NPA

(NON PERFORMING ASSETS)

INTRODUCTION:

Commercial banks assets are of various types such as-

1. Standard Asset:- The assets which generate regular income are called standard assets.

2. Sub-standard Asset:- The asset which is overdue for a period of more than 90 days but
less than 12 months.

3. Doubtful Asset:- The asset which is overdue for a period of more than 12 months.

4. Loss Assets:- The assets which are doubtful and are considered as non-recoverable by
banks.

Out of these types Sub-standard, Doubtful and Loss Assets are included under NPAs.

All assets which generate periodical income are called Performing Assets .While,all those
assets which do not generate periodical income are called Non Performing Assets.

The problem of non performing assets have shaken the entire Indian banking system.The
main reason of high percentage of NPAs is the target oriented approach,which deteriorates
the qualitative aspect of lending.The other reasons are wilful defaults,ineffective supervision
of loan accounts and lack of technical & managerial expertise on the part of borrowers.NPAs
put detrimental impact on the profitability ,capital adequacy ratio and credibility of banks.As
the build up of NPAs have been a major factor in the erosion of profitability of public sector
banks in India,the Narsimham Committee (II) understand the need to reduce the average
level of NPAs of all the banks from 15% to 3% by 2002.The defination of weak banks given by
this committee has internalized the concept of NPAs.The working group on restructuring
weak public sector banks supplemented the above definition by a combination of 7
parameters covering solvency ,earning capacity and profitability . An asset is classified as
non performing asset if the borrower does not pay dues in the form of principal & interest
for a period for 180 days.However with effect from march 2004 ,default status would be
given to a borrower if dues are not paid for 90 days.If any advances or credit facility granted
by bank to a borrower becomes non performing ,then bank will have to treat all the
advances /credit facilities having any regard to the fact that there may still exit certain
advances/credit facilities having performance status.In other words if the customers do not
repay principal amount & interest for a certain period of time then such loans called
NPAs.Thus non performing assets are basically non performing loans.NPA is defined as
advances for which interest or repayment opf principal or both remain outstanding for a
period of more than 2 quarters.The level of NPA ,act as an indicator showing the bankers
credit risks and efficiency of allocation of resource.

Gross NPA: These are the sum total of all loan assets that are classified as NPAs as
per RBI guidelines as on Balance sheet .Gross NPA reflects the quality of the loans
made by banks.It consists of all the nonstandard assets.It can calculated with the
help of following ratio :

Gross NPAs Ratio=Gross NPAs/Gross advances

Net NPA:These are those type of NPAs in which the bank has deducted the
provision regarding NPAs.These shows the actual burden of banks.Since in
India,bank balance sheets contain a huge amount of NPAs & the process of recovery
& write off of loans is very time consuming ,the provisions of the banks have to make
against the NPAs according to the RBI guidelines ,are quite significant.That,why the
difference between gross & net NPA is quite high.It can be calculated by following:

Net NPAs=Gross NPAs - Provisions /Gross Advances

Asset Classification:The RBI has issued guidelines to the banks for classification of
assets into four categories:

1.Standard Assets : These are those loans which do not have any problem or have
less risk.A standard asset is performing asset.Standard asset generate continuous
income and repayments. Such assets carry a normal risk & are not NPA in the real
sense.So that,no special provisions are required for standard Assets.
2.Substandard assets: These assets come under the category of NPA ,which assets
are NPA from a period of less than 12 months .All those assets (loans & advances)
which are considered as non performing for a period of 12 months are called as sub -
standard assets.

3.Doubtful assets: These assets come under the category of NPA ,which assets
exceedingly more than 12 months.All those assets which are considered as non
performing for period of more than 12 months are called as doubtful assets.

4.Loss Assets: These NPAs which are identified as unreliable by internal inspector of
banks ,external auditors or by RBI .All those assets which cannot be recovered are
called Loss Assets.

Present NPA Scenario:-

RBI’s financial stability report said the gross NPA ratio of all banks increased to 9.1%
by September 2016 from 7.8% in March 2016. Public Sector Banks are worst hit as
their gross NPA increased to 12.5% by March 2017 from 11.8% in September 2016.

