INTRODUCTION Action for enforcement of security interest can be
initiated only if the secured asset is classified as Nonperforming
asset. Non performing asset means an asset or account of borrower
,which has been classified by bank or financial institution as sub
standard , doubtful or loss asset, in accordance with the direction
or guidelines relating to assets classification issued by RBI. An
asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank. A non-performing asset
(NPA) was defined as a credit facility in respect of which the
interest and/ or instalment of principal has remained past due for
a specified period of time. With a view to moving towards
international best practices and to ensure greater transparency, it
has been decided to adopt the 90 days overdue norm for
identification of NPAs, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a non-performing
asset (NPA) shall be a loan or an advance where; Interest and/ or
instalment 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 the case of bills purchased and discounted, Interest
and/or instalment 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 purposes, and
Any amount to be received remains overdue for a period of more
than 90 days in respect of other accounts. As a facilitating
measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by
April 1, 2002. However, the date of classification of an advance as
NPA should not be changed on account of charging of interest at
monthly rests. Banks should, therefore, continue to classify an
account as NPA only if the interest charged during any quarter is
not serviced fully within 180 days from the end of the quarter with
effect from April 1, 2002 and 90 days from the end of the quarter
with effect from March 31, 2004.
Out of order An account should be treated as out of order if the
outstanding balance remains continuously in excess of sanctioned
limit /drawing power. in case where the out standing balance in the
principal operating account is less than the sanctioned amount
/drawing power, but there are no credits continuously for six
months as on the date of balance sheet or credit are not enough to
cover the interest debited during the same period ,these account
should be treated as out of order.
Overdue Any amount due to the bank under any credit facility is
overdue if it is not paid on due date fixed by the bank.
Asset Classification
Categories of NPAs Standard Assets: Standard assets are the ones
in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also
very important that in this case the arrears of interest and the
principal amount of loan does not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset
that is amount due more than 90 days then it is NPA and NPAs are
further need to classify in sub categories. Banks are required to
classify non-performing assets further into the following three
categories based on the period for which the asset has remained
nonperforming and the realisability of the dues: ( 1 ) Sub-standard
Assets ( 2 ) Doubtful Assets ( 3 ) Loss Assets
( 1 ) Sub-standard Assets:-With effect from 31 March 2005, a sub
standard asset would be one, which has remained NPA for a period
less than or equal to 12 month. The following features are
exhibited by sub standard assets: the current net worth of the
borrowers / guarantor or the current market value of the security
charged is not enough to ensure recovery of the dues to the banks
in full; and the asset has well-defined credit weaknesses that
jeopardise the liquidation of the debt and are characterised by the
distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.
( 2 ) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in
assets that were classified as sub-standard, with the added
characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently known facts, conditions and
values highly questionable and improbable. With effect from March
31, 2005, an asset would be classified as doubtful if it remained
in the sub-standard category for 12 months.
( 3 ) Loss Assets:--
A loss asset is one which considered uncollectible and of such
little value that its continuance as a bankable asset is not
warranted- although there may be some salvage or recovery value.
Also, these assets would have been identified as loss assets by the
bank or internal or external auditors or the RBI inspection but the
amount would not have been written-off wholly.
FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the
rising NPAs. But the problem of NPAs is more in public sector banks
when compared to private sector banks and foreign banks. The NPAs
in PSB are growing due to external as well as internal factors.
EXTERNAL FACTORS Ineffective recovery tribunal The Govt. has set
of numbers of recovery tribunals, which works for recovery of loans
and advances. Due to their negligence and ineffectiveness in their
work the bank suffers the consequence of non-recover, their by
reducing their profitability and liquidity.
Wilful Defaults There are borrowers who are able to payback
loans but are intentionally withdrawing it. These groups of people
should be identified and proper measures should be taken in order
to get back the money extended to them as advances and loans.
