NPA Management

Asset Classification

Assets

Performing Non Performing Assets

Assets (NPA)

Standard Sub -Standard Doubtful Loss

Assets Assets Assets Assets
 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 BANKER – SIDE

Defective Sanction
Lack of Planning No post-sanction
Diversion of Funds supervision, etc
Disputes within Delay in releases
Directed lending
No contribution Slow decision
No modernization making process
Improper monitoring
Industrial Relations
Natural Calamities
 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
• 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

 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 2.88 6.32 NA
2002 6.65 8.52 1.53 4.71 2.04
2003 5.33 6.69 3.36 2.39 1.53
2004 5.63 5.32 5.48 3.46 3.46
2005 4.5 3.86 5.21 2.39 2.39
2006 3.48 0.98 2.21 1.29 1.29
2007 2.65 0.2 1.65 1.39 1.39
2008 1.87 0.29 0.72 0.98 0.98
2009 1.32 0.28 0.78 0.72 0.87
 GROSS & NET NPA OF COMMERCIAL
BANKS (in Rs. Crores)
Gross Net

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
 GROSS &NET NPA (as
percentage of total assets)
 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
S SCBs FY 2007-08 2008-09 2009-10 2010-11
No 2006-07
1 Gross NPAs 2.5 2.3 2.3 2.4 2.3
(%)
2 Net NPAs 1.0 1.0 1.1 1.1 0.9
(%)

3 Fresh NPA 1.7 1.8 2.1 2.2 2.0

Generation
Rate (%)
4 Net 9.2 7.8 8.6 9.1 10.0
NPAs/Net
Worth (%)
S Private FY 2007-08 2008-09 2009-10 2010-11
No Banks 2006-07

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 7.8 6.1 7.5 5.3 3.2

NPAs/Net
Worth (%)
S PSBs FY 2007-08 2008-09 2009-10 2010-11
No 2006-07

1 Gross NPAs 2.7 2.2 2.0 2.2 2.3

(%)

2 Net NPAs 1.1 1.0 0.9 1.1 1.1

(%)

3 Net 12.1 11.2 11.4 13.5 13.4

NPAs/Net
Worth (%)