Npa

BANKING THEORY AND PRACTICES

Non Performing Asset

An asset or a/c of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India.

An asset which does not yield any income to the bank in the form of principal and interest payments.

Banks usually classify as non performing assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue.

Banks need to monitor standard assets to arrest any a/c becoming a NPA.

The success of a bank depends upon the methods of managing NPAs and keeping them within a tolerance level.

Eg:

A loan in default would be considered non-performing. 

After a period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement.

If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.

Magnitude of NPA

The magnitude of NPA as at end- march 2010

BANK Total NPA ( Amount in crore )

Public Sector Banks 57, 301

Private Sector Banks 17, 384

Foreign Banks 7, 125

Total 81,810

Factors contributing to NPAs

The underlying reasons for NPAs in India can be classified into

i. Internal factorsii. External factorsiii. Other factors

1) Internal Factors

1. Diversion of funds for expansion / diversification / modernisation or for taking up new projects.

2. Diversion of funds for assisting or promoting associate concerns.

3. Time or cost overrun during the project implementation stage.

4. Funds borrowed for a particular purpose but not use for the said purpose.

5. Business failures due to product failure, failure in marketing etc.

6. Inefficiency in management of business.7. Slackness in credit management and monitoring.8. Inappropriate technology or problems related to

modern technology.9. Poor recovery of receivables.10. Willful defaults, fraud, disputes, management

disputes, mis-appropriation etc.

2) External Factors

1. Recession in the economy as a whole.2. Input or power shortage.3. Price escalation of inputs.4. Exchange rate fluctuations.

5. Accidents and natural calamities.6. Changes in govt. policies relating to excise and

import duties, pollution control orders etc.7. Scarcity of raw material, power and other

resources.

3) Other Factors

1. Poor monitoring of credits and the failure to recognise early warning signals shown by standard assets.

2. Promoters over optimism in setting up large projects.3. Sudden crashing of capital markets and the failure to

raise adequate funds.4. Wrong selection of borrowers.5. Dependence on single customers.

6. Granting of loans for certain sectors on the basis of govt.’s directives rather than commercial imperatives.

7. Mismatch of funding ie, using loans granted for short term for long term transactions.

8. Commitment of wilful defaults sensing that the legal recourse available to collect debts is very slow.

9. Lack of proper planning.

Early warning signals

Those which clearly indicate or show some signs of credit deterioration in the loan a/c.

They indicate potential problems involved in the accounts so that remedial action can be can be initiated immediately.

Classification of Early Warning Signals

a) Financial signalsb) Operational signalsc) Managerial signalsd) Banking signalse) External signals

a) Financial Warning Signals

i. Default in repayment.ii. Continuous irregularity in the a/c.iii. Deterioration in working capital position or in

liquidity.iv. Declining sales compared to previous period.

v. Substantial increase in long- term debts.vi. Raising sales but falling profits.vii. Incurring operating losses or net losses.viii. Raising level of bad debt losses.

b) Operational Warning Signals

i. Underutilization of plant capacity.ii. Non- payment of electricity, wages etc.iii. Frequent labour problems.iv. Poor diversification and frequent changes in plan

for expansion or diversification or modernisation.v. Evidence of over stocking and aged inventory.vi. Loss of important customers.

c) Managerial Warning Signals

i. Diversion of funds and poor financial controls.ii. Lack of cooperation from key personnel.iii. Change in management or ownership pattern or

key personnel.iv. Undertaking of undue risks.

d) Banking Signals

i. Frequent request for further loans.ii. Delays in servicing of interest.iii. Reduction of operations in the a/c or reduction of

bank balances.iv. Opening of accounts with other banks.

v. Dishonour of cheques or return of bills sent for collection.

vi. Not routing sales transactions through account.vii. Delays in submitting stock statements and other

data or Non- submission of periodical statements.viii. Frequent excess in the a/c.

e) External Warning Signals

i. Economic recession.ii. Introduction of new technology.iii. Changes in govt. policies.iv. Emergence of new competition.v. Natural calamities.vi. Weakening of industry characteristics.

Management of NPAs

a) Ensuring that loans are diversified across several customer segments.

b) Introducing risk management techniques to ensure better quality of loans.

c) Improving the quality of credit monitoring system.d) Reducing operating expenses by upgrading bank

technology.e) Monitoring early warning signals and taking

remedial action.

f) Adopting credit rating system to identify, measure and monitor the credit risk.

g) Reducing the impact of operational risks.h) Knowing a clients profile thoroughly.i) Appraising credit proposals professionally and

insisting on timely delivery of credit.j) Putting certain borrowal a/cs under watch list

which shows certain distress signals.

Remedies available

I. Non- legal remedies.II. Legal remedies.

I. Non- legal remedies

Compromise, mergers and takeovers. Goods pledged may be sold without the

intervention of court. The debts can be assigned in favour of an agency

which may collect debt for a service charge.

II. Legal remedies

a) Filing civil suits for the recovery of debts or for the enforcement of the security.

b) Filing suits under State Recovery Acts for the recovery of debts.

c) Referring the cases to Debt Recovery Tribunals and Debt Recovery Appellate Tribunal set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993.

d) Referring cases to Lokadalats constituted under the Legal Services Authorities Act, 1987 to resolve disputes by conciliation, mediation, compromise or amicable settlement.

e) Resolving large loans via debt recovery mechanisms, like Corporate Debt Restructuring mechanism.

f) Proceeding against default borrower under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI ACT) 2002.