Natural calamities This is the measure factor, which is creating
alarming rise in NPAs of the PSBs. every now and then India is hit
by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of
provisions in order to compensate those loans, hence end up the
fiscal with a reduced profit.
Mainly ours framers depends on rain fall for cropping. Due to
irregularities of rain fall the framers are not to achieve the
production level thus they are not repaying the loans.
Industrial sickness Improper project handling , ineffective
management , lack of adequate resources , lack of advance
technology , day to day changing govt. Policies give birth to
industrial sickness. Hence the banks that finance those industries
ultimately end up with a low recovery of their loans reducing their
profit and liquidity.
Lack of demand Entrepreneurs in India could not foresee their
product demand and starts production which ultimately piles up
their product thus making them unable to pay back the money they
borrow to operate these activities. The banks recover the amount by
selling of their assets, which covers a minimum label. Thus the
banks record the nonrecovered part as NPAs and has to make
provision for it.
Change on Govt. policies With every new govt. banking sector
gets new policies for its operation. Thus it has to cope with the
changing principles and policies for the regulation of the rising
of NPAs.
The fallout of handloom sector is continuing as most of the
weavers Cooperative societies have become defunct largely due to
withdrawal of state patronage. The rehabilitation plan worked out
by the Central govt to revive the handloom sector has not yet been
implemented. So the over dues due to the handloom sectors are
becoming NPAs.
INTERNAL FACTORS
Defective Lending process There are three cardinal principles of
bank lending that have been followed by the commercial banks since
long. i. ii. iii. Principles of safety Principle of liquidity
Principles of profitability
i. Principles of safety By safety it means that the borrower is
in a position to repay the loan both principal and interest. The
repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in
business Willingness to pay depends on: 1. Character borrower 2.
Honest 3. Reputation of
The banker should, there fore take utmost care in ensuring that
the enterprise or business for which a loan is sought is a sound
one and the borrower is capable of carrying it out successfully .he
should be a person of integrity and good character.
Inappropriate technology Due to inappropriate technology and
management information system, market driven decisions on real time
basis can not be taken. Proper MIS and financial accounting system
is not implemented in the banks, which leads to poor credit
collection, thus NPA. All the branches of the bank should be
computerised.
Improper swot analysis The improper strength, weakness,
opportunity and threat analysis is another reason for rise in NPAs.
While providing unsecured advances the banks depend more on the
honesty, integrity, and financial soundness and credit worthiness
of the borrower. Banks should consider the borrowers own capital
investment. it should collect credit information of the borrowers
from a. From bankers b. Enquiry from market/segment of trade,
industry, business. c. From external credit rating agencies.
Analyse the balance sheet True picture of business will be revealed
on analysis of profit/loss a/c and balance sheet. Purpose of the
loan
When bankers give loan, he should analyse the purpose of the
loan. To ensure safety and liquidity, banks should grant loan for
productive purpose only. Bank should analyse the profitability,
viability, long term acceptability of the project while
financing.
Poor credit appraisal system Poor credit appraisal is another
factor for the rise in NPAs. Due to poor credit appraisal the bank
gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs.
Managerial deficiencies The banker should always select the
borrower very carefully and should take tangible assets as security
to safe guard its interests. When accepting securities banks should
consider the 1. Marketability 2. Acceptability 3. Safety 4.
Transferability.
The banker should follow the principle of diversification of
risk based on the famous maxim do not keep all the eggs in one
basket; it means that the banker should not grant advances to a few
big farms only or to concentrate them in few industries or in a few
cities. If a new big customer meets misfortune or certain traders
or industries affected adversely, the overall position of the bank
will not be affected. Like OSCB suffered loss due to the OTM
Cuttack, and Orissa hand loom industries. The biggest defaulters of
OSCB are (2439.60lakhs). the OTM (117.77lakhs), and the handloom
sector Orissa hand loom WCS ltd
Absence of regular industrial visit The irregularities in spot
visit also increases the NPAs. Absence of regularly
visit of bank officials to the customer point decreases the
collection of interest and principals on the loan. The NPAs due to
wilful defaulters can be collected by regular visits.
