Presented By :- CA Gokul B. Rathi 098500 41311 NON PERFORMING ASSETS (NPA) Presented By :- CA Gokul B. Rathi 098500 41311

All loan facilities which are regular ! CA Gokul B Rathi Performing Asset : - Is an account which does not disclose any problems & carries not more than normal risk attached to the business. All loan facilities which are regular !

CA Gokul B Rathi Non Performing Assets (NPA): - NPA is defined as a loan or an advance in respect of which the interest &/or installment of principal remains “overdue” for a period of more than 90 days in respect of a term loan or remains “out of order” for a period of more than 90 days in respect of an Overdraft /Cash Credit. Any amount due to the Bank under any credit facility, if not paid by the due date fixed by the bank, becomes ‘overdue’. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

Non Performing Asset: - CA Gokul B Rathi Non Performing Asset: - A loan granted for short duration crops will be treated as NPA if the installment of principal or interest thereon remains overdue for two crop seasons. A crop season for each crop means the period upto harvesting of the crops raised. A loan granted for long duration crops will be treated as NPA if the installment of principal or interest thereon remains overdue for one crop season. ( Long duration crops = crop season longer than 1 year & short duration crops means which are not long duration crops ) A bill purchased & discounted will be NPA if it remains overdue for a period of more than 90 days from the date it is due. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

CA Gokul B Rathi 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. Even if the outstanding in the account is within limit/DP, but there are no credits continuously for 90 days or credits are not enough to cover interest debited, the account should be treated as ‘out of order’ .

NPA Identification – A Regular Exercise: - CA Gokul B Rathi NPA Identification – A Regular Exercise: - NPA identification is an ongoing process. An asset should be classified as NPA within a month of its’ becoming NPA & provisions for NPA should be done on quarterly basis rather than at year end only.

Temporary Deficiencies:- CA Gokul B Rathi Temporary Deficiencies:- Record of recovery should be seen before any a/c is treated as NPA. However, solitary entry at the year end which brings the account in order on year end but the a/c again becomes irregular subsequently, such a/c should be treated as NPA. An a/c should not be treated as NPA just because of some temporary deficiencies which are rectified subsequently. An a/c should be classified as NPA when there is threat of loss or recoverability of advance is in doubt. Recovery in the a/c should be from genuine sources & not because of grant of additional credit facilities to the borrower.

Borrower wise & not Facility wise CA Gokul B Rathi Borrower wise & not Facility wise When a loan a/c of a borrower is treated as NPA, all the other loan a/cs of the borrower, even if they are otherwise regular, should be treated as NPA as NPA classification should be borrower wise & not facility wise. When various advance a/cs of a borrower are in different categories of NPA, then the provisioning shall be as per the lowest category applicable.

Special Purpose Advances: - CA Gokul B Rathi Special Purpose Advances: - Agricultural Loans in areas suffering from Natural Calamities, Housing Loan to Staff Credit facilities guaranteed by Central would become NPA only if the guarantee is repudiated by the Govt. State Govt. Guaranteed Advances are treated at par with other advances. Project financing - For Infrastructure & Non infrastructure sectors Gold Loans – For Agricultural purposes & for non – Agricultural purposes Loans against FDs / IVPs / KVPs / Life Policies are not treated as NPA if adequate margin is available. Investments where Interest/Principal is overdue beyond 90 days

Project Loans: - For Infrastructure Projects – CA Gokul B Rathi Project Loans: - For Infrastructure Projects – NPA before DCCO, if 90 days overdue if not restructured NPA if fails to commence commercial operations within 2 years from original DCCO, even if regular, if not restructured For non Infrastructure Sector: - NPA if fails to commence commercial operations within 6 months original from DCCO, even if regular, if not restructured

Restructuring of Advances: - CA Gokul B Rathi Restructuring of Advances: - Three Stages: - Before commencement of commercial production /operation. After commencement of commercial production /operation but before the asset has been classified as Sub-standard. After commencement of commercial production /operation but before the asset has been classified as Sub-standard or Doubtful.

Restructuring of Advances: - CA Gokul B Rathi Restructuring of Advances: - Standard Asset to be classified as Substandard upon restructuring NPA Account upon restructuring would slip into further lower category All restructured accounts treated as NPA upon restructuring are eligible for upgradation to Standard if satisfactory performance is observed during specified period. If satisfactory performance not observed during specified period, Asset Classification to be with reference to the Pre Restructuring Repayment Schedule Any additional finance granted on restructuring to be treated as Standard Asset upto a period of 1 year after 1st installment becomes due as per Restructuring Package. If satisfactory performance not observed during the specified period, additional finance would be placed in the same category as other accounts

CA Gokul B Rathi Gross & Net NPA: - Gross NPA are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets, i.e. sub-standard, doubtful & loss assets. If Gross NPA of any Co-operative Bank is more than 10%of Gross Advances in any year, it comes under Supervisory Action Framework of RBI. Net NPA = Gross NPA – Provision for BDDR

Classification Of NPA: - CA Gokul B Rathi Classification Of NPA: - Standard Assets :- Advance account which does not disclose any problem & does not carry more than normal business risk. Substandard Assets – Which has remained NPA for a period less than or equal to 12 months. Doubtful Assets – Which has remained NPA for a period more than 12 months. Loss Assets – where loss has been identified by the bank or internal or external auditors or the RBI inspection, salvage value of security is negligible & the entire asset is proposed to be w/off after necessary approvals.

