Commercial Banking : NPAs

Banking Non Performing Assets 1

NON PERFORMING ASSETS
INCOME RECOGNITION,
ASSET CLASSIFICATION
AND
PROVISIONING NORMS
(IRAC NORMS)
&
Asset Reconstruction Companies
Banking Non Performing Assets 3
 Bank Credit (% to GDP)

Banking Non Performing Assets 4

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 Why Loan accounts go bad ?
 BORROWER-SIDE  BANKER – SIDE
 Lack of Planning  Defective Sanction
 Diversion of Funds  No post-sanction
 Disputes within… supervision, etc
 No contribution …  Delay in releases
 No modernisation …  Directed lending …
 Improper monitoring  Slow decision
 Industrial Relations.. making process
 Natural Calamities ...  Etc etc etc ….

Banking Non Performing Assets 8

 Health Code System in
Indian Banks during 1980’s
1. Satisfactory Accounts
2. Irregular Accounts
3. Sick-viable : Under Nursing
4. Sick – Non-viable : Sticky accounts
5. Advances Recalled
6. Suit Filed Accounts
7. Decreed Debts and
8. Debts classified by the Bank as
Bad/Doubtful Accounts

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 Asset Classification – 4 way - 1993
 Standard Assets
• All regular loan accounts &
investments (Performing Assets)

 Non-Performing Assets
1. Sub-Standard Assets
2. Doubtful Assets
3. Loss Assets
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 Performing Asset defined …
 An account (loan or investment) is
classified as Performing Asset if it
does not disclose any problems and
carry more than normal risk
attached to the business

 All loan facilities which are regular !

Banking Non Performing Assets 11

 N P As : Definition
 An asset, including a leased asset,
becomes non-performing when it
ceases to generate income for the
bank.

 A credit facility in respect of which

the interest and/or instalment of
principal has remained “past due”
for a specified time.
Banking Non Performing Assets 12
 Non Performing Assets
 In accounting, originally Bad & Doubtful Debts
 In 1980s, RBI followed 8 point Health Code
 Also called Non Performing Loans (NPLs)
 or Stressed Assets
• An advance where interest and / or instalment of
principal remain ‘overdue’ for a period of more
than 90 days in respect of Term Loan / OD / CC
/BP / BD / other accounts – investments, export
finance, SSI/SME/ agricultural, housing loan,
educational loan, lease and hire purchase …. Etc.
 Sub-standard, Doubtful and Loss Assets…
Banking Non Performing Assets 13
 Recovery of Loans
 Field Visits, Personal persuasion, Stock
Statements
 Notices on due dates – Ordy, Regd, Legal …
 Civil Procedure, Winding Up Notices, …
 Seizure and disposal of assets thro’ auctions
 Criminal Action per Sec 138 of NI Act …
 Compromises – Interest reduction / waiver,
deferment, Simple or Compound calculation
 Lok Adalat, DRT / BIFR Awards, OTS, CDR
 Asset Securitisation under SARFAESI Act …
Banking Non Performing Assets 14
 Def’n of NPAs Chronologically
 Mar 31, 1993 4 quarters

 Mar 31, 1994 3 quarters

 Mar 31, 1995 2 quarters

 Mar 31, 2004 1 quarter only ???

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 Sticky Loans in Banks in India
 Year Loss Doubtful Sub-std
 1998 6,242 27,146 17,428

 1999 7,444 31,350 19,928

 2000 7,558 33,688 19,594

 2001 8,001 37,756 18,206

Banking Non Performing Assets 17

 Sticky Loans in Banks in India
(Rs. In crores)
40,000
35,000
30,000
25,000
Loss
20,000
Doubtful
15,000 Sub-Std
10,000
5,000
0
1998 1999 2000 2001

Banking Non Performing Assets 18

 % NPAs to Total Advances
(Rs in crores)
 Year NPAs Total Loans %

 1998 50,816 3,52,696 14.4

 1999 58,722 3,99,436 14.7
 2000 60,840 4,75,757 12.8
 2001 63,962 5,58,679 11.4

 (Source : Trends & Progress : RBI, 2001)

Banking Non Performing Assets 19

 NPAs as % to Total Advances
600000

500000

400000
NPAs
300000
Total Loans
200000 % to Total

100000

0
1998 199 2000 2001

Banking Non Performing Assets 20

 IRAC NORMS
 Master circular dated 17th July, 2004.

 Superceded earlier master circular dated 22nd

August, 2003.

 Status-quo of classification in respect of earth-

quake affected accounts available upto
15/07/2004.

 Natural Calamities – Floods, Cyclones, Earth

quakes, Failure of Monsoon, Fire Accidents, etc...
Banking Non Performing Assets 21
 ASSET TYPE
STANDARD ASSET / PERFORMING
ASSET
The account is not non-performing and does
not carry more than the normal risk
attached to the business.