Re loaning process Non remittance of recoveries to higher
financing agencies and re loaning of the same have already affected
the smooth operation of the credit cycle. Due to re loaning to the
defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by
day.
Impact of NPA Profitability:NPA means booking of money in terms
of bad asset, which occurred due to wrong choice of client. Because
of the money getting blocked the prodigality of bank decreases not
only by the amount of NPA but NPA lead to opportunity cost also as
that much of profit invested in some return earning project/asset.
So NPA doesnt affect current profit but also future stream of
profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current earning
of bank. Liquidity:Money is getting blocked, decreased profit lead
to lack of enough cash at hand which lead to borrowing money for
shot\rtes period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another
cause of NPA due to lack of money. Routine payments and dues.
Involvement of management:Time and efforts of management is another
indirect cost which bank has to bear due to NPA. Time and efforts
of management in handling and managing NPA would have diverted to
some fruitful activities, which would have given good returns. Now
days banks have special employees to deal and handle NPAs, which is
additional cost to the bank. Credit loss:Bank is facing problem of
NPA then it adversely affect the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which
have negative impact to the people who are putting their money in
the banks .
NPA MANAGEMENT PREVENTIVE MEASURES
Formation of the Credit Information Bureau (India) Limited
(CIBIL) Release of Wilful Defaulters List. RBI also releases a list
of borrowers with aggregate outstanding of Rs.1 crore and above
against whom banks have filed suits for recovery of their funds
Reporting of Frauds to RBI Norms of Lenders Liability framing of
Fair Practices Code with regard to lenders liability to be followed
by banks, which indirectly prevents accounts turning into NPAs on
account of banks own failure.
Risk assessment and Risk management RBI has advised banks to
examine all cases of wilful default of Rs.1 crore and above and
file suits in such cases. Board of Directors are required to review
NPA accounts of Rs.1 crore and above with special reference to
fixing of staff accountability.
Reporting quick mortality cases Special mention accounts for
early identification of bad debts. Loans and advances overdue for
less than one and two quarters would come under this category.
However, these accounts do not need provisioning
NPA MANAGEMENT - RESOLUTION
Compromise Settlement Schemes
Banks are free to design and implement their own policies for
recovery and write off incorporation compromise and negotiated
settlements with board approval
Specific guidelines were issued in May 1999 for one time
settlement of small enterprise sector.
Guidelines were modified in July 2000 for recovery of NPAs of
Rs.5 crore and less as on 31st March 2007.
Restructuring / Reschedulement
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
Lok Adalat
Small NPAs up to Rs.20 Lacs Speedy Recovery Veil of Authority
Soft Defaulters Less expensive Easier way to resolve
Corporate Debt Restructuring Cell
The objective of CDR is to ensure a timely and transparent
mechanism for restructuring of the debts of viable corporate
entities affected by internal and external factors, outside the
purview of BIFR, DRT or other legal proceedings
The legal basis for the mechanism is provided by the
Inter-Creditor Agreement (ICA). All participants in the CDR
mechanism must enter the ICA with necessary enforcement and penal
clauses.
The scheme applies to accounts having multiple banking/
syndication/ consortium accounts with outstanding exposure of Rs.10
crores and above.
The CDR system is applicable to standard and sub-standard
accounts with potential cases of NPAs getting a priority.
Packages given to borrowers are modified time & again
Drawback of CDR Reaching of consensus amongst the creditors delays
the process
Debt Recovery Tribunal (DRT)
The banks and FIs can enforce their securities by initiating
recovery proceeding under the Recovery if Debts due to Banks and FI
act, 1993 (DRT Act) by filing an application for recovery of dues
before the Debt Recovery Tribunal constituted under the Act.
