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Definition of NPA:

An asset which has either stopped generating income or is not generating income expected of it. Why assets become NPAs?? Poor credit appraisal coupled with lack of monitoring. Reckless advance to achieve targets with inadequate legal provisions. Lack of coordination among banks.

RBI DEFINITION OF NPA


Interest and/or principal due remain overdue for a period more than 90 days in respect of a term loan. The amount remains out of order for a period of more than 90 days in respect of an overdraft/cash credit-BAL EXCEEDS LIMIT,NO CREDITS, CREDITS INSUFFICIENT FOR INTT The bills remain overdue for a period more than 90 days in case of bills purchased and discounted

RBI DEFINITION OF NPA


Interest and/or principal overdue for two harvest seasons but for a period not exceeding two half years in case of an advance granted for agricultural purposes Any amount to be received remains overdue for a period more than 90 days in respect of other accounts.

Asset Classification as per RBI Guidelines

Standard Assets:
The asset which does not disclose any problem and which does not carry more than the normal risk attached to the business. This asset is also called as performing asset.

Substandard Assets:
An asset which has been classified as a nonperforming asset for a period not exceeding 12 months, wef 31-03-2005. Where the terms of loan agreements regarding repayment have been renegotiated/rescheduled after the commencement of production should be treated as sub-standard assets. Unsecured Substandard Accounts: Assets where no security has been obtained (or value of security was less than 10% of the balance) from the beginning, are treated as unsecured sub-standard accounts(attracting 10% additional provision for unsecured portion).

Doubtful assets:
Asset which has remained in substandard category for a period exceeding 12 months, can continue as such for three years-D1-upto I year,D2->1 year, Upto 3 years,D3-beyond 3 years. Loss assets: An asset where the loss has been identified by the bank or internal auditors or the RBI inspection but the amount has not been written off, wholly or partly. Such an asset is not realisable although there may be some salvage value.

Provisioning Norms:

The purpose of classification of assets is to make adequate provisions on the basis of quality of assets, the realisation of security and the erosion in the value of the security. PROVISIONING Standard assets: A provision of 0.25% Direct Agr. & SME,OTHERS 0.40 %. Sub-standard assets: A provision of 10% of total outstanding is made.

Doubtful assets:
To the extent the debt is not covered by the realisable value of the security, 100% provision is to be made. In addition to the above, for the secured portion of the doubtful assets, provision is to be made between 20% and 100% depending upon the period for which the asset has remained doubtful:
Upto 1 year(D1): 20% More than 1 year but upto 3 years:30%(D2) Above 3 years: 100%(D3)

Loss assets:

The entire asset should be written off or if the assets are to be retained in the books for any reason, 100% provision is required to be made. NPAs Identification: Since the high level of NPAs dampens the performance of the banks, the identification of the potential problem accounts and their close monitoring assumes importance.

Movement of asset within NPA classification


Loss
Realizable value Of security < 10% of O/S

Substandard
12mths

Doubtful

Secured adv
Unsecured adv At the time of sanction it self Erosion of security >50% of o/s &<90% >90% of o/s

D-1
12mths

D-2 D-3

24mths

Indefinite Period till the security Available is >10% of O/S

Provision Norms, apart from Standard Assets


Substandard Doubtful Loss
100%

D-1
Secured adv Unsecured adv At the time of sanction it self 10% 20% 100% 20%

D-2 D-3
30% Secured 100% Portion

100% 100%

Unsecured portion

NPAs-Causes-Internal
Diversion of funds . Associate concerns. Time/Cost overruns. Business(Product/Marketing)Failure. Inefficient Management. Strained Labour Relations. Inappropriate Technology. Product Obsolescence.

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