Causes of NPA:

Often lending is not related to productive investment & the recovery of credit is not
linked to production of scale.The borrowers are mainly farmers and small scale
industries owner whose financial condition are generally weak.The volume of bank
credit tacked in sick industries is the evidence of this malady.Sometimes it is found
that advice given by BIFR & the directions given by the court to banks that to give
loan to sick industries.This type of practice is aggravating NPAs situation.NPA
arises due to factors like:

1.Speculation-Investing in high risk assets to earn high income.

2.Default- Wilful default by the borrowers.

3.Fraudulent Practices-These are like advancing loans to ineligible persons ,advances

without security or references ,etc.

4.Diversion of funds- Most of the funds are diverted for unnecessary expansion &
diversion of business.

5.Loans to marginal farmers & small scale industries- The first reason for
accumulation of NPA is lending to small scale industries & marginal farmers whose
condition is already financially weak. Sometimes it is also found that given by BIFR &
the directions given by the court to banks that to give loan to sick industries.This
type of practice is aggravating NPAs situation.

Internal Reasons for NPA:

 Lending to priority sectors: The faulty lending policy & making it compulsory for
lending to priority sectors.

 Defective credit in recovery mechanism.

 Lack of professionalism: If the bank staff lacks professionalism at work ,then it

will definitely result in rise of NPA.

 Time lag between sanction & disbursement of bank loan.

 Unscientific repayment schedule is also another factor contributing tom increase

in no. Of NPA.

 Mis-utilisation of loan by user.

 Political interference also results in increase in no. of NPA.

 Untimely communication to the borrowers regarding their dues.

External reasons for increasing NPA:

 Recession in the country.

 Infrastructural problems.

 Price rise.

 Delay in release of sanctioned limits by banks.

 Natural calamities etc.

One of the reasons for accumulations of large portfolio of NPAs with bank is-

Often lending is not linked to productive investment & the recovery of

credit is not linked to product scale.The borrowers are mainly farmers and small
scale industries owner whose financial condition is already weak .The volume of
bank credit tacked in sick industries is the evidence of this malady.Sometimes,it
is found that advice given by BIFR & directions given by courts to bank that they
should provide loans to sick industries.This type of practice is aggravating NPAs
situation if the level of NPA is not controlled immediately.

Ways of dealing with NPA:

1.Credit Management System-The origin of the problem of burgeoning NPAs

lies in the system of credit risk management by the banks.Banks are required to
have adequate preventive measures in fixing pre-sanctioning appraisal
responsibility & an effective post disbursement supervision .Banks should
continuously monitor loans to identify accounts that have potential to become
non -performing.
 2.Proper Provisioning-The Basel committee on banking supervision (BCBS)has
also provisionally laid down certain minimum risk-based capital standards that
apply to all internationally active commercial banks.This helps banks to provide
protection to the depositors & the creditors interest.The main objective of BCBS
is to built a sort of support system to take care of unexpected financial losses
due to market risk & operational risks thereby insuring financial market &
protecting depositors.

3.Strictness of rules- The SRFAESI Act should be made stricter & the legal
actions should be taken against the defaulters.The retail borrowers should also
have unlimited liability towards their loans & mortgaged assets.

4.Power to banks- Banks have to be given powers of inspection of the use of

loans & the loan should be disbursed on the point of purchase by the borrowers
to ensure proper utilization of the deposits.

5.Appraisal at the time of sanctioning of loan/advances- These are the

techniques or activities which are followed after the loan is disbursed to the
borrower.This helps the bank to keep checking the operations of the borrower
to ascertain that it is able to make profits & able to pay the loan & interest
thereon.

6.Reduce dependence on interest- The Indian bank are largely depending upon
lending & investment.The banks in the developed countries don’t depend upon
these incomes whereas 86% of income of Indian banks is accounted from
interest & the rest of the income is fee based.The banker can earn sufficient
margin by investing in safer securities though not at high rate of interest.