On adjudication, a recovery certificate is issued and the sale
is carried out by an auctioneer or a receiver.
DRT has powers to grant injunctions against the disposal,
transfer or creation of third party interest by debtors in the
properties charged to creditor and to pass attachment orders in
respect of charged properties
In case of non-realization of the decreed amount by way of sale
of the charged properties, the personal properties if the
guarantors can also be attached and sold.
However, realization is usually time-consuming Steps have been
taken to create additional benches
Proceedings under the Code of Civil Procedure
For claims below Rs.10 lacs, the banks and FIs can initiate
proceedings under the Code of Civil Procedure of 1908, as amended,
in a Civil court.
The courts are empowered to pass injunction orders restraining
the debtor through itself or through its directors,
representatives, etc from disposing of, parting with or dealing in
any manner with the subject property.
Courts are also empowered to pass attachment and sales orders
for subject property before judgment, in case necessary.
The sale of subject property is normally carried out by way of
open public auction subject to confirmation of the court.
The foreclosure proceedings, where the DRT Act is not
applicable, can be initiated under the Transfer of Property Act of
1882 by filing a mortgage suit where the procedure is same as laid
down under the CPC.
Board for Industrial & Financial Reconstruction (BIFR)/
AAIFR
BIFR has been given the power to consider revival and
rehabilitation of companies under the Sick Industrial Companies
(Special Provisions) Act of 1985 (SICA), which has been repealed by
passing of the Sick Industrial Companies (Special Provisions)
Repeal Bill of 2001.
The board of Directors shall make a reference to BIFR within
sixty days from the date of finalization of the duly audited
accounts for the financial year at the end of which the company
becomes sick
The company making reference to BIFR to prepare a scheme for its
revival and rehabilitation and submit the same to BIFR the
procedure is same as laid down under the CPC.
The shelter of BIFR misused by defaulting and dishonest
borrowers It is a time consuming process
National Company Law Tribunal (NCLT)
In December 2002, the Indian Parliament passed the Companies Act
of 2002 (Second Amendment) to restructure the Companies Act, 1956
leading to a new regime of tackling corporate rescue and insolvency
and setting up of NCLT.
NCLT will abolish SICA, have the jurisdiction and power relating
to winding up of companies presently vested in the High Court and
jurisdiction and power exercised by Company Law Board
The second amendments seeks to improve upon the standards to be
adopted to measure the competence, performance and services of a
bankruptcy court by providing specialized qualification for the
appointment of members to the NCLT.
However, the quality and skills of judges, newly appointed or
existing, will need to be reinforced and no provision has been made
for appropriate procedures to evaluate the performance of judges
based on the standards
Sale of NPA to other banks
A NPA is eligible for sale to other banks only if it has
remained a NPA for at least two years in the books of the selling
bank
The NPA must be held by the purchasing bank at least for a
period of 15 months before it is sold to other banks but not to
bank, which originally sold the NPA.
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
The bank may purchase/ sell NPA only on without recourse basis
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.
Sale of NPA to ARC/ SC under Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest Act 2002
(SRFAESI)
SARFESI provides for enforcement of security interests in
movable (tangible or intangible assets including accounts
receivable) and immovable property without the intervention of the
court
The bank and FI may call upon the borrower by way of a written
legal notice to discharge in full his liabilities within 60 days
from the date of notice, failing which the bank would be entitled
to exercise all or any of the rights set out under the Act.
Another option available under the Act is to takeover the
management of the secured assets
Any person aggrieved by the measures taken by the bank can
proffer an appeal to DRT within 45 days after depositing 75% of the
amount claimed in the notice.
Chapter II of SARFESI provides for setting up of reconstruction
and securitization companies for acquisition of financial assets
from its owner, whether by raising funds by such company from
qualified institutional buyers by issue of security receipts
representing undivided interest in such assets or otherwise.
