NPA Meaning, causes, classification , provisioning & consequences

By Prof. Divya Gupta

NPAs management
An asset becomes non performing when it ceases to generate income for the bank.
Till 1993: NPAs- 4 quarters past due

1994: 3 quarters past due

1995: 2 quarters past due

March 31 2005 onwards: Banks to move to 90 days norm.

Definition of NPA
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 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 case of an advance granted for agricultural purpose. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Other Applicable Guidelines:

When a particular facility offered to a borrower becomes a NPA, then all other credit facilities to the borrower will be treated as NPAs. Security/net worth/guarantor will not be considered while qualifying an account as NPA. Advances that are fully secured against term deposits, NSC, Indira Vikas Patra and surrender value of life insurance policy need not to be treated as NPA In case of consortium, each bank will classify its borrower account based on its record recovery.

Asset Classification
Standard Asset Sub-Standard Assets Doubtful Debts
D1 D2 D3

Losses Provisioning for loan loss

PROVISION FOR LOAN ASSET

Standard Assets Sub-Standard Assets Sub-Standard Assets (unsecured) Doubtful Assets- Up to One Year 0.40% of outstanding balance 10% of outstanding balance 20% of outstanding balance 20% of Secured portion 100% of Unsecured portion

Doubtful Assets- More Than One Year And Up to Three years

Doubtful Assets- More Than Three Years on or before 31.03.2004

30% of Secured portion

60% of Secured portion as on 31.03.2005 75% of Secured portion as on 31.03.2006

100% of Unsecured portion

100% of Unsecured portion 100% of Unsecured portion

100% of Outstanding balance irrespective of security available to the bank w. e. f. 31.03.2007 Loss 100% of outstanding balance

Provisioning in case of Standard Assets:

Asset
Agriculture & SME Housing loan above 20 lakhs Personal loans Credit card loans Commercial real estate Loan qualifying as market capital exposure All other advance

Percentage of provision
0.25% 1% 2%

0.40%

Underlying reasons for NPAs in India

Internal Factors: Diversion of funds for Expansion/diversification/modernization or taking up new projects Helping/promoting associate concerns Time/cost overrun during project implementation Business (product, marketing etc) failure Inefficiency in management. Slackness in credit management and monitoring Inappropriate technology/technical problems

External Factors

Recession Input/power shortage Price escalation Exchange rate fluctuation Accidents/natural calamities etc Changes in Govt policies in excise/import duties/pollution Control orders etc Liberalization/Removal of restrictions

The early warning signals for the rise in NPAs can be

A) FINANCIAL Persistent Irregularity in the account. Default in repayment. Invocation of bank guarantee. Incurring Losses. Opening accounts with other banks. Dishonor of cheques B) OPERATIONAL AND PHYSICAL Under utilization of plant capacity Non-payment of electricity, wages etc. Labor problems. Loss of important customers.

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C) LOSS OF MARKET CREDIT Court cases against the unit Inability to raise supplies on usual credit items D) ATTITUDINAL CHANGES Avoids contact with the bank Non/delayed submission of data/financials Fudging of financial statements

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MANAGERIAL SIGNALS
Change in Management or ownership pattern Lack of cooperation from key personnel Undertaking of undue risks

Consequences:
Grave concern to public Bottleneck in smooth flow of credit Eroded profitability of banks Increased cost of fund

Measures Taken By RBI and Govt. of India

Compromise Settlement Lok Adalats Debt Recovery Tribunal Corporate Debt Restructuring Credit Information Bureau SARFAESI Act 2002 - Asset Reconstruction Company

Thank you!!!