Chapter-2 Introduction & Literature Introduction :

In recent times there has been extensive disxussion on the accumulation of huge non performing assets on the balace sheets on the Indian banks, more specifically, Private Bank. Have larger Npas compared to that of publice banks. This raisen a concern in the industry and academia NPAs: Reduces the profitability of a bank; Weaken its financial health; Erode its solvency; The prsenenc of large NPAs affects a banks profit number of ways;
a) b)

Through reduced interst income. Through the creation of reservers and provision (to act as cushioun against loan lossesss) at the edxpense of profits The decline in profit has a bearing on variables like the capital to risk-weighted assets ratio (CRAR or the Capital Adequacy ratio). With the dip in the profit it become difficult for the Bank to raise.Tier-1 capital. Non Performing Assets:

A Non performing Assets is an advance where the borrower fails to meet the commitment Beyound a particular piint of tmes. To be more precise, an NPA is an advance wher interest or Instalmet payment remain overdue for over 90 days. These occur because of averiey of factore, which may be both internal as well as external to any bank. An assets including a leased asset, become non performing assets when it ceases to generate income for the bank. A loan becomes NPA when one of the following applicable; Interest or installment of principal emains = overduen for a peiod of more than 90 days in respect of a term loan. The account remain = out of orede in respect of an Overdraft/ Cash credit The bill remain over due for perio of moer than 90 days in the case of bills purchased and diccoutned. A loan granted for short duration crops will be treted as NPA, if the isstllment of the principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops will be treted as NPA, if the instloment ot the principal or interest theron remains overdue for one crop season.

Classification of NPAs;
The NPA. Are broadly classified into two categories viz. Gross and net Gross NPA reflect the quality of the loan made by banks Net NPA shows the actual burden of the banks

Asset Classification: Banks in India are required to classify NPAs in the following categories:

a)The period for which the asset has remained nonperforming b)The reliability of the dues.

Sub-standared assets 2.Doubtful assets. 3.Loss assets

1. 1.

Sub- standerad assets

With effect from 31 march 2005, a sub- standard would be one, which has reminded NPA for. A period less than or equal to 12 months. The following features are exhibited by sub-standard assets: The current net worth or the current market values of the security charged is not enough to ensure recovery of dues to the banks in full; The asset has defined credit weaknesses that jeopardize the liqudation of the debt.

1. Doubtful Assets

With effect from 31 March 2005, an assets would be classified as doubtful in that has reminded in the sub-standard category for a period of 12 month.

2. Loss Assets
A loss assets is the one which is considered uncollectable and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. Also, these assets would have been identified as = loss assets by the bank or internal or external auditor s or the RBI inspection but the amount would not been written off whoolly.

Provisiong Requrement for Loans or Advances

All banks shall maintain a provisoin for Loans Losses Account which shall be created by charges to provision expenses in the income statement and shall be maintained at al level adequate to absorb potential losses in the laonas or advance prortfolio . In detrming the individual loans or advances or gropu of laans or advace. The provision for Loan Losess Axxount shall always have cresit balace .Addition to or reductions of the provision for Loan Lossess Account shall be made only through provision in the income statement.

Based on the asset classification, the banks are requriemdt to maek a provision against Loan or advance. Bank shall maintain the minimum provision percentage against the outstanding provision and of each loan or advaces. Taking ito account the time lag beeetween an account become doubtful recovery, its recongintoin as an impaired loasn the realization of the security charged to the bank and likely erosion over time in the value of this secueity, banks classifies imaparied loans into =standard ,= doubtful, =loss assets, and make provision against these. The weight ages as per clsssification are as follows:

LOSS ASSETS should be written off or 100% provided

for.

DOUBTFUL ASSETS

Provision of 100% to the extend the advance is not coverd by the realization value of the security (to which bank has a valid recourse) That portion of the advaces covered by realizable valur of the security will be provided for the following basis:
Provision (for

Period for which advance has remained requirement the secured portion)

In doubtful category

Up to 1 year 1 to 3 year

20% 30%

SUB-STANDARD ASSETS
A General provision of 10% on total outstanding should be made (without making any Allowance for E.C. G.C. gurantee cover bad securities available). The = unsecured exposure identified as sub- standard would attract and additional provision of 10% thus constituting 20% on the outstanding balance.

STANDARD ASSETS
Under neither existing norms, bans shall make a general provison o minimum of 0.4% -1% on standard assets on global loan portfolio basis.