Commercial Banking : NPAs :Banking Non Performing Assets 1 Commercial Banking : NPAs


NON PERFORMING ASSETS :NON PERFORMING ASSETS INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING NORMS (IRAC NORMS) & Asset Reconstruction Companies


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Slide 4:Banking Non Performing Assets 4 Bank Credit (% to GDP)


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Why Loan accounts go bad ? :Banking Non Performing Assets 8 Why Loan accounts go bad ? BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within… No contribution … No modernisation … Improper monitoring Industrial Relations.. Natural Calamities ... BANKER – SIDE Defective Sanction No post-sanction supervision, etc Delay in releases Directed lending … Slow decision making process Etc etc etc ….


Health Code System in Indian Banks during 1980’s :Banking Non Performing Assets 9 Health Code System in Indian Banks during 1980’s Satisfactory Accounts Irregular Accounts Sick-viable : Under Nursing Sick – Non-viable : Sticky accounts Advances Recalled Suit Filed Accounts Decreed Debts and Debts classified by the Bank as Bad/Doubtful Accounts


Asset Classification – 4 way - 1993 :Banking Non Performing Assets 10 Asset Classification – 4 way - 1993 Standard Assets All regular loan accounts & investments (Performing Assets) Non-Performing Assets Sub-Standard Assets Doubtful Assets Loss Assets


Performing Asset defined … :Banking Non Performing Assets 11 Performing Asset defined … An account (loan or investment) is classified as Performing Asset if it does not disclose any problems and carry more than normal risk attached to the business All loan facilities which are regular !


N P As : Definition :Banking Non Performing Assets 12 N P As : Definition An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A credit facility in respect of which the interest and/or instalment of principal has remained “past due” for a specified time.


Non Performing Assets :Banking Non Performing Assets 13 Non Performing Assets In accounting, originally Bad & Doubtful Debts In 1980s, RBI followed 8 point Health Code Also called Non Performing Loans (NPLs) or Stressed Assets An advance where interest and / or instalment of principal remain ‘overdue’ for a period of more than 90 days in respect of Term Loan / OD / CC /BP / BD / other accounts – investments, export finance, SSI/SME/ agricultural, housing loan, educational loan, lease and hire purchase …. Etc. Sub-standard, Doubtful and Loss Assets…


Recovery of Loans :Banking Non Performing Assets 14 Recovery of Loans Field Visits, Personal persuasion, Stock Statements Notices on due dates – Ordy, Regd, Legal … Civil Procedure, Winding Up Notices, … Seizure and disposal of assets thro’ auctions Criminal Action per Sec 138 of NI Act … Compromises – Interest reduction / waiver, deferment, Simple or Compound calculation Lok Adalat, DRT / BIFR Awards, OTS, CDR Asset Securitisation under SARFAESI Act …


Def’n of NPAs Chronologically :Banking Non Performing Assets 15 Def’n of NPAs Chronologically Mar 31, 1993 4 quarters Mar 31, 1994 3 quarters Mar 31, 1995 2 quarters Mar 31, 2004 1 quarter only ???


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Sticky Loans in Banks in India :Banking Non Performing Assets 17 Sticky Loans in Banks in India Year Loss Doubtful Sub-std 1998 6,242 27,146 17,428 1999 7,444 31,350 19,928 2000 7,558 33,688 19,594 2001 8,001 37,756 18,206


Sticky Loans in Banks in India (Rs. In crores) :Banking Non Performing Assets 18 Sticky Loans in Banks in India (Rs. In crores)


% NPAs to Total Advances (Rs in crores) :Banking Non Performing Assets 19 % NPAs to Total Advances (Rs in crores) Year NPAs Total Loans % 1998 50,816 3,52,696 14.4 1999 58,722 3,99,436 14.7 2000 60,840 4,75,757 12.8 2001 63,962 5,58,679 11.4 (Source : Trends & Progress : RBI, 2001)


NPAs as % to Total Advances :Banking Non Performing Assets 20 NPAs as % to Total Advances


IRAC NORMS :Banking Non Performing Assets 21 IRAC NORMS Master circular dated 17th July, 2004. Superceded earlier master circular dated 22nd August, 2003. Status-quo of classification in respect of earth-quake affected accounts available upto 15/07/2004. Natural Calamities – Floods, Cyclones, Earth quakes, Failure of Monsoon, Fire Accidents, etc...


ASSET TYPE :Banking Non Performing Assets 22 ASSET TYPE ?STANDARD ASSET / PERFORMING ASSET The account is not non-performing and does not carry more than the normal risk attached to the business. ?NON-PERFORMING ASSET (NPA) The asset ceases to generate income for the bank. (Para 2 of the Master Circular)


IDENTIFICATION OF NPA :Banking Non Performing Assets 23 IDENTIFICATION OF NPA ?Cash Credit / Overdrafts ? Account remains ‘out of order’ for 90 days or more. The account is treated as ‘out of order’ if : * Outstanding Balance remains continuously in excess of sanction limit/drawing power for 90 days or more. * No credit continuously for 90 days or more as on the date of Balance Sheet. * Credits in the account are not sufficient to cover interest debited during the same period.


