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NPA MANAGEMENT

Prof.B B Bhattacharyya
Chair Professor
Lending
Risk of default
Profitability depends on churning of
advances portfolio.
Prompt recovery → Liquidity + Profitability
+ Ongoing lending
activity
→ Recoveries in written
off account/URI/UCI
Importance of Management of NPA
NPA – Inevitable
– 100% provision after 48 months
from the date of the account
becoming NPA – irrespective of
security.
Asset Quality
Quality of borrowal accounts –

• Careful evaluation of risks


• Pre-sanction / post sanction
• Regular follow-up of borrowal accounts – end
use of credit
• Timely recovery of interest/instalment
• Timely detection of symptoms of sickness
• Timely initiation of corrective measures to
regularise irregularities.
• Valuation once in two years.
Monitoring
• Recover orders
• Holding on operation in case of temporary
cash flow mismatches.
• Reschedule repayment terms according to
expected cash flows
• Restructure the dues according to
expected cash flows.
Non Performing Asset
• An asset that stops generating income for
banks.
• NPA defined in SARFAESI Act, 2002 as
follows:
– “An asset or Account of a borrower which has
been classified as sub-standard, Doubtful or
Loss Asset in accordance with RBI guidelines
on asset classification”.
Definition of NPAs
• The bank follows the guidelines of RBI on income
recognition, asset classification and provisioning. A NPA
is a loan or advance where –
– Interest and / or instalment of principal or any amount due to the
bank under any credit facility remain overdue for a period of
more than 90 days in respect of a term loan.
– The A/C remains ‘Out of Order’, in respect of an Overdraft /
Cash Credit.
When is an Asset considered bad -
• When the borrower defaults on Principal /
Interest payment for more than 90 days.
Classification of NPAs
NPAs

SUB STANDARD DOUBTFUL LOSS


Provision requirement
Standard Asset

Direct advances to agriculture / SME 0.25%

All other Loans and Advances 0.40%


Asset Classification
• Borrower-wise not facility-wise

• Under consortium arrangement


Wilful Default
• Defaulting in repayment obligations inspite
of having capacity.
• Defaulted and not utilized for specific
purpose and diverted.
• Defaulted and siphoned off – funds not
available with the unit.
Compromise Settlement
• Regular Settlement
• Special OTS
Recovery Action
• Lok Adalat
• SARFAESI Act
• DRT
• Civil Suit
• Sale of Assets
• BIFR
Substandard Asset

• With effect from 31st March 2005, substandard asset is one which has remained
NPA for a period less than or equal to 12 months. Its Asset Code is 20. The
provision requirement in substandard asset was earlier flat 10% of the
outstanding dues, irrespective of the category of the advance (secured or clean).

• Now RBI has removed the CAP on the unsecured exposures and individual Bank
Boards were given the freedom to formulate their own policy guidelines for
prudential norms on unsecured exposures. Simultaneous with this liberalisation,
RBI has made norms of provision requirement on unsecured exposure of Banks
more stringent. Unsecured exposure is defined as an exposure where the
realisable value of security as stipulated and ascertained by the valuation is not
more than 10% `ab initio’. That means all clean / unsecured advances such as
clean overdraft etc. will form ‘unsecured exposure `ab initio’. These accounts,
when they become NPA as substandard asset, will now (w.e.f. 31.3.2005)
require a provision at 20% of the outstanding balances.
• The normal secured advances, when moving to NPA as
substandard asset will also now require 20% of the
outstanding balance as provision (presently 10%). Thus,
now onwards the substandard assets will continue to
have 2 segments as hitherto viz. Substandard – Secured
Assets – Code 21 and Sub-standard – Unsecured
Assets – Code 22, however, the provision requirement
for both the segments will now be 20% of outstanding
dues net of URI lying in sundry credit but without making
any allowance for ECGC/CGTMSE cover.
Doubtful Asset

• It consists of 3 stages - Doubtful I, Doubtful II and


Doubtful III. The provision requirement in each stage of
Doubtful asset will be as under:

• Doubtful I (Code 31) – Assets remaining for a period of 12


months in Doubtful category – provision requirement shall
be 20% of RVS + 100% of shortfall in security (i.e. NPAs
over 12 months upto 24 months)

• Doubtful II (Code 32) – Assets remaining for a period of


further 24 months in Doubtful category – provision
requirement shall be 30% of RVS + 100% of shortfall in
security (i.e. NPAs over 24 months upto 48 months)
Doubtful Asset
• Doubtful III (Code 33) – Assets remaining for more than 3 years in
Doubtful category. RBI has now decided that all advances
classified as doubtful for more than 3 years (i.e. entering/entered to
Doubtful III category) on or after 1st April 2004 shall require a
provision of 100% for the secured portion also w.e.f. year ending
31.3.2005. In other words all accounts migrating from Doubtful II to
Doubtful III on or after 1.4.2004 shall require 100% provision as on
31.3.2005 and thereafter (irrespective of RVS).