The ARC can takeover the management of the business of the
borrower, sale or lease of a part or whole of the business of the
borrower and rescheduling of payments, enforcement of security
interest, settlement of dues payable by the borrower or take
possession of secured assets
Additionally, ARCs can act as agents for recovering dues, as
manager and receiver.
Drawback differentiation between first charge holders and the
second charge holders.
Non Performing Assets ( NPAs ) of Banks in India 2008(Amount in
Rs. Crore) As on March 31,2008Bank Name Gross NPAs PSU Banks Gross
Advance Gross NPA Ratio %
State Bank of India & its AssociatesState Bank of Bikaner
& Jaipur State Bank of Hyderabad State Bank of India State Bank
of Indore State Bank of Mysore State Bank of Patiala State Bank of
Saurashtra State Bank of Travancore 521 179 571 437 312 12837 265
359 36724 12309 28440 25304 35901 422181 18356 21305 1.4 1.5 2.0
1.7 0.9 3.0 1.4 1.7
Nationalised BanksAllahabad Bank Andhra Bank Bank of Baroda Bank
of India Bank of Maharashtra Canara Bank 1011 372 1981 1931 766
1416 50312 34556 107672 114793 29798 107655 2.0 1.1 1.8 1.7 2.6
1.3
Central Bank of India Corporation Bank Dena Bank IDBI Bank Ltd
Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab
& Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union
Bank of India United Bank of India Vijaya Bank
2350 584 573 1565 487 997 1280 136 3319 1769 1652 1657 761
512
74287 39664 23381 83608 40228 61058 55327 18409 120932 65197
55627 75879 28152 32019
3.2 1.5 2.4 1.9 1.2 1.6 2.3 0.7 2.7 2.7 3.0 2.2 2.7 1.6
Private Banks / Other Scheduled Commercial BanksAxis Bank Bank
of Rajasthan Catholic Syrian Bank Centurion Bank of Punjab City
Union Bank Development Credit Bank Dhanalakshmi Bank Federal Bank
HDFC Bank ICICI Bank IndusInd Bank 486 126 131 540 83 63 63 469 904
7580 392 59899 7529 3387 16455 4575 4105 2146 19327 64032 229892
12897 0.8 1.7 3.9 3.3 1.8 1.5 2.9 2.4 1.4 3.3 3.0
ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur
Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Nainital Bank
Ratnakar Bank SBI Commercial & International Bank South Indian
Bank Tamilnad Mercantile Bank Yes Bank
116 485 380 194 453 138 19 37 5 188 122 11
14663 19164 11102 9569 15729 3931 1002 617 364 10597 5431
9432
0.8 2.5 3.4 2.0 2.9 3.5 1.8 6.0 1.4 1.8 2.2 0.1
Foreign BanksAB Bank ABN AMRO Bank Abu Dhabi Commercial Bank
Antwerp Diamond Bank BNP Paribas Bank of America Bank of Bahrain
& Kuwait Bank of Ceylon Bank of Nova Scotia Barclays Bank
Calyon Bank China Trust Commercial Bank Citibank 3 294 19 34 1 25
17 2 61 2 1 1011 26 20502 182 476 3805 3453 301 56 4776 7664 1815
129 38915 10.2 1.4 10.7 0.0 0.9 0.0 8.4 29.6 0.0 0.8 0.1 1.0
2.6
Deutsche Bank Development Bank of Singapore HSBC JP Morgan Chase
Bank Krung Thai Bank Mashreq Bank Mizuho Corporate Bank Oman
International Bank Shinhan Bank Societe Generale Sonali Bank Ltd
Standard Chartered Bank State Bank of Mauritius The Bank of Tokyo -
Mitsubishi UFJ
60 5 697 121 7 1 723 -
9000 2368 30467 1158 9 41 863 1 314 385 9 33729 214 2307
0.7 0.2 2.3 10.5 0.0 0.0 0.8 0.0 0.0 0.0 10.0 2.1 0.0 0.0
RBI Report and Annual accounts/balance sheet of banks
Reserve Bank Guidelines on purchase/ sale of Non Performing
Financial Assets
Scope 1. These guidelines would be applicable to banks, FIs and
NBFCs purchasing/ selling non performing financial assets, from/ to
other banks/FIs/NBFCs (excluding securitisation companies/
reconstruction companies).