NON-PERFORMING ASSET (NPA)

The asset ceases to generate income for the
bank. (Para 2 of the Master Circular)

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 IDENTIFICATION OF NPA
Cash Credit / Overdrafts ⇒
Account remains ‘out
of order’ for 90 days
or more.

The account is treated as ‘out of order’ if :

* Outstanding Balance remains continuously in

excess of sanction limit/drawing power for 90
days or more.
* No credit continuously for 90 days or more as
on the date of Balance Sheet.
* Credits in the account are not sufficient to cover
interest debited during the same period.

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 IDENTIFICATION OF NPA …
Term Loans ⇒Interest and/or instalment
remains overdue for 90
days or more.
Bills Purchased and ⇒Bill remains overdue for 90
Discounted days or more.
Agricultural Advances ⇒Interest and/or installment
remains overdue for two
harvest seasons for short
duration crop, one harvest
season for long duration
crop.
Others ⇒ Any amount to be received
remains overdue for 90 days

Banking or more .
Non Performing Assets 24
 CLASSIFICATION NORMS
Standard Asset
The account is not non-performing.

Sub-Standard Asset
A sub standard Asset is one which has remained NPA
for a period less than or equal 12 months. (w.e.f.
31st March 2005)

Loss Assets
These are accounts, identified by the bank or internal
or external auditors or by RBI Inspectors as wholly
irrecoverable but the amount for which has not been
written off.
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 CLASSIFICATION NORMS
Doubtful Asset - Three Categories

Category Period

Doubtful - I up to One Year

Doubtful - II Up to Three Years

Doubtful - III More than Three Years

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 PROVISIONING NORMS
STANDARD ASSET
 0.25% on Standard Assets on Global loan
portfolio basis

SUB-STANDARD ASSET
 10% of total outstanding
 20% of total outstanding if loan is unsecured ab
initio (new guidelines)
Banking Non Performing Assets 27
 PROVISIONING NORMS
SUB-STANDARD (Cont’d)
Banks are permitted to phase the additional
provisioning upon reduction in transition period
from 18 to 12 months Over a period of four years
with minimum 20% each year (new guidelines)
LOSS ASSET:
100% should be provided for

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 PROVISIONING NORMS
DOUBTFUL ASSETS

Period Provision (Secured +Unsecured)

Upto 1 year 20% + 100%

1to 3 years 30% + 100%
More than 3 years 100% + 100%
(effective from 31st March 2005)

Outstanding as on 60%, 75%, 100% on secured portion.

31st March 2004 2005 2006 2007

Banking Non Performing Assets 29

 PROVISIONING NORMS
Provision Under Special circumstances
 Normal provision on Government
guaranteed advances.

 In case of advances guaranteed by

DICGC/ECGC, Provision should be made
only for balance in excess of the amount
guaranteed by these corporations.

Banking Non Performing Assets 30

 IMPORTANT ASPECTS
Exempted Category (Para 4.2.10 of Master
Circular)
 Advances against term deposits, NSCs, IVPs,
KVPs and Life Insurance Policies need not
be treated as NPAs, till security cover is
sufficient to cover outstanding balance.
 Income to be recognised subject to
availability of margin.
 Advance against gold ornaments /
Government securities not exempt.

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 IMPORTANT ASPECTS
Classification of a Borrower (Para 4.2.6 of
Master Circular)

 All facilities granted to a borrower shall be

treated as NPA & not only that facility which has
become irregular.

 Obtain cross-branch confirmation for

classification.

Exception: Credit facility to Primary Agricultural

Credit Society (PACS) and Farmers
Service Societies (FSS) under on
lending arrangement.
Banking Non Performing Assets 32
 IMPORTANT ASPECTS
Consortium Advances (Para 4.2.7 of Master
Circular)

 Member banks shall classify the accounts

according to their own record of recovery.

 Bank needs to arrange to get their share of

recovery or obtain an express consent from the
Lead Bank.

 Bank may obtain Lead Bank confirmation &

cognizance of the same may be taken?

Banking Non Performing Assets 33

 IMPORTANT ASPECTS
Corporate Debt Restructuring (CDR) - (Para 4.2.15 of Master
Circular)
 CDR is an institutional mechanism for evolving financial
solution.

 CDR will be available only in respect of multiple

banking/syndication/consortium accounts with outstanding
exposure of Rs.20 Crores & above. (Not available for sole banking
accounts)

 Accounting treatment for restructuring under CDR will be

same as applicable to otherwise restructured accounts.

