NPA Management in banks Presentation By : Dr.Narinder Kumar Bhasin Director - Gyan Bharti Institute of Technology CEO –Smart Institute of Banking Insurance and Finance PhD Research Scholar –Amity University Batch 2015 -2018

WHAT IS NPA NPA ACCOUNTS ARE THOSE ACCOUNTS WHICH DO NOT YEILD ANY INCOME OR CEASED TO GENERATE INCOME FOR THE BANK.

WHY ACCOUNT BECOME NPA Poor Selection of Borrowers Poor Appraisal Failure of providing timely support Poor follow up and monitoring Hesitation to accept project failure or precipitate PNPA. Government Policies Unforeseen Circumstances.

ASSET CLASSIFICATION STANDARD: A loan Asset which does not pose any threat to recovery. SUB STANDARD: NPA up to 12 months. DOBTFUL: Doubtful - I : NPA up to 24 months Doubtful - II : NPA up to 48 Months Doubtful - III : NPA beyond 48 Months Loss Assets : Loss has been identified by Banks Internal/ external/ auditor/ RBI inspector.

Performing Asset An account does not disclose any problems and carry more than normal risk attached to the business All loan facilities which are regular !

Non Performing Assets Non Performing Asset means a loan or an account 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 RBI.

Introduction Earlier assets were declared as NPA after completion of the period for the payment of total amount of loan and 30 days grace. In present scenario assets are declared as NPA if none of the installment is paid till 180 days i.e. six months in respect of a term loan.

Introduction With effect form March 31, 2004 a non-performing asset (NPA) shell be a loan or an advance where; interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, the account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

CATEGORIES OF NPA Standard Assets : Arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year Substandard Assets : Which has remained NPA for a period less than or equal to 12 months. Doubtful Assets : Which has remained in the sub-standard category for a period of more than 12 months D1 i.e. up to 1 year : 20% provision is made by the bank D2 i.e. up to 2 year : 30% provision is made by the bank D3 i.e. up to 3 year : 100% provision is made by the bank Loss Assets : where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

Reasons behind rise in NPA Lack of proper pre-enquiry by the bank for sanctioning a loan to a customer. Non performance of the business or the purpose for which the customer has taken the loan. Willful defaulter. Loans sanctioned for agriculture purposes. Change in govt. policies leads to NPA.

Effects of NPA on banks & FI Restriction on flow of cash done by bank due to the provisions of fund made against NPA. Drain of profit. Bad effect on goodwill. Bad effect on equity value.

Factors Impacting Rise In NPAs External factors : Ineffective legal framework & weak recovery tribunals Lack of demand / economic recession or slowdown Change in Govt. policies Wilful defaults by customers Alleged political interferences

Factors Impacting Rise In NPAs Internal factors : Defective Lending process Inappropriate / non –use of technology like MIS , Computerization Improper SWOT analysis Inadequate credit appraisal system Managerial deficiencies Absence of regular industrial visits & monitoring Deficiencies in re-loaning process Alleged corruption Inadequate networking & linkages b/w banks

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

TYPES OF NPA Gross NPA : Gross NPAs 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 like as sub-standard, doubtful, and loss assets. Gross NPAs Gross NPAs Gross Advances

Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Net NPAs Gross = __NPAs – Provisions__ Gross Advances - Provisions

Causes NPA arises due to a number of factors or causes like:- Speculation : Investing in high risk assets to earn high income. Default : Willful default by the borrowers. Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business. Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies. External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

SBI State Bank of India  Net NPAs : Rs 12,347.90 crore Gross NPAs : Rs 25,326.29 crore The gross non-performing assets (NPAs) of public sector banks increased by 20 per cent during June-September 2011. Standard & Poor's, which had in September downgraded standalone ratings of State Bank of India, said high credit risks in the Indian banking sector reflects that the country has a weak payment culture and legal system that often result in low recoveries and delayed settlement of foreclosures.

ICICI Bank 2. ICICI Bank Net NPAs: Rs 2,407.36 crore Gross NPAs: Rs 10,034.26 crore ICICI Bank has the highest NPAs among private sector banks. ICICI Bank has slightly improved its net bad debts to 0.90 per cent from 0.91 per cent in the earlier quarter. Indian banks face challenges like increase in interest rates on saving deposits, a tighter monetary policy, restructured loan accounts and increasing infrastructure loans.

NET NON PERFORMING ASSETS   YEARS SBI PNB ICICI UTI SCB 1998 7.31 10.21 3.69 5.33 3.30 1999 7.30 10.38 3.22 3.66 2.88 2000 6.07 9.57 1.14 5.63 2.42 2001 7.33 8.96 6.32 NA 2002 6.65 8.52 1.53 4.71 2.04 2003 6.69 3.36 2.39 2004 5.32 5.48 3.46 2005 4.5 3.86 5.21 2006 3.48 0.98 2.21 1.29 2007 2.65 0.2 1.65 1.39 2008 1.87 0.29 0.72 2009 1.32 0.28 0.78 0.87

GROSS & NET NPA OF COMMERCIAL BANKS (in Rs. Crores)

GROSS &NET NPA (as percentage of total assets)

Sub-Standard Assets: An asset which has remained NPA for a period less than or equal to 12 months. Doubtful Assets: An asset that has remained in the substandard category for a period of 12 months. Loss Assets: An asset where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

Standard Assets Direct advances to agriculture and SME at 0.25%, CRE at 1% Other loans and advances at 0.40% Substandard Asset A general provision of 15% on total outstanding The ‘unsecured exposures’ which are ‘substandard’ to attract additional provision of 10%, i.e., a total of 25% on the outstanding balance.

