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DEFINITION OF NPAS A NPA is a loan or an advance where; Interest and /or installment of principal remain overdue for a period of more than 90days in respect of a term loan , The account remains out of order in respect of an overdraft/ cashcredit The bill remains overdue for a period of more than 90days in the case of bills purchased and discounted Theinstallmentorinterestremainsoverduefortwocropseasonsincaseofshortdurationcropsandforonecropseasonincaseoflongdurationcrops


CATEGORIES OF NPA SubstandardAssets Which has remained NPA for a period less than or equal to12months . Doubtful Assets Which has remained in the substandard category for a period of 12months(mainly upto 3years ). Loss Asset s 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 .


PROVISIONING NORMS StandardAssets- generalprovisionofaminimumof 0.25% SubstandardAssets- 10%ontotaloutstandingbalance,10%onunsecuredexposuresidentifiedassub-standard . DoubtfulAssets- 100%totheextentadvancenotcovered byrealizablevalueofsecurity.Incaseofsecuredportion , provisionmaybemadeintherangeof20%to100%dependingontheperiodofassetremainingsub-standard LossAssets- 100%oftheoutstanding

Impact f NPAs upon  Banks:

Impact f NPAs upon Banks They erode current profits through provisioning requirements . They result in reduced interest income . They require higher provisioning requirements affecting profitsand accretion to capital . They limit recycling of funds, set in assets-liability mismatches , etc . Adverse impact on Capital Adequacy Ratio . ROE and ROA goes down because NPAs do not earn . Banks rating gets affected . Banks cost of raising funds goes up . RBIs approval required for declaration of dividend if Net NPA ratio is above 3%. Bad effect on Goodwill & equity value.

Underlying Reasns for NPAs in India :

Underlying Reasns for NPAs in India Internal Factors Inefficiency in management Slackness in credit management and monitoring Lack of co-ordination among lenders. Problem of bad credit appraisal. Inappropriate Technology/technical problems Funds borrowed for a particular purpose but not use for the said purpose. Project not completed in time. Poor recovery of receivables.

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Contd. Excess capacities created on non-economic costs . In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets . Business failures . Diversion of funds for expansion\modernization\setting upnew projects\helping or promoting sister concerns . Willful defaults, siphoning of funds, fraud, disputes,management disputes, Mis -appropriation etc ., Deficiencies on the part of the banks viz. in credit appraisal,monitoring and follow-ups, delay in settlement of payments\subsidiaries by government bodies etc.

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External Factors Recession . Input / power shortage Price escalation. Exchange rate fluctuation Accidents and natural calamities, Liberalization of Economy / removal of restrictions/reduction of tariffs. Sluggish legal system . Long legal tangles. Changes that had taken place in labour laws

Underlying Reasons for NPAs in India :

Underlying Reasons for NPAs in India Contd . Lack of sincere effort & Industrial recession . Scarcity of raw material, labour and other resources. Shortage of raw material, raw material\input priceescalation , power shortage, industrial recession, excesscapacity , natural calamities like floods, accidents. Failures, nonpayment\over dues in other countries,recession in other countries, externalization problems,adverse exchange rates etc. Government policies like excise duty changes, Importduty changes etc.,

Preventive Measrements for NPA :

Preventive Measrements for NPA Early Recognition of the Problem Identifying Borrowers with Genuine Intent Time liness and Adequacy of Response and Focus on Cash Flows Management Effectiveness Multiple Financing

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Four categories of early symptoms: Financial. Operational and Physical. Attitudinal Changes. Others ( death of person , competition in the market etc.)

Sale of NPAs to other Banks :

Sale of NPAs to other Banks A NPA is eligible for sale to other banks only if it has remained a NPA for at least two years in the books of the selling bank The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banks but not to bank , which originally sold the NPA The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasing. The bank may purchase/ sell NPA only on without recourse basis. If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA

Measures Initiated by RBI & Govt :

Measures Initiated by RBI & Govt Compromise Settlement Schemes Restructuring / Reschedulement Lok Adalat Corporate Debt Restructuring Cell Debt Recovery Tribunal (DRT) Proceedings under the Code of Civil Procedure Board for Industrial & Financial Reconstruction (BIFR )/AAIFR National Company Law Tribunal (NCLT) Sale of NPA to other banks Sale of NPA to ARC / SC under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 ( SRFAESI)Liquidation

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