Impact of NPA:

1.Profitability - NPAs put detrimental effect on the profitability ,as interest on NPAs
cannot be included in the income of the banks .Moreover,it puts an end to recycling
of funds obtained with great difficulty ,hence reduces the ability of banks for lending
more & thus results in lesser interest income
2.Employment generation- Since NPA are reducing,then banks will able to provide
more & more loan to borrowers for setting up their business which will in turn into
employment opportunities to unemployed.

3.Standard of living of the people- When people are getting employed ,their
purchasing power will increase.Due to this standard of living will increase.They will
be able to meet their basic requirement on both ends.

4.Income Levels - The productivity of individuals funds & manpower will utilize.The
advances given by banks to borrowers will also utilize properly.Banks will get their
advances back on time.Due to this banks will also be able to provide extra benefits &
bonus to its employees,high dividends to shareholders which will increase their
income levels.

5.Liquidity - Money is getting blocked ,decreased profit lead to lack of enough cash
at hand which lead to borrowing money for shortest period of time which lead to
additional cost to the company.Difficulty in operating the functions of bank ls
another cause of NPA due to lack of money.

6.Credit Loss - If a bank is facing problem of NPA ,then it adversely affects the value
of bank in terms of market for credit.It will lose its goodwill & brand image & credit
which have negative impact to the people who are putting in their money in banks.

7.Involvement of Management - Time and efforts of management is another

indirect cost which bank has to bear due to NPA would have diverted to some
fruitful activities ,which would have given good returns .

8.Effects Credibility - Credibility of banking system is also affected greatly due to

higher levels of NPAs,because it shakes the confidence of general public in the
soundness of banking system.NPA not only affect the performance of banks but also
affects the economy as a whole .

9.Public Confidence - Credibility of banking system is also affected greatly due to

higher level NPAs because it shakes the confidence e of general public in the
soundness of banking system.The increased NPAs may pose liquidity issues which is
likely to lead run on bank by depositors.Thus,the increased incidence of a NPAs not
only affects the performance of bank but also affects the economy as a whole.

10.Reduce the earning capacity of assets & badly affects the ROA- High provisioning
requirement on mounting NPAs adversely affects capital adequacy ratio & banks
profitability.
11.Affect the market competitiveness- Cause reduction in availability of funds for
further credit expansion due to unproductiveness of existing portfolio.

12.NPAs affect risk facing ability of banks- On the whole it effect the credibility of
banks will be in difficult position in raising fresh capital from the market for future
financial needs.

13.New reporting system - Indian banks are to report NPAs from April 2012 in a
computer recognized format. It is stated that almost 90% of all banks ‘s loan
portfolio is under the computerized system of NPA reporting or system based
reporting .The discretion of bank managers in classifying assets according to their
local judgement is eliminated.This change in reporting pattern makes identification
of NPA as a machine driven objective activity.

14.Aviation Sector - The Indian banking system has a total exposure of around
rs.40,000cr to the ailing aviation sector.SBI alone has a exposure of 5,000cr to the
aviation industry .It is common Knowledge that many airlines are either in the red or
marginally profitable.According to a RBI report,nearly three-fourth of the top banks’s
loans to the aviation sector are either impaired or restructured.

Measures to control NPA:

General ways of dealing with NPA’s:

1.Credit Management Sysem - The origin of the problem of burgeoning NPAs lies in
the system of credit risk management by the banks.Banks are required to have
adequate preventive measures in fixing pre -sanctioning appraisal responsibility & an
effective post disbursement supervision.Banks should continuously monitor loans to
identify accounts that have potential to become non - performing.

2.Proper Provisioning - The Basel committee on banking supervision (BCBS) has alsp
internationally laid down certain minimum risk-based capital standards that apply to
all internationally active commercial banks I.e. banks capital should be at least 8% of
their risk weighted assets.This helps banks to provide protection to the depositors &
the the creditors interest.

3.Strictness of rules - The SARFAESI Act should be made stricter & the legal actions
should be taken against the defaulters .The retail borrowers should have unlimited
liability towards their loan & mortgaged assets.

