NPA MANAGEMENT – AN
OPPORTUNITY FOR CAs
Presentation by : S. Ravi, FCA
INTRODUCTION
Non-performing assets (NPAs) are one of the major concerns for banks
in India as they reflect the performance of banks.
A high level of NPAs suggests high probability of a large number of
credit defaults that affect the profitability and net-worth of banks and
also erodes the value of the asset.
NPAs affect the liquidity and profitability, in addition to posing threat
on quality of asset and survival of banks.
To improve the financial health in the banking system it is necessary to
trim down NPAs.
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
2
CURRENT STATUS OF NPAs

According to latest data released by RBI, Gross non-performing asset (GNPA)
ratio has risen to 4.45% as on March 2015 as compared to 4.1% in March 2014

Stressed assets ratio, which is GNPA plus restructured standard advances for
the system, stood at 10.9%, as at the end of March, 2015 as compared to 10% in
March, 2014 and 10.7% in September 2014.

GNPAs for public sector banks as on March 2015 stood at 5.17%, while the
stressed assets ratio stood at 13.2%

The capital adequacy ratio of the banking system has been steadily declining and
at the end of March 2015, it stood at 12.70% as against 13.01% in March 2014.
March 2013
March 2014
March 2015
Gross NPAs
3.4%
4.1%
4.45%
Net NPAs
-
2.2%
2.36%
Overall Stressed Advances
9.2%
10
10.9%
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
3
DEFINITION OF NON PERFORMING ASSETS (NPAs)
A non performing asset (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 and 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 Feb 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.
Banks should, classify an account as NPA only if the interest due and charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
4
‘OUT OF ORDER’ AND ‘OVERDUE’
‘Out of Order’ status
An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of sanctioned limit /drawing power. Even if the outstanding in
the account is within limit/DP, but there are no credits continuously for 90 days or
credits are not enough to cover interest debited, the account 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.
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
5
TYPES OF LOANS
Nature of Facility
Parameters
Term Loan
Interest and/or instalment of principal remain overdue
beyond 90 days
Overdraft/Cash Credit
Remains “out of order”
Bill Purchased/discounted
Remains overdue beyond 90 days
Crop Loans
(Short duration crops)
Instalment of principal or interest thereon remains
overdue for 2 crop seasons
Crop Loans
(Long duration crops)
Instalment of principal or interest thereon remains
overdue for 1crop season
Securitisation transactions
Amount of liquidity facility remains outstanding beyond
90 days
Derivative transactions
Overdue receivables representing positive mark-tomarket value of a derivative contract which remains
unpaid beyond 90 days from specified due date for
payment
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
6
CLASSIFICATION OF NPAs
Substandard
Assets
• Which has remained NPA for a period less than or equal to 12
months.
• Has credit weaknesses that jeopardise the liquidation of the debt &
are characterised by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
Doubtful
Assets
• Which has remained in the substandard category for a period of 12
months.
• 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 doubtful.
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.
• Considered uncollectible and of little value that its continuance as a
bankable asset is not warranted although there may be some salvage
or recovery value.
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
7
PROVISIONING NORMS
Category
Provision Required (%)
Standard
Assets




Substandard
Assets
 Secured Exposure - 15%
 Unsecured Exposure for Escrow A/cs available in case of Infrastructure
lending, infrastructure loan accounts - 20%
 Other Unsecured Exposure - 25%
Doubtful
Assets
 Up to one year :- Secured - 25% & Unsecured - 100%
 One to three years :- Secured - 40% & Unsecured - 100%
 More than three years :- 100%
Loss Assets
 100% of outstanding amount
Direct Advances to Agriculture & SME Sectors - 0.25%
Commercial Real Estate Advances - 1%
Advances to Commercial Real Estate (Residential Housing Sector) - 0.75%
All other Loans & Advances not included in above - 0.40%
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
8
CAUSES OF NPAs
Causative factors for rising NPAs in the banks are 3 ‘B’s Business Environment, Borrower and Banker
Business
Environment
• Recession in the
economy
• Sudden change in Global
& Domestic markets
• Lack of conductive legal
system for loan recovery
• Lack of cohesive
regulatory framework
• Policy reversal i.e.
changes in government
policies
• Social political pressures
on commercial credit
decisions
• Natural Calamities
• Scams
Borrower
• Improper choice of
project/activity
• Adoption of obsolete
technology
• Promoters/Management
disputes
• Inefficient Management
• Resource crunch
• Strained labour relation
• Diversion of funds
• Willful defaulter
• Fraudulent intention
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
Banker
• Lack of credit skill
• Delay in credit decision &
disbursement
• Credit decisions taken
under extraneous
influences
• Lack of proper credit
monitoring
• Lack of effective NPA
management
9
IMPACT OF NPAs

Profitability of banks is hampered severely as the banks do not earn any
income from NPAs, rather they incur cost for their maintenance and have
to provide for future losses.

