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Contd..
5- The instalment of principal or interest thereon remains overdue for one crop season for long duration crops, 6- The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006. 7- In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
Classification of NPA
Substandard Assets - A substandard asset is one, which has remained NPA for a period less than or equal to 12 months. Doubtful Assets - A doubtful asset is one, which remained NPA for a period exceeding 12 months. Loss Assets - A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI
1 to 3 year
More than 3 years
40%
100%
Unsecured portion
100 percent of the extent to which the advance is not covered by the realisable value of the security
Loss asset- If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. Sub-standard asset Secured part - General provision of 15% on total outstanding. Unsecured part- Additional provision of 10% i.e., a total of 25% on the outstanding balance. Infrastructure loans-20%
Standard asset a) direct advances to agricultural and SMEs sectors at 0.25% b) advances to Commercial Real Estate (CRE) Sector at 1.00% c) all other loans and advances are above or at 0.40%
IMPACT OF NPA
Drain on Profitability Impact on capital adequacy High cost of funds due to NPAs. The assets and liability mismatch will widen The economic value additions (EVA) by banks gets upset since EVA = net operating profit minus cost of capital
Prevention of NPAs
Appraisal techniques of bank to be sharpened Strict due diligence to ensure that project is technically feasible Avoiding fixing of unrealistic payment schedule Off site surveillance or Onsite inspection Trying to look for early warning signals
Contd..
The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasing
If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.
Banks are free to design and implement their own policies for restructuring/ rehabilitation of the NPA accounts Reschedulement of payment of interest and principal after considering the Debt service coverage ratio, contribution of the promoter and availability of security
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The CDR system is applicable to standard and sub-standard accounts with potential cases of NPAs getting a priority Reference to CDR Mechanism may be triggered by: Any or more of the creditors having minimum 20% share in either working capital or term finance, or By the concerned corporate, if supported by a bank/FI having minimum 20% share as above Structure of CDR System: CDR Standing Forum CDR Empowered Group CDR Cell
Conclusion
Management of NPA is need of the hour To be effective, NPA management has to be an exercise pervading the entire bank from the Board down the last level The course open to the banker is to ensure that an asset does not become NPA If it does, banks should take steps for early recovery failing which the profitability of the bank will be eroded That can trigger other problems to undermine the banks financial condition