Doubtful Assets 100% of the extent to which the advance is not covered by the realisable value of the security For the secured portion, provision to be made as follows, depending upon the period for which the asset has remained doubtful

Loss Assets Write Off or provision of 100% of outstanding

NPA Management Strategies Indian Banks are pursuing variety of strategies to control NPAs, which can be studied under two broad categories as under : a. Preventive Management b. Curative Management

NPA Management Strategies a. Preventive Management -  It is rightly said that prevention is better than cure. Developing ‘Know Your Client’ profile (KYC Monitoring Early Warning Signals  Installing Proper Credit Assessment and Risk Management Mechanism Reduced Dependence on Interest Generating Watch-list/Special Mention Category

NPA Management Strategies b. Curative Management  Re-phasement of loans Pursuing Corporate Debt Restructuring (CDR Encouraging rehabilitation of potentially viable units Encouraging acquisition of sick units by healthy units Entering compromise schemes with borrowers / Entering one time settlement

NPA Management Strategies Using Lok Adalats for compromise settlement for smaller loans in “doubtful” and “loss” category. Using Securitization & SARFAESI Act Using Asset Reconstruction Company (ARC) Approaching Debt Recovery Tribunals (DRTs). Recovery Action against Large NPAs Circulation of Information of Defaulters- Strengthening Database of Defaulters

Fresh NPA Generation Rate (%) S No SCBs FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.5 2.3 2.4 2 Net NPAs (%) 1.0 1.1 0.9 3 Fresh NPA Generation Rate (%) 1.7 1.8 2.1 2.2 2.0 4 Net NPAs/Net Worth (%) 9.2 7.8 8.6 9.1 10.0

S No Private Banks FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.1 2.4 2.9 2.7 2.3 2 Net NPAs (%) 0.9 1.1 1.3 1.0 0.6 3 Net NPAs/Net Worth (%) 7.8 6.1 7.5 5.3 3.2

S No PSBs FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.7 2.2 2.0 2.3 2 Net NPAs (%) 1.1 1.0 0.9 3 Net NPAs/Net Worth (%) 12.1 11.2 11.4 13.5 13.4

RECOVERY STRATEGY willing to pay able to pay unable to pay unwilling to pay

LEAGAL TOOLS RECOVERY Lok Adalat Debt recovery Act Orissa and Bihar Money suit or Mortgage Suit. Debt Recovery Tribunal – 1993 Securitization and Reconstruction of Financial Assets and enforcement of Security Interest. (SARFAESI) - 2002 Sale of Financial Assets to Securitization/ Reconstruction Company.

RECOVERY OF DEBT Recovery of Debts Due to Banks and Financial Institutions Act, was passed by the Government of India (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions.

DRT The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Appointment of Presiding Officer (PO) and Recovery officer. (RO) Setting of DRT Offices.

DEBT RECOVERY TRIBUNAL Authority : Secured Loan 10 lac and above To Auction Defaulters Property Charged to Bank. To hear Appeal against SARFAESIA. STRUCTURE Presiding officer High court Judge or Officer of General Manager Rankwith Legal Background. RECOVERY OFFICER Chief Manager of sponsored Bank

PROCEDURE DEMAND NOTICE Valuation Possession Auction For unsecured portion - regular court For Appeal DRAT.

SARFAESI ACT 2002 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) Empowers Banks and Financial Institutions to recover their non performing assets without the intervention of the Court. The provisions of this Act are applicable only for NPA loans with outstanding above Rs.1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.

SARFAESI ACT 2002 The Act has made provisions for registration and regulation of Securitisation companies or Reconstruction Companies by the RBI, to facilitate securitisation of  financial assets of banks, empower SCs/ARCs to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and FIs to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default

Bank empowerment by ACT To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days. To give notice to any person who has acquired any of the secured assets 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.

Bank empowerment by ACT If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures: Take possession of the security Sale or lease or assign the right over the security Manage the same or appoint any person to manage the same

Implementation of SARFAESIA Appointment of Authorized person. Recall of loan 30 days notice The bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial assets. 60 days. Possession – Immovable Assets, Movable Assets. – Normally 30 days time to file objections. Auction of the property.

Sale to reconconstruction company. There are many Assets reconstruction Companies to whom Bank Sale its NPA Assets for which SARFAESI Act has spelt out the detail procedure. Some of them are Assets care and Reconstruction enterprises.(ACRE) ARCIL Pridhvi Asset Reconstruction and Securitisation Company Limited (PARAS)

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