IDENTIFICATION OF NPA … :Banking Non Performing Assets 24 IDENTIFICATION OF NPA … ?Term Loans ?Interest and/or instalment remains overdue for 90 days or more. ?Bills Purchased and ?Bill remains overdue for 90 Discounted days or more. ?Agricultural Advances ?Interest and/or installment remains overdue for two harvest seasons for short duration crop, one harvest season for long duration crop. ?Others ? Any amount to be received remains overdue for 90 days or more .


CLASSIFICATION NORMS :Banking Non Performing Assets 25 CLASSIFICATION NORMS ? Standard Asset The account is not non-performing. ? Sub-Standard Asset A sub standard Asset is one which has remained NPA for a period less than or equal 12 months. (w.e.f. 31st March 2005) ? Loss Assets These are accounts, identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off.


CLASSIFICATION NORMS :Banking Non Performing Assets 26 CLASSIFICATION NORMS ? Doubtful Asset - Three Categories Category Period Doubtful - I up to One Year Doubtful - II Up to Three Years Doubtful - III More than Three Years


PROVISIONING NORMS :Banking Non Performing Assets 27 PROVISIONING NORMS STANDARD ASSET 0.25% on Standard Assets on Global loan portfolio basis SUB-STANDARD ASSET 10% of total outstanding 20% of total outstanding if loan is unsecured ab initio (new guidelines)


PROVISIONING NORMS :Banking Non Performing Assets 28 PROVISIONING NORMS SUB-STANDARD (Cont’d) Banks are permitted to phase the additional provisioning upon reduction in transition period from 18 to 12 months Over a period of four years with minimum 20% each year (new guidelines) LOSS ASSET: 100% should be provided for


PROVISIONING NORMS :Banking Non Performing Assets 29 PROVISIONING NORMS DOUBTFUL ASSETS Period Provision (Secured +Unsecured) Upto 1 year 20% + 100% 1to 3 years 30% + 100% More than 3 years 100% + 100% (effective from 31st March 2005) Outstanding as on 60%, 75%, 100% on secured portion. 31st March 2004 2005 2006 2007


PROVISIONING NORMS :Banking Non Performing Assets 30 PROVISIONING NORMS Provision Under Special circumstances Normal provision on Government guaranteed advances. In case of advances guaranteed by DICGC/ECGC, Provision should be made only for balance in excess of the amount guaranteed by these corporations.


IMPORTANT ASPECTS :Banking Non Performing Assets 31 IMPORTANT ASPECTS ?Exempted Category (Para 4.2.10 of Master Circular) Advances against term deposits, NSCs, IVPs, KVPs and Life Insurance Policies need not be treated as NPAs, till security cover is sufficient to cover outstanding balance. Income to be recognised subject to availability of margin. Advance against gold ornaments / Government securities not exempt.


IMPORTANT ASPECTS :Banking Non Performing Assets 32 IMPORTANT ASPECTS ?Classification of a Borrower (Para 4.2.6 of Master Circular) All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. Obtain cross-branch confirmation for classification. Exception: Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement.


IMPORTANT ASPECTS :Banking Non Performing Assets 33 IMPORTANT ASPECTS ?Consortium Advances (Para 4.2.7 of Master Circular) Member banks shall classify the accounts according to their own record of recovery. Bank needs to arrange to get their share of recovery or obtain an express consent from the Lead Bank. Bank may obtain Lead Bank confirmation & cognizance of the same may be taken?


IMPORTANT ASPECTS :Banking Non Performing Assets 34 IMPORTANT ASPECTS ? Corporate Debt Restructuring (CDR) - (Para 4.2.15 of Master Circular) CDR is an institutional mechanism for evolving financial solution. CDR will be available only in respect of multiple banking/syndication/consortium accounts with outstanding exposure of Rs.20 Crores & above. (Not available for sole banking accounts) Accounting treatment for restructuring under CDR will be same as applicable to otherwise restructured accounts. ? Projects under implementation Treatment to be in line with Para 4.2.16 of Master Circular


GREENING ISSUES :Banking Non Performing Assets 35 GREENING ISSUES ?Sanction/extension of Additional facility / Adhoc facility. ?Enhancement of Limit. ?Conversion of Overdue Limits. ?Frequent Re-schedulement of Term Loans. ?Adjusting Loan of one borrower against other borrower.


INCOME RECOGNITION :Banking Non Performing Assets 36 INCOME RECOGNITION ? Income Recognition For NPA accounts income should be recognised on realisation basis. When an account becomes non-performing, unrealised interest of the previous year to be derecognised/ reversed. ? Adjustment of Recoveries - Priority Unrealised Expenses Unrealised Interest Amount of Principal Outstanding Clarification vide Master Circular - in the absence of clear agreement between the Bank and the Borrower, an appropriate policy to be followed in uniform and consistent manner.


