It

refers to the degree of financial strength and risk in a bank's assets, typically loans and investments. A comprehensive evaluation of asset quality is one of the most important components in assessing the current condition and future viability of the bank. It is measured by a lender's credit standards, and the liquidity of securities held in the investment portfolio

 Quality

of banks assets impacts a banks financial performance can be a negative impact on earnings due to:
Lower interest income Higher provision to the loan loss reserve Increased administrative costs

There

 Asset

Quality problems can:

Diminish liquidity inherent in the loan portfolio Negative impact on the adequacy of bank

capital Reflects upon managements competence

Credit risk in the banks assets Determine if the borrowers will repay when their obligations are due Significant because:
Suggest problems for management, customers,

shareholders and regulators. Be an indicator of future charge-offs. Tend to identify poor managers and problem banks. Significantly affect earnings, capital and liquidity.

A Non- Performing Asset is Loan Account where interest or Loan instalment or both have not been paid by the borrower for a period of 90 days or more from the due date. In case of running account like Cash-Credit or Overdraft A/c, if the account remains out of order for a period of 90 days or more, the account becomes Non-Performing Asset. Out of order means: There have not been sufficient credits within a period of 90 days after application of interest to cover the interest amount.

GUIDELINES OF ASSETS

FOR CLASSIFICATION

DRAWING POWER: i) The drawing power has been exceeded for a period of 90 days or more. ii) stock statement on which dp calculated is more than 3 months old. IRREGULAR DRAWINGS: the accounts in which the irregular drawings permitted for a continues period of 90 days will become npa even though unit may be working or the borrowers financial position is satisfactory.

CREDIT LIMITS : An account where the regular limit have not been renewed / reviewed within 90 days from the due date will be classified as NPA. In case of constraints such as non availability of financial statements and other data and branch data should furnish evidence to show that renewal / review us already on up to 180 days such account will not be treated as NPA. ADHOC LIMITS : not recovered within 90 days of the due date will become NPA.

Asset Classification
non-performing assets are classified in to three categories based on the period for which the assets has remained as NPA and realisability of the amount.
1. 2. 3.

SUB STANDARD ASSETS DOUBTFUL ASSETS LOSS ASSETS

 LOSS ASSETS

a loss asset is one where loss has been identified by the bank or internal / external auditors or rbi inspection. i.e. a loan considered unrecoverable and continuance as a loan is not warranted although there may be some salvage or recovery value. Security value has reduced to less than 10% of the outstandings.

SUB STANDARD : Which have remained as an NPA for a period less than or equal to 12 months i.e. an asset will have well defined credit weaknesses that jeopardize the recovery of the debt and are characterized that the bank will sustain some loss if deficiencies are not corrected. DOUBTFUL ASSETS : An asset would be classified as a doubtful asset if it has remained in the sub standard category for a period of 12 months, i.e. a loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub standard, with the added characterization that the weakness make recovery highly questionable and improbable.

EROSION IN THE VALUE OF SECURITY

ACCOUNTS WHERE THERE ARE POTENTIAL THREATS FOR RECOVERY ON ACCOUNT OF EROSION IN THE VALUE OF SECURITY/ASSET SHOULD BE STRAIGHTWAY CLASSIFIED AS DOUBTFUL OR LOSS ASSET AS APPROPRIATE. EROSION IN REALISABLE VALUE OF SECURITY IS LESS THAN 50% - STRAIGHTAWAY CLASSIFIED UNDER DOUBTFUL. IF THE REALISABLE VALUE OF THE SECURITY IS LESS THAN 10% - STRAIGHTAWAY CLASSIFIED AS LOSS ASSET.

1.

2.

NON PERFORMING ASSET

AN ASSET, INCLUDING A LEASED ASSET, BECOMES NONPERFORMING WHEN IT CEASES TO GENERATE INCOME FOR THE BANK NPAs are largely a fallout of banks' activities with regard to advances, the credit appraisal system, monitoring of end-usage of funds and recovery procedures. Asset quality has a major effect on NPAs.

PROVISIONING NORMS
1. 2. i) ii)

LOSS ASSETS 100% OF THE OUTSTANDING SHOULD BE PROVIDED FOR. DOUBTFULASSETS 100 percent of the unsecured portion, In regard to the secured portion, provision should be made on the following basis-

Period in doubtful category Provision requirement (%) Up to one year One to three years More than three years 20 30 100

SUB-STANDARD A general provision of 10% on total outstanding. The 'unsecured exposures', which are identified as 'substandard' would attract additional provisions of 10 per cent,

STANDARD ASSETS: (a) direct advances to agricultural and SME sectors at 0.25 per cent; (b) residential housing loans beyond Rs. 20 lakh at 1 per cent; (c) advances to specific sectors, i.e., personal loans (including credit card receivables), loans and advances qualifying as capital market exposures, Commercial real estate loans at 2 per cent (d) all other advances not included in (a), (b) and (c) above, at 0.40 per cent.

EFFECT OF NPA

CEASES GENERATING INCOME TO THE BANK. INTEREST AND OTHER INCOME TO MAKE PROVISIONS OUT OF EARNINGS REFLECTS EFFICIENCY OF THE BANK -RATING OF BANK IS ALSO AFFECTED.

Asset quality placed as the most import parameter in measurement of Banks performance under CAMELS supervisory rating system of RBI. CACS (Capital, Asset Quality, Compliance and Systems & Control) in respect of foreign banks has been put in place from 1999.

MAJOR FACTORS CONTRIBUTING TO THE LOAN BECOMING NPA

ON BANKS PART SELECTION OF BORROWER. UNVIABILITY OF THE PROJECT. APPRAISAL NOT DONE PROPERLY. DELAY IN SANCTIONS/DELIVERY OF CREDIT. UNREALISTIC REPAYMENT SCHEDULE NON FOLLOWUP AND SUPERVISION -PRE-SANCTION / POST-SANCTION. -CONTINUOUS FOLLOWUP . -INSPECTIONS.

MAJOR FACTORS CONTRIBUTING TO THE LOAN BECOMING NPA

II- ON BORROWERS PART DIVERSION OF FUNDS a) EXPANSION b) DIVERSIFICATION c) MODERNISATION d) HELPING ASSOCIATES. BUSINESS FAILURE a) PRODUCT b) MARKETING c) TECHNICAL d) INEFFICIENT MANAGEMENT TIME / COST OVER RUN.

WILLFUL DEFAULT. SIPHONING OF FUNDS (MISUTILISATION) FRAUDS -DEFECTIVE DOCUMENTS AND

TITLE etc

External factors such as recession, input/power shortage , price escalation, natural calamities, accidents