Projects under implementation

 Treatment to be in line with Para 4.2.16 of Master Circular

Banking Non Performing Assets 34

 GREENING ISSUES
Sanction/extension of Additional facility /
Adhoc facility.
Enhancement of Limit.
Conversion of Overdue Limits.
Frequent Re-schedulement of Term Loans.
Adjusting Loan of one borrower against other
borrower.

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 INCOME RECOGNITION
Income Recognition
For NPA accounts income should be recognised on realisation basis.
When an account becomes non-performing, unrealised interest of the
previous year to be derecognised/ reversed.

Adjustment of Recoveries - Priority

Unrealised Expenses

Unrealised Interest

Amount of Principal Outstanding

Clarification vide Master Circular - in the absence of clear agreement

between the Bank and the Borrower, an appropriate policy to be
followed in uniform and consistent manner.

Banking Non Performing Assets 36

 DISCLOSURE
At Branch Level
 Auditor needs to report the compliance with IRAC norms of RBI with
respect to classification & provisioning for NPA and income
recognition in Long Form Audit Report (LFAR) of the branch.

At Head Office Level

 Advances are disclosed net off NPA provisions & Interest
Suspense.

 Accounting policy for classification, provisioning & income

recognition need to be disclosed.

 Disclosure needs to be made as required in terms of the guidelines

issued by the Reserve Bank of India in connection with Percentage
of Net NPAs to Net Advances, Provision for Standard Assets & NPAs,
Movements in NPAs, Movement in Provision for NPAs.

Banking Non Performing Assets 37

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 Asset Reconstruction Companies

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 Experience abroad
 Spain - Dep Guarantee Fund : 1977-80
 Chile - Cash Purchase of Bad Loans1982
 USA - Resolution Trust Corp’n, 1989
 Japan - Coop Cr’ Purchasing Co 1993
 Poland : Rescheduled Bad Loans : 1994
 Eastern Europe : Govt Bonds : 1994
(Hungary)

Banking Non Performing Assets 42

Experience abroad...
 Tanzania - 1988
 Ghana - NPA Recovery Trust – 1989
 Sweden - SECURUM - January 1993
 Uganda - 1995
 Philippines - Asset Privatisation Trust
 Malaysia - Soft loans by Central Bank
 Colombia, Czech, Slovak, etc too

Banking Non Performing Assets 43

 Asset Reconstruction
Companies
 Capital from Banks/Financial Inst’ns
 ARCs in private sector like an SPV
 Staff from Banks/Financial Inst’ns
 Issue Bonds in lieu of Assets taken over
 Guaranteed by Government of India
 Stamp Duty to be exempted
 On par with Venture Funds for Inc. Tax

Banking Non Performing Assets 44

 Developments in India
 Ordinance in June 2002 on Securitisation Law
 Enacted by Parliament in December 2002
 Securitisation and Reconstruction of
Financial Assets and Enforcement of
Security Interest Act (SARFAESI) 2002
 Powers to Lenders – To Seizure of Assets,
Change of Management, Securitisation of
Financial Assets, etc
 Challenged in Supreme Court by M/s. Mardia
Chemicals Ltd., against right of ICICI Bank
Banking Non Performing Assets 45
 Setting up of AR Companies in India
1. Asset Reconstruction Company India Ltd
(ARCIL) – (SBI+ HDFC+ IDBI+ ICICI Bk)
2. Asset Care Enterprise (ACE) – (IFCI +
PNB)
3. ARC to be floated by Kotak Mahindra Bank?
4. ASREC – Andhra Bank, Stanchart,
Deutsche and UTI Bk?
5. Corp Bank, ING Vysya and Actis to start?
Banking Non Performing Assets 46
Definition of ARCs (RBI _ April 2003)

 A company which is set up with

the objective of taking over
distressed assets (Non
Performing Assets) from banks
or financial institutions and to
reconstruct or re-pack these
assets to make those assets
Banking Non Performing Assets 47

saleable
 Objectives of ARCs in India
 To buy out troubled loans from banks
and make special efforts at
recovering value from the assets, if
necessary by special legislation, with
special powers for recovery.
 Restructuring of weak banks to divest
the bad loan portfolio — essential for
a comprehensive restructuring
strategy of weak banks.
Banking Non Performing Assets 48
 ARCIL
 www.arcil.co.in
 Sponsored by SBI, ICICI Bank Ltd., IDBI Ltd. and
Punjab National Bank

 Vision - Mission Statement

 Vision
• Be a major contributor to the Indian economy by
capturing value from the impaired assets
 Mission
• Maximise value through innovative resolution
• Establish fair and transparent business practices
• Facilitate development of market for distress debt

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 ARCIL : Shareholding Pattern