Higher provisioning requirement on mounting NPAs adversely affect capital
adequacy ratio

Credit flow to needy persons/ sectors is held up.

Cost of credit i.e. interest rate goes up and consequently the high interest
rate affects the viability of many running units.

Decrease the value of share sometimes even below their book value in the
capital market.

NPAs affect the risk facing ability of banks.

Waste of valuable Management time.
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
10
PROCESS OF NPA MANAGEMENT
Process – NPA Management
Stress
Identification in
the account
Creating a sub-asset category viz. ‘Special Mention Accounts’
(SMA) with the three sub - categories as under:-
Restructuring
 Prior NPA
 Post NPA
Up-gradation/
Recovery
 Up-gradation – CDR, JLF etc.
 Recovery – SARFAESI, DRT , OTS etc.
 SMA -NF: Principal /interest payment not overdue for
more than 30 days but account showing Non-financial
(NF) signals of incipient stress
 SMA -1: Principal /interest payment overdue between
31-60 days
 SMA -2: Principal /interest payment overdue between
61-90 days
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
11
NPA MANAGEMENT – PREVENTIVE MEASURES

Credit Appraisal & Risk Management Mechanism
 Documentation of credit policy & credit audit immediately after sanction
necessary to upgrade the quality of credit appraisal in banks
 Banking system equipped with prudential norms to minimize credit risk

Organizational Reformation
 Improvement in the managerial efficiency, skill up gradation for proper
assessment of credit worthiness

Reduce Dependence on Interest
 Banker can earn sufficient net margin by investing in safer securities not at a
high rate of interest
 Facilitates for limiting of high level of NPAs gradually

Potential & Borderline NPAs under Check
 Require quick diagnosis & remedial measure so that they do not step into
NPAs categories
 Auditors must monitor all outstanding accounts in respect of accounts
enjoying credit limits beyond cut-off points, so that new sub-standard assets
can be kept under check.
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
12
NPA MANAGEMENT – CORRECTIVE MEASURES
Bankers should adopt the corrective measures proactively in credit
management
Rectification
3 ‘R’
Measures
as advised
by RBI
Restructuring
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
Recovery
13
NPA MANAGEMENT – CORRECTIVE MEASURES

For revitalizing distressed assets in the economy, RBI has come up guidelines
on Joint Lenders’ Forum (JLF) & Corrective Action Plan (CAP) for taking
prompt action for early identification of distressed assets & taking corrective
actions for regularising the accounts, revival of viable units and recovery/sale
of unviable units on proper diagnosing the problems.

These guidelines have been made applicable to only Special Mention Account2 (SMA-2 accounts are those accounts where principal or interest payment is
overdue between 61-90 days); which are reported to Central Repository of
Information on Large Credits (CRILIC) by any of the lenders under
Consortium and Multiple Banking Arrangements.
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
14
TOOLS FOR RECOVERING NPAs

Compromise Settlement Scheme

Lok Adalats

Corporate Debt Restructuring (CDR)

Debt Recovery Tribunals (DRT)

SARFAESI Act 2002 (Securitization & Reconstruction of Financial
Assets & Enforcement of Security Interest Act, 2002)

Board for Industrial & Financial Reconstruction (BIFR)/AAIFR

National Company Law Tribunal (NCLT)

Sale of NPA to other banks

Declaration of Non-cooperative borrowers & Wilful defaulters
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
15
OPPORTUNITIES FOR CHARTERED ACCOUNTANTS
Study &
Preparation of
Rehabilitation
package
Assist &
Prepare
Viability study
Conduct
Business, Assets
& Share
Valuation
Due Diligence
Study for Business
Restructuring
Forensic
Audits
OPPORTUNITIES
Preparation
of Scheme of
Arrangement
Credit Audit
of borrowers
Verification &
Vetting of
Documents
Stock Audits
Monitoring of
Accounts
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
Consultancy on
Taxation
aspects
16
THANK YOU
NPA Management – An Opportunity for CAs
By: S. Ravi, FCA
17