Non Performing Assets

Non Performing Assets

Non Performing Asset (NPA) - NPA is an asset which does not generate income for Bank

RBI Definition of NPA

NPA is an asset where interest on loan or installment of principle is overdue for more than 90 days for term loan

NPA definition
For overdraft / cash credit NPA means (i) outstanding balance continuously in excess of sanctioned limit / drawing power for 90 days, or (ii) no credit continuously for 90 days, or (iii) credits not enough to cover interest debited

NPA definition
For bills purchased or discounted, NPA means bill has remained outstanding for more than 90 days

Asset Classification

NPA categories
NPAs are classified as under: Substandard Assets Doubtful Assets Loss Assets

Standard Assets
Which are not NPAs Interest / Principle overdue for less than 90 days Account not out of order (CC/OD) for 90 days

Substandard Assets
Overdue for more than 90 days Which remains NPA for less than 12 months Well defined credit weakness - loan recovery may be difficult if deficiencies are not corrected

Doubtful Assets
Which remains NPA after 12 months in substandard category Weakness of substandard category continues Recovery of loan highly improbable

Loss Assets
An asset where loss is identified by bank management / internal or external auditors / RBI inspection but account not written off Account not considered realisable

Asset Classification
Based on credit weakness and age of default Availability of security or Networth of borrower or guarantor not relevant Bank has to set up proper internal system for NPA identification without delay

Government guaranteed advances

Central Govt.- NPA only when CG guarantee invoked and repudiated State Govt.- as per normal procedure

Upgradation of NPA
If arrears of interest and principal are paid by borrower, account no longer remains NPA and may be upgraded as standard asset

Asset Classification
Important Rule Asset Classification is borrower wise not facility wise if one facility becomes NPA, all facilities will be treated NPA For consortium loans- as per individual recovery record of bank

Erosion in value of security

Account not to go through stages as per time schedule Account to be straightway classified as Doubtful (value < 50%) or loss asset (value < 10%)

Project Loans
Bank to specify date of completion of project During implementation, NPA if irregular for more than 90 days If delay in completion more than 6 monthsproject treated as NPA if recovery irregular unless restructured (extension of time for completion up to one year treated as restructuring)

Income recognition for NPAs

For NPAs, income can be recognised only if actually received Any past income on accrual basis also to be reversed Advances against FDs /NSC/ LIC policies - income may be booked provided adequate margin available in account

Provisioning
In addition to non booking of income for NPAs , provision has also to be made from Profit and Loss account Provision depends upon asset category Provision also for Standard Asset

Provisioning for NPAs

Loss assets To be written off If not -100% of outstanding to be provided

Provisioning for NPAs

Doubtful Assets Secured portion Up to one year in Doubtful 1- 3 years More than 3 years Unsecured portion

: : : :

25 % 40 % 100 % 100 %

Provisioning for NPAs

Substandard Assets - 15 % + 10 % of security shortfall (for infrastructure projects total 20 %)

Provisioning for Standard Assets

Provision 0.40 % Agri and SMEs - 0.25% Commercial 1 % Real Estate

Summary
Asset Standard Substd. Doubtf. Loss default 90dys 90d- 1yr > 1yr provn o/s sec shfl 0.40% 15% 10% 25/40/ 100% 100% 100% -

Provisioning
Norms given are minimum requirements Banks may provide higher amount depending upon their assessment of asset quality

Gross and Net NPA

Gross NPAs =Total in Substandard to loss category Net NPAs =Gross NPA Provision for NPAs

Provision Coverage Ratio (PCR)

PCR = Total provision for NPA / Gross NPAs PCR not to be less than 70%
PCR to be disclosed in Notes to Accounts in the Balance Sheet

Impact of NPAs on Bank Balance Sheet

Reduction in profit due to non recognition of income / reversal of past income Making provision for NPA from profit Overall profit is reduced

NPA data
ICICI Bk Yes Bank PNB SBI HDFC Bk UCO Bk
NPAs 0.62 % 0.05 % 1.52 % 1.82 % 0.18 % 1.96 % PCR 80 % 79 % 63 % 68 % 82 % 54 %

Assets data (Mar 2011)

std PSB 97.8 Pvt 97.8 Fgn 97.5 SCB 97.8 sub 1.04 0.56 0.94 0.95 dtf 0.99 1.33 1.06 1.06 loss 0.19 0.35 0.55 0.24

Reasons for NPAs- internal factors

Management deficiency Lack of demand Raw material shortage Environmental factors Poor credit appraisal Long appraisal time Depression in capital markets

Internal factors
Diversion of funds Improper supervision and follow up Lack of promoter funds Cost and time over-runs Competition Improper rescheduling during during initial years

NPAs- External factors

Economic slow down Change in Govt. policies Power shortage Transport bottlenecks Natural calamities Import problems Ineffective legal system

NPA Management
Strengthening of credit appraisal Timely disbursements Effective supervision and follow up Reschedulement in genuine cases Legal action at the earliest / DRTs Special Audit Sale of assets

NPA Management
OTS in appropriate cases Rehabilitation of sick cases CDR Mechanism Change of management NPA Committees/ Top Mgmt. Review Invoke guarantees Securitisation Act

Questions

Qn I
Loan o/s since 1.8.2011 Loan amount Rs. 120 cr Security value Rs. 100 cr For Balance Sheet on 31.3.2012 - what would be NPA category of loan - compute provision

Qn II
Loan o/s since 1.1.2010 Loan amount Rs. 320 cr Land given as security is valued at Rs 304 cr Company made Balance sheet in 31.3.2012 What is NPA category of this loan What provision to be made How provision in shown in Balance Sheet

Qn. III
Loan a/c I has o/s Rs. 100 cr ( A/c is regular) Loan a/c II has o/s Rs. 70 cr, irregular since 15.6.2011 For Balance Sheet on 31.3.2012 What is category of NPA for loan I and II Compute provision required

Qn IV
Loan o/s since 21.1.2012 O/S amount Rs.50 cr For Balance Sheet on 31.3.2012 What is category of asset What provision to be made How provision to be shown in Balance Sheet