NPA Management in
banks
Presentation By :
Dr.Narinder Kumar Bhasin
Director - Gyan Bharti Institute of Technology
CEO –Smart Institute of Banking Insurance and Finance
PhD Research Scholar –Amity University Batch 2015 -2018
WHAT IS NPA
NPA ACCOUNTS ARE THOSE
ACCOUNTS WHICH DO NOT YEILD ANY
INCOME OR CEASED TO GENERATE
INCOME FOR THE BANK.
WHY ACCOUNT BECOME NPA
•
•
•
•
•
Poor Selection of Borrowers
Poor Appraisal
Failure of providing timely support
Poor follow up and monitoring
Hesitation to accept project failure or
precipitate PNPA.
• Government Policies
• Unforeseen Circumstances.
Fig 1: Asset Classification
Assets
Performing
Assets
Standard
Assets
Non Performing Assets
(NPA)
Sub -Standard
Assets
Doubtful
Assets
Loss
Assets
ASSET CLASSIFICATION
STANDARD: A loan Asset which does not pose any
threat to recovery.
SUB STANDARD: NPA up to 12 months.
DOBTFUL:
Doubtful - I
: NPA up to 24 months
Doubtful - II
: NPA up to 48 Months
Doubtful - III
: NPA beyond 48 Months
Loss Assets
: Loss has been identified by
Banks Internal/ external/ auditor/ RBI inspector.
Performing Asset
• An account does not disclose any
problems and carry more than normal
risk attached to the business
• All loan facilities which are regular !
Non Performing Assets
• Non Performing Asset means a loan or
an account of borrower, which has
been classified by a bank or financial
institution as sub-standard, doubtful or
loss asset, in accordance with the
directions or guidelines relating to asset
classification issued by RBI.
Introduction
• Earlier assets were declared as NPA
after completion of the period for the
payment of total amount of loan and 30
days grace.
• In present scenario assets are declared
as NPA if none of the installment is paid
till 180 days i.e. six months in respect of
a term loan.
Introduction
With effect form March 31, 2004 a non-performing asset
(NPA) shell be 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
Loan,
 the account remains 'out of order' for a period of more
than 90 days, 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,
CATEGORIES OF NPA
 Standard Assets : Arrears of interest and the principal
amount of loan does not exceed 90 days at the end of
financial year
 Substandard 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 more than 12 months
• D1 i.e. up to 1 year : 20% provision is made by the bank
• D2 i.e. up to 2 year : 30% provision is made by the bank
• D3 i.e. up to 3 year : 100% provision is made by the bank
 Loss 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.
Reasons behind rise in 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.
• Willful defaulter.
• Loans sanctioned for agriculture purposes.
• Change in govt. policies leads to NPA.
Effects of NPA on banks & FI
• Restriction on flow of cash done by bank
due to the provisions of fund made
against NPA.
• Drain of profit.
• Bad effect on goodwill.
• Bad effect on equity value.
Factors Impacting Rise In NPAs
External factors :
• Ineffective legal framework & weak
recovery tribunals
• Lack of demand / economic recession or
slowdown
• Change in Govt. policies
• Wilful defaults by customers
• Alleged political interferences
Factors Impacting Rise In NPAs
Internal factors :
• Defective Lending process
• Inappropriate / non –use of technology like MIS ,
Computerization
• Improper SWOT analysis
• Inadequate credit appraisal system
• Managerial deficiencies
• Absence of regular industrial visits & monitoring
• Deficiencies in re-loaning process
• Alleged corruption
• Inadequate networking & linkages b/w banks
Why Loan accounts go bad ?
BORROWER-SIDE
Lack of Planning
Diversion of Funds
Disputes within
No contribution
No modernization
Improper monitoring
Industrial Relations
Natural Calamities
BANKER – SIDE
Defective Sanction
No post-sanction
supervision, etc
Delay in releases
Directed lending
Slow decision
making process
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 substandard, doubtful, and loss assets.
• Gross NPAs
Gross NPAs
Gross Advances
• 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 NPAs Gross = __NPAs – Provisions__
Gross Advances - Provisions
Causes
•
•
•
•
NPA arises due to a number of factors or causes like:Speculation : Investing in high risk assets to earn high income.
Default : Willful default by the borrowers.
Fraudulent practices : Fraudulent Practices like advancing loans to
ineligible persons, advances without security or references, etc.
• Diversion of funds : Most of the funds are diverted for unnecessary
expansion and diversion of business.
• Internal reasons : Many internal reasons like inefficient management,
inappropriate technology, labour problems, marketing failure, etc. resulting
in poor performance of the companies.
