A STUDY PAPER OF NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS
PRESENTATION BY SAYANTAN PATRA
CONTENTS
Definition of NPAS Categories of NPA Provisioning norms Factors contributing to NPAS Current status of NPAS NPA management preventive measures Factors Affecting the Acceptance of Proposal by Bank Preparation Stage Conclusion
DEFINITION OF NPAS
A NPA is 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 in respect of an overdraft/ cash credit The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted The installment or interest remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops
CATEGORIES OF NPA
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 12 months 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.
PROVISIONING NORMS
Standard Assets general provision of a minimum of 0.25% Substandard Assets 10% on total outstanding balance, 10 % on unsecured exposures identified as sub-standard & 100% for unsecured doubtful assets. Doubtful Assets 100% to the extent advance not covered by realizable value of security. In case of secured portion, provision may be made in the range of 20% to 100% depending on the period of asset remaining sub-standard Loss Assets 100% of the outstanding
FACTORS CONTRIBUTING TO NPAS
Poor Credit discipline Inadequate Credit & Risk Management Diversion of funds by promoters Funding of non-viable projects In the early 1990s PSBs started suffering from acute capital inadequacy and lower/ negative profitability. The parameters set for their functioning did not project the paramount need for these corporate goals. The banks had little freedom to price products, cater products to chosen segments or invest funds in their best interest
FACTORS CONTRIBUTING TO NPAS
Since 1970s, the SCBs functioned as units cut off from international banking and unable to participate in the structural transformations and new types of lending products. Audit and control functions were not independent and thus unable to correct the effect of serious flaws in policies and directions Banks were not sufficiently developed in terms of skills and expertise to regulate the humongous growth in credit and manage the diverse risks that emerged in the process
FACTORS CONTRIBUTING TO NPAS
Inadequate mechanism to gather and disseminate credit information amongst commercial banks
Effective recovery from defaulting and overdue borrowers was hampered on account of sizeable overhang component arising from infirmities in the existing process of debt recovery, inadequate legal provisions on foreclosure and bankruptcy and difficulties in the execution of court decrees.
IMPACT OF NPAS ON OPERATIONS
Drain on Profitability Impact on capital adequacy Adverse effect on credit growth as the bankers prime focus becomes zero percent risk and as a result turn lukewarm to fresh credit. Excessive focus on Credit Risk Management High cost of funds due to NPAS
CURRENT STATUS OF NPAS
All SCBS average Net NPA Ratio for 2005-06 is 1.22 (As per RBIs Statistics) The banks have been able to report lower NPA percentage mostly by providing against or writing off NPAs. The provision to certain extent was facilitated by higher profits on account of treasury management The better Net NPA ratio was also facilitated by higher credit off take resulting in larger asset portfolio/ book size.
NPA MANAGEMENT PREVENTIVE MEASURES
Formation of the Credit Information Bureau (India) Limited (CIBIL) Release of Wilful Defaulters List. RBI also releases a list of borrowers with aggregate outstanding of Rs.1 crore and above against whom banks have filed suits for recovery of their funds Reporting of Frauds to RBI Norms of Lenders Liability framing of Fair Practices Code with regard to lenders liability to be followed by banks, which indirectly prevents accounts turning into NPAs on account of banks own failure
NPA MANAGEMENT PREVENTIVE MEASURES
Risk assessment and Risk management RBI has advised banks to examine all cases of wilful default of Rs.1 crore and above and file suits in such cases. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff accountability. Reporting quick mortality cases Special mention accounts for early identification of bad debts. Loans and advances overdue for less than one and two quarters would come under this category. However, these accounts do not need provisioning
NPA MANAGEMENT RESOLUTION
Compromise Settlement Schemes Restructuring / Reschedulement Lok Adalat Corporate Debt Restructuring Cell Debt Recovery Tribunal (DRT) Proceedings under the Code of Civil Procedure Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR National Company Law Tribunal (NCLT) Sale of NPA to other banks Sale of NPA to ARC/ SC under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SRFAESI) Liquidation
NEGOTIATION PROCESS FOR SETTLEMENT OF NON PERFORMING ASSETS
FACTORS AFFECTING THE ACCEPTANCE OF PROPOSAL BY BANK
Banks Documentation. Security value. Realizable sale value. Banks ability to sell. Ability & Source of the borrower. Ability & Source of the guarantor. Vulnerability of the borrower/guarantor. Time frame. Strength and Zeal of bank's field staff. What message is bank sending out (No in a fraud case.) Banks Policy. Success rate.
PREPARATION STAGE
Thorough study of the case Find out our strengths and weaknesses in the case. Find out the vulnerable point/weaknesses of the borrower. Follow-up with the Borrower and Guarantors. Visit factory/Collaterals/residence. Find out properties not charged to the bank. Indicate that Bank is willing to compromise.
Conclusion
The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.
Conclusion
Banks also redistribute losses to other borrowers by changing higher interest rates. Lower deposit rates and higher lending rates repress savings and financial markets, which hampers economic growth.
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