4.Power to banks - Banks have to be given powers of inspection of the use of loans
& the loan should be disbursed on the point of purchase by the borrowers to ensure
proper utilisation of the deposits.

A.Preventive Management:These are to prevent the assets from becoming a non

performing assets.Banks have to concentrate on the following to minimize the level
of NPAs.

1.Know Your Client’ Profile(KYC)-Most banks in India have a system of preparing KYC
profile/credit report.As a part of ‘KYC’ system,visits are made on clients & their
places of business.The frequency of such visits depends on the nature & needs of the
relationship.

2.Credit Assessment & Risk Management Mechanism- It is everlasting solution to

the problem of NPA.It is necessary that the banking system is equipped with
prudential norms to minimize if not completely avoid the problem of credit risk
models for the purpose of credit risk management.

3.Organizational Restructuring- With regard to internal factors leading to NPAs the

onus for containing the same rest with the bank themselves.These will necessities
organizational restructuring improvement in the managerial efficiency ,skill up
gradation for proper assessment of credit worthiness & a change in the attitude of
the banks towards legal action.

4.Reduce Dependence on Interest Income- The Indian banks are largely depending
upon lending & investment.The banker can earn safer sufficient high net margin by
investing in safer securities though not at higher rate of interest.It gradually
facilitates for limiting high level of NPA.

5.Wilful Defaulters- RBI has issued guidelines in respect of detection of wilful default
& diversion of funds.As per these guidelines a wilful default occurs when a borrower
defaults in meeting its obligations to the lender when it has capacity to honor the
obligations or when funds have been utilized for purpose other than those for which
finance was granted.RBI has advised leaders to initiate legal measures including
criminals actions,wherever required ,& undertake a proactive approach in change in
management ,where appropriate.

B.Curative Management:
The curative measures are designed to maximize recoveries so that banks funds
locked up in NPAs are released for recycling .The central govt & RBI have taken steps
for controlling incidence of fresh NPAs & creating legal & regulatory environment to
facilitate the recovery of existing NPAs of banks.They are:

1.One Time Settlement Scheme- This scheme covers all sectors sub standard
assets,doubtful or loss assets as on 31st march 2000.All cases on which the banks
have initiated action under SARFAESI Act & also cases pending before courts/BIFR
are covered.

2.Lok Adalats - Lok adalats institutions help banks to settle disputes involving
account in “doubtful” & “loss” category ,with outstanding balance of rs. 5 lakh for
compromise.This mechanism has proved to be quite effective for speedy justice &
recovery of small loans.
3.Securitization & SARFAESI Act 2002- This act enables the bank to issue notices to
defaulters who have to pay the debts within 60 days.Once the notice is issued the
borrower cannot sell or dispose the assets without the consent of the lender.The
securitization act further empowers the bank to take over the possession of the
assets & management of the company.The lender can recover the dues by selling the
assets or changing the management of the firm.

4.Compromise Settlement - Compromise Settlement scheme provides a simple

mechanism for recovery of NPA. Compromise Settlement scheme is applied to
advances below rs. 10cr .It covers suit filed cases & cases pending with courts &
DRTs.Cases of wilful default & fraud were excluded.

5.Asset Reconstruction Company (ARC) - This empowerment encouraged the three

major players in Indian banking system to come together to set up first ARC. Arcil is
the first ARC in the country to commence business of resolution of NPAs upon
acquisition from Indian bank & financial institutions.As the first ARC ,Arcil has played
a pioneering role in setting standards for the industry in India .

(A) Unlocking capital for the banking system & the economy the primary objective of
Arcil is to expedite recovery of the amounts locked in NPAs of lenders & thereby
recycling capital.Arcil thus,provides relief to the banking system by managing NPAs &
help them concentrate on core banking activities thereby enhancing shareholders
value.

(B)Creating a vibrant market for distressed debt assets /securities in India offering a
trading platforms for lenders .Arcil has Made successful efforts in funnelling
investment from both domestic & international players for funding these Acquisition
 Of distressed assets ,followed by showcasing them to prospective buyers . This has
initiated creation of a secondary market of distressed assets in the country besides
Hastening their resolution.

