Non Performing Assets and it's management

NPA and it's management

1. NPA Management

2. 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 !

3. 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.

4. 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, Banks should classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter Introduction

5. 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 and provision is made for 10% of the secured portion and 20% of the unsecured portion of the outstanding. Doubtful Assets : Which has remained in the sub-standard category for a period of 12 months. Provisioning is made at 100% of the unsecured portion of the outstanding and for secured portion 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

6. 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. In other words such an assets is considered uncollectable and of such little value that it’s continuance as a bankable assets is not warranted although there may be some salvage value .

7. 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.

8. Factors Impacting Rise In NPA s 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

9. Factors Impacting Rise In NPA s 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

10. BANKER – SIDE Defective Sanction No post-sanction supervision, etc Delay in releases Directed lending Slow decision making process BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within No contribution No modernization Improper monitoring Industrial Relations Natural Calamities Why Loan accounts go bad ?

11. 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.

12. 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 sub-standard, doubtful, and loss assets. Gross NPAs Gross NPAs Gross Advances

13. 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

14. 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.

15. 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.

16. NET NON PERFORMING ASSETS     YEARS SBI PNB ICICI UTI SCB 1998 7.31 10.21 3.69 5.33 3.30 1999 7.30 10.38 3.22 3.66 2.88 2000 6.07 9.57 1.14 5.63 2.42 2001 7.33 8.96 2.88 6.32 NA 2002 6.65 8.52 1.53 4.71 2.04 2003 5.33 6.69 3.36 2.39 1.53 2004 5.63 5.32 5.48 3.46 3.46 2005 4.5 3.86 5.21 2.39 2.39 2006 3.48 0.98 2.21 1.29 1.29 2007 2.65 0.2 1.65 1.39 1.39 2008 1.87 0.29 0.72 0.98 0.98 2009 1.32 0.28 0.78 0.72 0.87

17. 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

18. 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 Generating Watch-list/Special Mention Category

19. 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 Recovery Action against Large NPAs Circulation of Information of Defaulters- Strengthening Database of Defaulters

20. LOK ADALAT To settle disputes involving account in “ doubtful ” and “ loss ” category. Outstanding balance of Rs.5 lakhs for compromise settlement. Proved to be quite effective for speedy justice and recovery of small loans. Progress through this channel is expected to pick up in the coming years

21. DEBT RECOVERY TRIBUNALS (DRT) To recover their bad Debt quickly and efficiently. 33 Debt Recovery Tribunal and 5 Debt Recovery Appellate Tribunal It is the special court established by central government for the purpose of bank or any financial institutions recovery. The judges of this court are the retired judges of high court. In this court only the recovery cases of Rs.10 lakhs and above can be filed.

22. SARFAESI Act SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT 2002 The Act provides three alternative methods for recovery of non-performing assets, namely: - Securitisation Asset Reconstruction  Enforcement of Security without the intervention of the Court. 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

23. This Act empowers the Bank: To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice.    To give notice to any person who has acquired any of the secured assets from the borrower 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.    Any Security Interest created over Agricultural Land cannot be proceeded with.

24. ARCIL A company which is set up with the objective of taking over distressed assets (NPA) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable. To buy out troubled loans from banks and make special efforts at recovering value from the assets, if necessary by special legislation , with special powers for recovery. Restructuring of weak banks to divest the bad loan portfolio. India’s first ARC with an initial equity of Rs.10 crore with ICICI bank , IDBI and SBI. Incorporated as a public limited company on F ebruary 11, 2002

25. OBJECTIVES Unlocking capital for the banking system and the economy Creating a vibrant market for distressed debt assets /securities in India offering a trading platform for Lenders To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimally www.arcil.co.in

26. CORPORATE DEBT RESTRUCTURING (CDR) For the revival of the corporate as well as for the safety of the money lent by the banks and FI. Based on the experience in other countries like the U.K., Thailand,Korea, etc. Objective was to ensure timely and transparent mechanism for restructuring of the corporate debts CDR mechanism will be a voluntary system based on debtor creditor agreement and inter-creditor agreement.

27. CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts . An outstanding exposure of Rs.20 crore and above by banks and institutions.