Non performing assets (npa)

AN OVERVIEW OF NON PERFORMING ASSETS

1. PREPARED BY DR.R.RUPA NON PERFORMING ASSETS (NPA)

2. Non Performing Asset (NPA) Non per forming asset shall be an advance where: * Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan , * The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC ), * The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted , * Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and * Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

3. Types of NPA a) Gross NPA: T he 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 nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio : GROSS NPA = GROSS NPA/ GROSS ADVANCE b) Net NPA: Those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. In India, bank's balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following: NET NPA=(GROSS NPA-PROVISION)/(GROSS ADVANCE – PROVISION) X 100

4. Reasons for an account becoming NPA: Internal Factors: Funds borrowed for a particular purpose but not use for the said purpose. Project not completed in time . Poor recovery of receivables . Excess capacities created on non-economic costs. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. Business failures. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delaying settlement of payments\ subsidiaries by government bodies etc.,

5. 2) External Factors: Sluggish Legal System i.e. long legal tangles, changes that had taken place in labour laws & lack of sincere effort. Scarcity of raw material, power and other resources. Industrial Recession. Shortage of raw material, raw material / input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents. Failures, nonpayment over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc. Government policies like excise duty changes, Import duty changes etc.

6. Reasons for Occurrence of NPAs These loans can occur due to the following reasons: Normal banking operations Bad lending practices Incremental component (due to internal bank management, like credit policy, terms of credit, etc...) Competition banks are enormously selling unsecured loans

7. Impact of NPA: Profitability Liquidity Involvement of Management Credit Loss

8. How to reduce NPA? Some steps are as follows by which bank can reduce NPA - 1. SARFAESI ACT 2002 - The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. 2. Lok Adalats : Lok Adalat is for the recovery of small loans. According to RBI guidelines issued in 2001, they cover NPA up to Rs . 5 lakhs, both suit filed and non-suit filed are covered. 3. Compromise Settlement: It is a scheme which provides a simple mechanism for recovery of NPA. It is applied to advances below Rs . 10 Crores . 4. Credit Information Bureau: A Credit Information Bureau help banks by maintaining a data of an individual defaulter and provides this information to all banks so that they may avoid lending to him/her. 5. Debt Recovery Tribunals: The debt recovery tribunal act was passed by Indian Parliament in 1993 with the objective of facilitating the banks and financial institutions for speedy recovery of dues in cases where the loan amount is Rs . 10 lakhs and above.

9. Preventive Measurement for NPA Early Recognition of the Problem Identifying Borrowers with genuine intent . Timeliness & Adequacy of response Focus on Cash flows Management Effectiveness Multiple Financing

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