• As an intermediate measure for smooth transition, RBI had


implemented a graded system of provision requirement at 60% and
75% of the RVS + 100% of shortfall for the year ending 31.03.05
and 31.03.06 for accounts which were classified as Doubtful III
category as on 31.03.04 (i.e. Stock Doubtful III A/cs). However,
these accounts also will require 100% provision from 31.03.07
onwards.
Loss Assets – Code 40

• A loss asset is one where loss has been


identified by Bank or internal or external
creditors or RBI inspectors but the amount has
not been fully written off. Such an asset is
considered uncollectible and of such little value
that its continuance is not warranted, even
though there may be some small (less than
10%) salvage recovery value. The provision
requirement is 100% of net outstanding dues.
These loss assets should be gradually written off
from the books.
Reasons of NPA
• Internal to borrowing limit
– Faulty machinery leading to rejection of
products,
– Inventory pile up,
– Delay in receivable
– High staff turnover
– Family dispute
– Management Inefficiency
– Diversion / Siphoning of funds
Reasons of NPA
• External to borrowing limit
– Economic downturn
– Industry downturn
– Infrastructural deficiency
– Government policies
– Shortage of inputs
Reasons of NPA
• Bank specific -
– Wrong selection
– Perfunctory credit analysis
– Lending not linked to productive investment
– Faulty credit management
– Over finance and under finance
– Repayment schedule not properly drawn
– Mis-utilisation of loans
– Lack of communication and contact with borrowers
– No Inspection
– Imperfect documentation
– Failure to pick up warning signals
– Non renewal of documentation
Banks NPA Management Policy –
Preventive Action
• Market Intelligence
• Timely review of accounts – scrutiny of financial
statements
• Monitoring of over drawings / over limits allowed.
• Periodical evaluation of collaterals
• Monitoring management of borrowing unit
• Monitoring conduct of accounts
• Strict monitoring of watch category accounts
• Compliance of audit / inspection irregularities
• Inspection – Pre and periodic post sanction
Warning signals – Detective action
• Unauthorized excess drawing
• Sudden spurt in turnover –overtrading/
Sudden fall in turnover
• Frequent cheque returns
• Frequent requests by borrowers for
overlimit / overdrawings.
• Delay in realisation of receivables
Corrective Actions
• Meeting the customer and discussions.
• Market information about the unit
• Increased number of visits to the unit and
explore scope of additional security
• Take a realistic view of the situation –
borrower’s intention in particular.
• If situation demand, reschedule,
restructure the account.
i) Appropriation of liquid securities (TDR,
NSC, shares, margin money etc.) and
pledged goods, to reduce outstanding
ii)Disposal of other securities, with the co-
operation of borrowers.
iii) Restructuring under Bank’s policy, CDR,
BIFR etc., for viable units.
iv) Compromise settlement of dues through
negotiation under Bank’s Recovery
Policy and special RBI OTS Schemes (in
force from time to time)
v) Forum of Lok Adalat and Recovery
Camps.
vi) Recalling the advance
vii) Initiating action under SRFAESI Act
against charged securities
viii) Filing suit in Court/DRT – Execution of
decree
ix) ECGC claim, if any, to be lodged after
recalling the advance, reporting the
default and follow up for early settlement
of the claim.
x) Sale of financial assets to ARCs
xi) Sale of financial assets to Banks/FIs/
NBFCs
xii) Lastly, after all the chances of recovery
of dues are exhausted, we may resort to
writing off of the balance dues.
RECOVERY PROCESS

Thoroughly examine the conduct of the


Account / existing security / obtain
Discreet market report

Call the borrower / authorised


Representatives for discussion on an
appointed date

If the borrower comes to the bank, If the borrower does not respond
as desired to the call

Discuss the problems vis-à-vis banks’


Security position. Explore additional security.
If problems appear genuine, draw a plan of action for
‘holding on’ operation for a while to tide over temporary
difficulties. Otherwise reschedule / restructure with or Contd….
without concession
If the borrower does not respond
to the call

Give one more chance and fix


One more date

If still there is no response,


bank representatives must visit

Chances are borrower will appear If borrower meets the bank and submits
recalcitrant the problems faced by him

If problems appear genuine, may go for a


Reschedulement, restructuring or an
one-time settlement on concessional terms.

Contd…
In case, borrower appears
Recalcitrant, take stock of banks
security

If banks security is weak /


If bank is well secured talk tough Negligible , try for compromise,
and attempt for a OTS, exert pressure through
compromise 3rd party e.g. guarantor

If the borrower does not agree,


The borrower may agree Issue notice under SARFAESI,
If eligible

If the borrower agrees for a Chances are SARFAESI notice may


Compromise, negotiate yield results and borrower will
approach for a settlement

If SARFAESI result does not


yield result, confiscate security and
dispose of the security preferably
by auction.
Impact of NPAs
• Reduce the earning capacity of assets and
adversely affect ROA.
• Higher provisioning requirement on mounting
NPAs adversely affect capital adequacy and
also banks profitability.
• Increase in funding cost.
• Reduction in the value of shares.
• Affect the market competitiveness.
• Further credit expansions gets affected.
• Profitability / Credibility of the bank gets affected.
THANK YOU

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