• External reasons : External reasons like a recession in the economy,
infrastructural problems, price rise, delay in release of sanctioned limits by
banks, delays in settlements of payments by government, natural
calamities, etc.
SBI
• State Bank of India
Net NPAs : Rs 12,347.90 crore
Gross NPAs : Rs 25,326.29 crore
• The gross non-performing assets (NPAs) of public sector
banks increased by 20 per cent during June-September 2011.
• Standard & Poor's, which had in September downgraded
standalone ratings of State Bank of India, said high credit
risks in the Indian banking sector reflects that the country has
a weak payment culture and legal system that often result in
low recoveries and delayed settlement of foreclosures.
ICICI Bank
• 2. ICICI Bank
• Net NPAs: Rs 2,407.36 crore
Gross NPAs: Rs 10,034.26 crore
• ICICI Bank has the highest NPAs among private
sector banks. ICICI Bank has slightly improved its
net bad debts to 0.90 per cent from 0.91 per cent in
the earlier quarter.
• Indian banks face challenges like increase in
interest rates on saving deposits, a tighter monetary
policy, restructured loan accounts and increasing
infrastructure loans.
NET NON PERFORMING
ASSETS
YEARS
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
SBI
7.31
7.30
6.07
7.33
6.65
5.33
5.63
4.5
3.48
2.65
1.87
1.32
PNB
10.21
10.38
9.57
8.96
8.52
6.69
5.32
3.86
0.98
0.2
0.29
0.28
ICICI
3.69
3.22
1.14
2.88
1.53
3.36
5.48
5.21
2.21
1.65
0.72
0.78
UTI
5.33
3.66
5.63
6.32
4.71
2.39
3.46
2.39
1.29
1.39
0.98
0.72
SCB
3.30
2.88
2.42
NA
2.04
1.53
3.46
2.39
1.29
1.39
0.98
0.87
GROSS & NET NPA OF COMMERCIAL
BANKS (in Rs. Crores)
Gross
Net
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
GROSS &NET NPA (as
percentage of total assets)
Non Performing
Assets
Substandard Assets
Doubtful Assets
Loss Assets
 Sub-Standard Assets: An asset which has remained
NPA for a period less than or equal to 12 months.
 Doubtful Assets: An asset that has remained in the
substandard category for a period of 12 months.
 Loss Assets: An asset 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.
•
•
•
•
•
•
Standard Assets
Direct advances to agriculture and SME at 0.25%,
CRE at 1%
Other loans and advances at 0.40%
Substandard Asset
A general provision of 15% on total outstanding
The ‘unsecured exposures’ which are
‘substandard’ to attract additional provision of
10%, i.e., a total of 25% on the outstanding
balance.
• Doubtful Assets
• 100% of the extent to which the advance
is not covered by the realisable value
of the security
• For the secured portion, provision to be
made as follows, depending upon the
period for which the asset has
remained doubtful
• Loss Assets
• Write Off or provision of 100% of
outstanding
NPA Management Strategies
• Indian Banks are pursuing variety of
strategies to control NPAs, which can be
studied under two broad categories as
under :
– a. Preventive Management
– b. Curative Management
NPA Management Strategies
a. Preventive Management - It is rightly said
that prevention is better than cure.
• Developing ‘Know Your Client’ profile (KYC
• Monitoring Early Warning Signals
• Installing Proper Credit Assessment and Risk
Management Mechanism
• Reduced Dependence on Interest
• Generating Watch-list/Special Mention
Category
NPA Management Strategies
b. Curative Management
• Re-phasement of loans
• Pursuing Corporate Debt Restructuring (CDR
• Encouraging rehabilitation of potentially viable
units
• Encouraging acquisition of sick units by healthy
units
• Entering compromise schemes with borrowers /
Entering one time settlement
NPA Management Strategies
• Using Lok Adalats for compromise settlement
for smaller loans in “doubtful” and “loss”
category.
• Using Securitization & SARFAESI Act
• Using Asset Reconstruction Company (ARC)
• Approaching Debt Recovery Tribunals (DRTs).