2. A financial asset, including assets under multiple/consortium
banking arrangements, would be eligible for purchase/sale in terms
of these guidelines if it is a non-performing asset/non performing
investment in the books of the selling bank. 3. The reference to
'bank' in the guidelines would include financial institutions and
NBFCs. Structure
4. The guidelines to be followed by banks purchasing/ selling
non-performing financial assets from / to other banks are given
below. The guidelines have been grouped under the following
headings:
i. Procedure for purchase/ sale of non performing financial
assets by banks, including valuation and pricing aspects.
ii. Prudential norms, in the following areas, for banks for
purchase/ sale of non performing financial assets:
a. Asset classification norms b. Provisioning norms c.
Accounting of recoveries d. Capital adequacy norms e. Exposure
norms
iii. Disclosure requirements
5. Procedure for purchase/ sale of non performing financial
assets, including valuation and pricing aspects
i). A bank which is purchasing/ selling non-performing financial
assets should ensure that the purchase/ sale is conducted in
accordance with a policy approved
by the Board. The Board shall lay down policies and guidelines
covering, inter alia,
a. Non performing financial assets that may be purchased/ sold;
b. Norms and procedure for purchase/ sale of such financial assets;
c. Valuation procedure to be followed to ensure that the economic
value of financial assets is reasonably estimated based on the
estimated cash flows arising out of repayments and recovery
prospects; d. Delegation of powers of various functionaries for
taking decision on the purchase/ sale of the financial assets; etc.
e. Accounting policy
ii). While laying down the policy, the Board shall satisfy
itself that the bank has adequate skills to purchase non performing
financial assets and deal with them in an efficient manner which
will result in value addition to the bank. The Board should also
ensure that appropriate systems and procedures are in place to
effectively address the risks that a purchasing bank would assume
while engaging in this activity.
iii) The estimated cash flows are normally expected to be
realised within a period of three years and not less than 5% of the
estimated cash flows should be realized in each half year.
iv) A bank may purchase/sell non-performing financial assets
from/to other banks only on 'without recourse' basis, i.e., the
entire credit risk associated with the nonperforming financial
assets should be transferred to the purchasing bank. Selling bank
shall ensure that the effect of the sale of the financial assets
should be such that the asset is taken off the books of the bank
and after the sale there should not be any known liability
devolving on the selling bank.
v) Banks should ensure that subsequent to sale of the non
performing financial assets to other banks, they do not have any
involvement with reference to assets sold and do not assume
operational, legal or any other type of risks relating to the
financial assets sold. Consequently, the specific financial asset
should not enjoy the support of credit enhancements / liquidity
facilities in any form or manner.
vi) Each bank will make its own assessment of the value offered
by the purchasing bank for the financial asset and decide whether
to accept or reject the offer.
vii) Under no circumstances can a sale to other banks be made at
a contingent price whereby in the event of shortfall in the
realization by the purchasing banks, the selling banks would have
to bear a part of the shortfall.
viii) A non-performing asset in the books of a bank shall be
eligible for sale to other banks only if it has remained a
non-performing asset for at least two years in the books of the
selling bank.
ix) Banks shall sell non-performing financial assets to other
banks only on cash basis. The entire sale consideration should be
received upfront and the asset can be taken out of the books of the
selling bank only on receipt of the entire sale consideration.
x) A non-performing financial asset should be held by the
purchasing bank in its books at least for a period of 15 months
before it is sold to other banks. Banks should not sell such assets
back to the bank, which had sold the NPFA.