Provisioning Norms: - Asset Classification Particulars CA Gokul B Rathi Provisioning Norms: - Asset Classification Particulars Provision Required % Standard Direct Advances to Agriculture & SME Sectors 0.25 Commercial Real Estate Advances 1.00 All other Loans & Advances not included in above 0.40 Sub-standard Secured Exposure 15 Unsecured Exposure for Escrow A/cs available in case of Infrastructure lending, infrastructure loan accounts 20 Other Unsecured Exposure 25

Provisioning Norms: - Asset Classification Particulars CA Gokul B Rathi Provisioning Norms: - Asset Classification Particulars Provision Required % Doubtful - Secured Unsecured D1 (Upto 1 year) 25 100 D2 (One to Three years) 40 D3 (More than 3 years) Loss Loss Asset

Income Recognition Policy: - CA Gokul B Rathi Income Recognition Policy: - Income from NPA Accounts is booked only when actually received & is not accounted for on accrual basis. Even in case Govt. guaranteed advances, interest is to be recognized only when realized. Interest on Advances against FDRs, KVPs, NSCs, IVPs & LIC Policies is to be accounted when due if sufficient margin is available in the account. Fees & Commission earned on rescheduling is to be recognized on accrual basis over the period covered by reschedulement.

Income Recognition Policy: - CA Gokul B Rathi Income Recognition Policy: - When an account becomes NPA, interest, fees, commission, etc, debited to account but is not actually realized needs to be reversed or provided for. When Bills Purchased & Discounted becomes NPA at the close of any year, interest accrued on such bills in the previous year should be reversed or provided for if not realized already. In case of Govt. Guaranteed Advances, interest debited but not realized needs to be provided for. In case of Equipment Leasing undertaken by the Bank, interest component in the Lease account which has become NPA needs to be reversed if unrealized. Interest & Other Income on NPA Accounts realized out of additional credit facilities cannot be taken to Income.

No post-sanction supervision, etc Delay in releases Directed lending CA Gokul B Rathi Why Loan Accounts go Bad ? BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within No contribution No modernization Improper monitoring Industrial Relations Natural Calamities BANKER – SIDE Defective Sanction No post-sanction supervision, etc Delay in releases Directed lending Slow decision making process

CA Gokul B Rathi IMPACT OF NPA: - Profitability Liquidity & Opportunity Cost Waste of valuable Management time Loss of credibility as high NPA reflect poorly on Management Impact on Share Price Gross NPA more than 10% in case of Co-op. Banks, Supervisory Action follows & restrictions imposed.

Identifying borrowers with genuine intent CA Gokul B Rathi PREVENTIVE MEASURES FOR NPA: - Identifying borrowers with genuine intent Early recognition of the problem a/cs. Timeliness & adequacy of response Monitoring of credit turnover in CC/OD A/cs. Containing diversion of funds, Monitoring willful defaulters. Adequacy of collateral security in case of large borrowal accounts

CA Gokul B Rathi TOOLS FOR RECOVERING NPA: - LOK ADALATS DEBT RECOVERY TRIBUNALS (DRT) SARFAESI ACT, 2002 (Securitization & Reconstruction of Financial  Assets & Enforcement of Security Interest Act, 2002) ASSET RECOVERY CONSTRUCTION COMPANY INDIA LIMITED (ARCIL) CORPORATE DEBT RESTRUCTURING (CDR)

DEBT RECOVERY TRIBUNALS (DRT): - CA Gokul B Rathi DEBT RECOVERY TRIBUNALS (DRT): - To recover their bad Debt quickly & efficiently. 33 Debt Recovery Tribunal & 5 Debt Recovery Appellate Tribunal It is the special court established by Central Government for the purpose of recovering money belonging to the banks or financial institutions. The judges of this court are the retired judges of High Courts. In this court, only the recovery cases of Rs.10 Lacs & above can be filed.

CA Gokul B Rathi SARFAESI Act: - The Act provides three alternative methods for recovery of non-performing assets, namely: - - Securitization - Asset Reconstruction  - Enforcement of Security without the intervention of the Court. Bad loans with outstanding above Rs. 1.00 Lac. NPA loan accounts where the amount is less than 20% of the Principal & Interest are not eligible to be dealt with under this Act.

This Act empowers the Bank: CA Gokul B Rathi This Act empowers the Bank: To issue demand notice to the defaulting borrower & guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice.    To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.    To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.    Any Security Interest created over Agricultural Land cannot be proceeded with.

CA Gokul B Rathi CDR Mechanism: - CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts . An outstanding exposure of banks & institutions to the extent of Rs.20 Crore & more.

Some Tips for Auditors: - CA Gokul B Rathi Some Tips for Auditors: - Verify the previous year’s audited NPA Statement to confirm that all the Accounts which were NPA last year have been covered in Current Year Statement except those which are closed or upgraded. If closed, whether from genuine sources. If upgraded, whether from proper recovery in the account. Tally the number of accounts. Verify whether unrealized Interest has been reversed in respect of accounts which have slipped during the year.

Some Tips for Auditors: - CA Gokul B Rathi Some Tips for Auditors: - Verify that proper classification has been done with reference to Date of NPA. Whether valuation report for Immovable Properties is on record & it is within 3 years. See that, valuation is taken as per Valuation Report at Distress Value. In case of depreciable assets, depreciation has been considered at the time of valuation. Securities shown are properly under lien of the Bank.

Some Tips for Auditors: - CA Gokul B Rathi Some Tips for Auditors: - All the accounts related to particular borrower have been treated as NPA under lowest category applicable & provision made accordingly. In case of D1 & D2 accounts, unsecured portion is provided for @ 100%. Verify overdue/overdrawn/SMA accounts to ensure that all NPA A/cs have been covered in the Statement & provided for. Ensure that a/cs are not upgraded after restructuring except cases covered by special regulatory treatment. Ensure that OIR as per Balance Sheet tallies with that as per NPA Statement.

Thank you ! CA Gokul B. Rathi, Pune gokulrathi007@yahoo.co.in