• Recovery Action against Large NPAs
• Circulation of Information of DefaultersStrengthening Database of Defaulters
S
No
SCBs
FY
2007-08 2008-09 2009-10 2010-11
2006-07
1
Gross NPAs
(%)
2.5
2.3
2.3
2.4
2.3
2
Net NPAs
(%)
1.0
1.0
1.1
1.1
0.9
3
Fresh NPA
Generation
Rate (%)
1.7
1.8
2.1
2.2
2.0
4
Net
NPAs/Net
Worth (%)
9.2
7.8
8.6
9.1
10.0
S
No
Private
Banks
FY
2007-08 2008-09 2009-10 2010-11
2006-07
1
Gross NPAs
(%)
2.1
2.4
2.9
2.7
2.3
2
Net NPAs
(%)
0.9
1.1
1.3
1.0
0.6
3
Net
NPAs/Net
Worth (%)
7.8
6.1
7.5
5.3
3.2
S
No
PSBs
FY
2007-08 2008-09 2009-10
2006-07
2010-11
1
Gross NPAs
(%)
2.7
2.2
2.0
2.2
2.3
2
Net NPAs
(%)
1.1
1.0
0.9
1.1
1.1
3
Net
NPAs/Net
Worth (%)
12.1
11.2
11.4
13.5
13.4
RECOVERY STRATEGY
willing to pay
willing to pay
able to pay
unable to pay
unwilling to pay unwilling to pay
able to pay
unable to pay
LEAGAL TOOLS RECOVERY
•
•
•
•
•
Lok Adalat
Debt recovery Act Orissa and Bihar
Money suit or Mortgage Suit.
Debt Recovery Tribunal – 1993
Securitization and Reconstruction of
Financial Assets and enforcement of Security
Interest. (SARFAESI) - 2002
• Sale of Financial Assets to Securitization/
Reconstruction Company.
RECOVERY OF DEBT
Recovery of Debts Due to Banks
and Financial Institutions Act, was
passed by the Government of
India (Act 51 of 1993) for
expeditious
adjudication
and
recovery of debts due to banks
and financial institutions.
DRT
• The Debts Recovery Tribunal have been
constituted under Section 3 of the Recovery of
Debts Due to Banks and Financial Institutions
Act, 1993.
• Appointment of Presiding Officer (PO) and
Recovery officer. (RO)
• Setting of DRT Offices.
DEBT RECOVERY TRIBUNAL
Authority :
– Secured Loan
– 10 lac and above
– To Auction Defaulters Property Charged to
Bank.
–
To hear Appeal against SARFAESIA.
STRUCTURE
Presiding officer
• High court Judge or Officer of General Manager
Rankwith Legal Background.
RECOVERY OFFICER
Chief Manager of sponsored Bank
PROCEDURE
•
•
•
•
•
•
DEMAND NOTICE
Valuation
Possession
Auction
For unsecured portion - regular court
For Appeal DRAT.
SARFAESI ACT 2002
•
•
The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security
Interest Act, 2002 (SARFAESI) Empowers
Banks and Financial Institutions to recover
their non performing assets without the
intervention of the Court.
The provisions of this Act are applicable only
for NPA loans with outstanding above Rs.1.00
lac. NPA loan accounts where the amount is
less than 20% of the principal and interest
are not eligible to be dealt with under this Act.
SARFAESI ACT 2002
• The Act has made provisions for registration
and regulation of Securitisation companies or
Reconstruction Companies by the RBI, to
facilitate securitisation of financial assets of
banks, empower SCs/ARCs to raise funds by
issuing
security
receipts
to
qualified
institutional buyers (QIBs), empowering banks
and FIs to take possession of securities given
for financial assistance and sell or lease the
same to take over management in the event of
default
Bank empowerment by ACT
• To issue demand notice to the defaulting
borrower and guarantor, calling upon them to
discharge their dues in full within 60 days.
• To give notice to any person who has
acquired any of the secured assets to
surrender the same to the Bank.
• To ask any debtor of the borrower to pay any
sum due or becoming due to the borrower.
Bank empowerment by ACT
• If the borrower fails to comply with the
notice, the Bank may take recourse to one
or more of the following measures:
• Take possession of the security
• Sale or lease or assign the right over the
security
• Manage the same or appoint any person
to manage the same
Implementation of SARFAESIA
• Appointment of Authorized person.
• Recall of loan 30 days notice
• The bank or financial institution may, if it
considers appropriate, give a notice of
acquisition of financial assets. 60 days.
• Possession – Immovable Assets, Movable
Assets. – Normally 30 days
time to file objections.
• Auction of the property.
Sale to reconconstruction company.
• There are many Assets reconstruction
Companies to whom Bank Sale its NPA
Assets for which SARFAESI Act has spelt out
the detail procedure. Some of them are
• Assets care and Reconstruction
enterprises.(ACRE)
• ARCIL
• Pridhvi Asset Reconstruction and
Securitisation Company Limited (PARAS)
Smart Institute of Banking Insurance and Finance (
SIBF)
THANK YOU