(xi) Banks are also permitted to sell/buy homogeneous pool
within retail nonperforming financial assets, on a portfolio basis
provided each of the nonperforming financial assets of the pool has
remained as non-performing financial
asset for at least 2 years in the books of the selling bank. The
pool of assets would be treated as a single asset in the books of
the purchasing bank.
xii) The selling bank shall pursue the staff accountability
aspects as per the existing instructions in respect of the
non-performing assets sold to other banks.
6. Prudential norms for banks for the purchase/ sale
transactions(A) Asset classification norms
(i). The non-performing financial asset purchased, may be
classified as 'standard' in the books of the purchasing bank for a
period of 90 days from the date of purchase. Thereafter, the asset
classification status of the financial asset purchased, shall be
determined by the record of recovery in the books of the purchasing
bank with reference to cash flows estimated while purchasing the
asset which should be in compliance with requirements in Para 5
(iii).
(ii). The asset classification status of an existing exposure
(other than purchased financial asset) to the same obligor in the
books of the purchasing bank will continue to be governed by the
record of recovery of that exposure and hence may be different.
(iii) Where the purchase/sale does not satisfy any of the
prudential requirements prescribed in these guidelines the asset
classification status of the financial asset in the books of the
purchasing bank at the time of purchase shall be the same as in the
books of the selling bank. Thereafter, the asset classification
status will continue to be determined with reference to the date of
NPA in the selling bank. (iv)Any restructure/reschedule/rephrase of
the repayment schedule or the
estimated cash flow of the non-performing financial asset by the
purchasing bank shall render the account as a non-performing
asset.
(B) Provisioning norms
Books of selling bank
i. When a bank sells its non-performing financial assets to
other banks, the same will be removed from its books on
transfer.
ii. If the sale is at a price below the net book value (NBV)
(i.e., book value less provisions held), the shortfall should be
debited to the profit and loss account of that year.
iii. If the sale is for a value higher than the NBV, the excess
provision shall not be reversed but will be utilised to meet the
shortfall/ loss on account of sale of other non performing
financial assets.
Books of purchasing bank
The asset shall attract provisioning requirement appropriate to
its asset classification status in the books of the purchasing
bank.
(C) Accounting of recoveries
Any recovery in respect of a non-performing asset purchased from
other
banks should first be adjusted against its acquisition cost.
Recoveries in excess of the acquisition cost can be recognised as
profit.
(D) Capital Adequacy
For the purpose of capital adequacy, banks should assign 100%
risk weights to the non-performing financial assets purchased from
other banks. In case the non-performing asset purchased is an
investment, then it would attract capital charge for market risks
also. For NBFCs the relevant instructions on capital adequacy would
be applicable.
(E) Exposure Norms
The purchasing bank will reckon exposure on the obligor of the
specific financial asset. Hence these banks should ensure
compliance with the prudential credit exposure ceilings (both
single and group) after reckoning the exposures to the obligors
arising on account of the purchase. For NBFCs the relevant
instructions on exposure norms would be applicable.
7. Disclosure Requirements
Banks which purchase non-performing financial assets from other
banks shall be required to make the following disclosures in the
Notes on Accounts to their Balance sheets:
A. Details of non-performing financial assets purchased:
(Amounts in Rupees crore)
1. (a) No. of accounts purchased during the year (b) Aggregate
outstanding
2. (a) Of these, number of accounts restructured during the year
(b) Aggregate outstanding
B. Details of non-performing financial assets sold: (Amounts in
Rupees crore) 1. No. of accounts sold 2. Aggregate outstanding 3.
Aggregate consideration received
C. The purchasing bank shall furnish all relevant reports to
RBI, CIBIL etc. in respect of the non-performing financial assets
purchased by it.
Category Public sector bank Private sector bank Foreign bank
Gross NPA/ Gross Advance (in %) 2001 12.37 2002 11.09 2003 9.36
2004 7.79
8.37
9.64
8.07
5.84
6.84
5.38
5.25
4.62