Act:
On the basis of recommendations of Trawler Committee, a simplified procedure for recovery of
commercial banks dues has been introduced. The recommendations of the committee have been
accepted by most of the states but the results in terms of recovery are not encouraging.
Settlement of claim with Deposit Insurance and Credit Guarantee Corporation of India
(DICGC): Bank should submit their proposals for outstanding loans with DICGC for settlement
of their claims and reduce their NPAs. DICGC will recover the outstanding loans on behalf of the
banks
Surprisingly, in the pre-crisis period, private banks topped the list of banks
with highest NPAs (see the chart). A quick look at the top ten NPA scorers in
September 2008 shows ICICI Bank at the top. This was followed by small and
medium-sized private sector banks such as Karnataka Bank, Lakshmi Vilas
Bank, Kotak Mahindra and IndusInd Bank. Among the few sarkari banks that
figure in the list are Central Bank,Uco Bank and Syndicate Bank.
By March 2009, a few months before the Congress-led UPA II assumed
power, the scene began changing gradually. More state-run banks began
appearing in th picture. The country's largest lender by assets, State Bankb
of India (SBI) and Indian Overseas Bank found place in the list of top NPA
scorers. Still private sector lenders figured prominently in the list with ICICI
and DCB Bank leading the pack. To be sure, there is no direct link between
the ascension of UPA-II and the increase in the NPA picture, but this is when
before the Narendra Modi government assumed power at the Centre with a
landslide victory over the Congress-led UPA government. The bad loan
troubles of government banks began to hit hard despite the best efforts by
banks to cover up possible NPA stock to restructured loan category. The list
now is dominated mostly by public sector banks, witheight out of ten banks
being government owned.
Date of default
(IV) The bank has to incur additional cost in supervision and follow up.
(VI) The bank has to provide for the provisioning, thus effecting the net profit
of
the bank.
(VII) The bank faces difficulty to get license for new branches.
(VIII) NPAs have a very negative effect on CRAR (Capital Risk Adequacy
Ratio).
NPAs to the maximum possible extent. Not only reduction in NPAs even up
gradation
in the quality of such assets would help the banks to improve their bottom
lines
because the provisions already made can be transferred to the income head
in case of
up gradation of NPAs.
Conclusion
The problem of NPAs can be tackled only with proper credit assessment and
risk
management mechanism.
enthusiasm of the
In
situation
of
liquidity
overhang,
the
about their adverse selection and potential danger of addition to the stock of
NPAs. It is
not completely to avoid the problem of NPAs. The onus for containing the
factors leading
Quite often borrowers face the difficulties in raising funds from banks due to
mounting
NPAs. Either the bank is reluctant in providing the requisite funds to the
genuine
borrowers or if the funds are provided, they come at a very high cost to
compensate the
lenders losses caused due to high level of NPAs. While the gross NPA reflects
the
quality of loans made by banks, net NPA shows the actual burden of banks.
The banks
The continuous decrease in the time period is to bring the Indian banking
norms at par
with international norms. Such policy revisions will certainly reduce the NPAs
and in
Bibliography
1. Rajput N.,Gupta M.,Chauhan A.K., 2013, A Comparative Analysis of NPA
Management Between SBI And CBI , Indian Journal of research,Vol 2,Issue 4.
Webliography
WWW.scribed.com
WWW.wikipedia. com
WWW.Google. co.in
WWW.yahoo.com
WWW.