(C)To evolve & create significant capacity in the system for quicker resolution of
NPAs by deploying the assets optimally with a view to achieving high delivery
capabilities for resolution.Arcil has put in place a structure aimed at outsourcing the
various sub functions of resolution to specialized agencies,wherever applicable .

Corporate Debt Restructuring(CDR):

CDR framework is to ensure timely & transparent mechanism for restructuring of the
corporate debts of viable entities facing problems ,outside the purview of BIFR,DRT
& other legal proceedings ,for the benefit of all concerned .In particular,the
framework will aim at preserving viable corporate that are affected by certain
internal & external & minimize the losses to the creditors & other stakeholders
through an orderly & coordinated restructuring programme.CDR system in the
country will have a three - tier structure:

(A)CDR Standing Forum: It would be a representative general body of all financial

institutions & bank participating in the CDR system.All financial institutions & bank
should participate in the system for their own interest.CDR Standing Forum will be
self - empowered body,which will lay down policies & guidelines,guide & monitor
the progress of corporate debt restructuring .

(B)CDR Empowered Group:It would be mandated to look into each case of debt
restructuring ,examine the viability & rehabilitation potential of the company &
prove the restructuring package within a specified time frame of 90 days ,or at best
180 days of reference to the Empowered Group.

(C)CDR Cell: The CDR Standing Forum & the CDR Empowered Group will be assisted
by a CDR Cell in all their functions.The CDR Cell will make the initial scrutiny of the
proposals received from borrowers /lenders ,by calling for proposed rehabilitation
plan & other information and put up the matter before the CDR Empowered
Group,within one month to decide whether rehabilitation is prima facie feasible ,if
so ,the CDR Cell will proceed to prepare detailed rehabilitation plan with the help of
lenders & if necessary ,experts to be engaged from outside.If not found facie
feasible , the lenders may start action for recovery of their dues.

The Mechanism of the CDR:

CDR will be a non - statutory mechanism.CDR mechanism will be a voluntary system

based on debtor-creditor agreement & inter-creditor agreement.The scheme will not
apply to accounts involving only one financial institution or bank.The CDR
mechanism will cover only multiple banking accounts/syndication accounts with
outstanding exposure of rs. 20cr & above by banks & institution .The CDR system will
be applicable only to standard and sub - standard accounts.However,as an interim
measure ,permission for corporate debt restructuring will be be made available by
RBI on the basis of specific recommendation of CDR “Core -Group”, if a minimum
75% by value of the lenders constituting banks .There would be no requirement of
the account/company being sick or being in default for a specified period before
reference to the CDR Group.

This approach would provide the necessary flexibility & facilitate timely intervention
for debt restructuring .Prescribing any milestone may not be necessary ,since the
debt restructuring exercise is being triggered by banks & financial institution or with
their consent.In no case,the request of any corporate indulging in wilful default will
be considered for restructuring under CDR.

Circulation of Information of Defaulters:

The RBI has put in place a system for periodical circulation of details of wilful
defaulters of banks & financial institution .The RBI also publishes a list of borrowers
against whom banks & financial institution in recovery of finds have filed suits as on
31st march every year.It will serve financial institution as a caution list while
considering a request for new or additional credit limits from defaulting borrowing
units & also from the directors,partners of these entities.
Credit Information Bureau:
The institutionalization of information sharing arrangement is now possible through
the newly formed credit information bureau of India limited (CIBIL) .It was set up in
January 2001,by SBI,HDFC & two foreign technology partners.This will prevent those
who take advantage of lack of system of information sharing amongst leading
institution to borrow large amount against the same assets & property ,which has no
measures contributed to the incremental of NPAs of banks.

Credit Information om Defaulters & Role of Credit Information

Bureaus:
A good information system is required to prevent loans from turning into a NPA. If a
borrower is a defaulter to a bank,this information should be available to all banks so
that they may avoid lending to him .A credit information bureau can help by
maintaining a data bank which can be assessed by all lending institutions.