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Banking Non Performing Assets 51
 Developments in 2004
 Revised Definition of NPA to 90 Days
 Banks managed to bring down NPAs < 3%
 SARFAESI Act, 2002 amended in Dec 2004
• To set up Asset Reconstruction Companies
• Take possession of secured assets of borrowers
• Right to lease out, sell and realize such assets
• Right to take over the management of borrowers
• 60 days notice by lenders is adequate
• No appeal permissible unless borrowers deposit
50% amount due and approach DRT / DRAT
Banking Non Performing Assets 52
NPAs in Banks : March 2005 (Rs in Cr)
Banks Total Gross Net NPAs
Assets NPAs
Public 16,76,847 46,380 16,135
(27)
Private 4,25,802 8,715 4,038
(29)
Foreign
(31)
IDBI Bank 81,360 1,216 848

Banking Non Performing Assets 53

 CDR mechanism
 Corporate Debt Restructuring mechanism
 Similar to UK, Thailand, Korea & Malaysia
 RBI guidelines to Banks and FIs in Aug’01
 To ensure timely and transparent mecha-
nism to restructure debts, outside purview
of BIFR, DRTs and other legal proceedings
 To consider all viable entities with dues
above Rs. 20 crores facing problems of
repayment ...
Banking Non Performing Assets 54
 CIBIL – www.cibil.com
 Credit Information Bureau of India Ltd
 Exchange of Credit Info among Banks/FIs
 Unscrupulous borrowers cannot play one
bank against another for credit facilities
 Set up in January 2001 by SBI + HDFC +
Dun and Bradstreet Info Pvt Ltd + Trans
Union International Inc – Rs 25 cr Capital
 Formal set up 2005 onwards ...

Banking Non Performing Assets 55

 Economic Times dt Jan 05, 2006
 Bad Loans cross 16% of India’s GDP
 ARCIL puts figure at Rs. 2,36,000 crores
 Says unlocking value from NPAs will help
banks meet additional capital requirements
 Gr NPAs in financial sector – Rs 1,11,000
crores; Restructured Standard Assets – Rs.
27,000 crores; Corporate Debt
Restructring – Rs. 65,000 crores; Bad
Loans Written off by Banks Rs. 77,000 crs.
Banking Non Performing Assets 56
 Banking – Asset Quality

Banking Non Performing Assets 57

 Gross NPAs as % of Total ASSETs
BANKS 2001- 2002- 2003- 2004- 2005-
2 3 4 5 6
87 SCBs 4.60 4.00 3.30 2.52 1.86

28 PSBs 4.89 4.21 3.50 2.73 2.09

20 OPBs 5.20 4.34 3.64 3.15 2.50

9 NPBs 3.90 3.76 2.42 1.56 0.96

30 FBs 2.41 2.44 2.13 1.43 0.96

Banking Non Performing Assets 58
 Net NPAs as % of Total ASSETs
BANKS 2001- 2002- 2003- 2004- 2005-
2 3 4 5 6
87 SCBs 2.30 1.90 1.20 0.92 0.66

28 PSBs 2.42 1.93 1.28 0.95 0.72

20 OPBs 3.23 2.51 1.17 1.39 0.91

9 NPBs 2.10 2.116 1.10 0.80 0.43

30 FBs 0.81 0.79 0.66 0.42 0.40

Banking Non Performing Assets 59
 Net NPAs as % of Total Assets

3.5
3
87 SCBs
2.5
28 PSBs
Percentages

2
20 OPBs
1.5
9 NPBs
1
30 FBs
0.5
0
2001-2 2002-3 2003-4 2004-5 2005-6
Years

Banking Non Performing Assets 60

 Gross NPAs as % of
Total Advancess
BANKS 2001- 2002- 2003- 2004- 2005-
2 3 4 5 6
87 SCBs 10.40 8.80 7.20 5.20 3.30

28 PSBs 11.09 9.36 7.79 5.53 3.70

20 OPBs 11.01 8.86 7.59 5.97 4.30

9 NPBs 8.86 7.64 4.99 3.59 1.70

30 FBs 5.38 5.25 4.62 2.85 1.90

Banking Non Performing Assets 61
 Net NPAs as % of Total Advances
BANKS 2001- 2002- 2003- 2004- 2005-
2 3 4 5 6
87 SCBs 5.50 4.40 2.90 2.00 1.20

28 PSBs 5.82 4.53 2.99 2.06 1.30

20 OPBs 7.13 5.54 3.85 2.74 1.60

9 NPBs 4.94 4.63 2.36 1.85 0.80

30 FBs 1.89 1.76 1.48 0.86 0.80

Banking Non Performing Assets 62
 Net NPAs as % of Total Advances

8
7
87 SCBs
6
28 PSBs
Percentages

5
4 20 OPBs
3 9 NPBs
2
30 FBs
1
0
2001-2 2002-3 2003-4 2004-5 2005-6
Years

Banking Non Performing Assets 63