DISCLOSURE :Banking Non Performing Assets 37 DISCLOSURE ? At Branch Level Auditor needs to report the compliance with IRAC norms of RBI with respect to classification & provisioning for NPA and income recognition in Long Form Audit Report (LFAR) of the branch. ? At Head Office Level Advances are disclosed net off NPA provisions & Interest Suspense. Accounting policy for classification, provisioning & income recognition need to be disclosed. Disclosure needs to be made as required in terms of the guidelines issued by the Reserve Bank of India in connection with Percentage of Net NPAs to Net Advances, Provision for Standard Assets & NPAs, Movements in NPAs, Movement in Provision for NPAs.


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Asset Reconstruction Companies :Banking Non Performing Assets 41 Asset Reconstruction Companies


Experience abroad :Banking Non Performing Assets 42 Experience abroad Spain - Dep Guarantee Fund : 1977-80 Chile - Cash Purchase of Bad Loans1982 USA - Resolution Trust Corp’n, 1989 Japan - Coop Cr’ Purchasing Co 1993 Poland : Rescheduled Bad Loans : 1994 Eastern Europe : Govt Bonds : 1994 (Hungary)


Experience abroad... :Banking Non Performing Assets 43 Experience abroad... Tanzania - 1988 Ghana - NPA Recovery Trust – 1989 Sweden - SECURUM - January 1993 Uganda - 1995 Philippines - Asset Privatisation Trust Malaysia - Soft loans by Central Bank Colombia, Czech, Slovak, etc too


Asset Reconstruction Companies :Banking Non Performing Assets 44 Asset Reconstruction Companies Capital from Banks/Financial Inst’ns ARCs in private sector like an SPV Staff from Banks/Financial Inst’ns Issue Bonds in lieu of Assets taken over Guaranteed by Government of India Stamp Duty to be exempted On par with Venture Funds for Inc. Tax


Developments in India :Banking Non Performing Assets 45 Developments in India Ordinance in June 2002 on Securitisation Law Enacted by Parliament in December 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) 2002 Powers to Lenders – To Seizure of Assets, Change of Management, Securitisation of Financial Assets, etc Challenged in Supreme Court by M/s. Mardia Chemicals Ltd., against right of ICICI Bank


Setting up of AR Companies in India :Banking Non Performing Assets 46 Setting up of AR Companies in India Asset Reconstruction Company India Ltd (ARCIL) – (SBI+ HDFC+ IDBI+ ICICI Bk) Asset Care Enterprise (ACE) – (IFCI + PNB) ARC to be floated by Kotak Mahindra Bank? ASREC – Andhra Bank, Stanchart, Deutsche and UTI Bk? Corp Bank, ING Vysya and Actis to start?


Definition of ARCs (RBI _ April 2003) :Banking Non Performing Assets 47 Definition of ARCs (RBI _ April 2003) A company which is set up with the objective of taking over distressed assets (Non Performing Assets) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable


Objectives of ARCs in India :Banking Non Performing Assets 48 Objectives of ARCs in India To buy out troubled loans from banks and make special efforts at recovering value from the assets, if necessary by special legislation, with special powers for recovery. Restructuring of weak banks to divest the bad loan portfolio — essential for a comprehensive restructuring strategy of weak banks.


ARCIL :Banking Non Performing Assets 49 ARCIL www.arcil.co.in Sponsored by SBI, ICICI Bank Ltd., IDBI Ltd. and Punjab National Bank Vision - Mission Statement Vision Be a major contributor to the Indian economy by capturing value from the impaired assets  Mission Maximise value through innovative resolution Establish fair and transparent business practices Facilitate development of market for distress debt


ARCIL : Shareholding Pattern :Banking Non Performing Assets 50 ARCIL : Shareholding Pattern


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Developments in 2004 :Banking Non Performing Assets 52 Developments in 2004 Revised Definition of NPA to 90 Days Banks managed to bring down NPAs < 3% SARFAESI Act, 2002 amended in Dec 2004 To set up Asset Reconstruction Companies Take possession of secured assets of borrowers Right to lease out, sell and realize such assets Right to take over the management of borrowers 60 days notice by lenders is adequate No appeal permissible unless borrowers deposit 50% amount due and approach DRT / DRAT


NPAs in Banks : March 2005 (Rs in Cr) :Banking Non Performing Assets 53 NPAs in Banks : March 2005 (Rs in Cr)


CDR mechanism :Banking Non Performing Assets 54 CDR mechanism Corporate Debt Restructuring mechanism Similar to UK, Thailand, Korea & Malaysia RBI guidelines to Banks and FIs in Aug’01 To ensure timely and transparent mecha-nism to restructure debts, outside purview of BIFR, DRTs and other legal proceedings To consider all viable entities with dues above Rs. 20 crores facing problems of repayment ...


CIBIL – www.cibil.com :Banking Non Performing Assets 55 CIBIL – www.cibil.com Credit Information Bureau of India Ltd Exchange of Credit Info among Banks/FIs Unscrupulous borrowers cannot play one bank against another for credit facilities Set up in January 2001 by SBI + HDFC + Dun and Bradstreet Info Pvt Ltd + Trans Union International Inc – Rs 25 cr Capital Formal set up 2005 onwards ...


Economic Times dt Jan 05, 2006 :Banking Non Performing Assets 56 Economic Times dt Jan 05, 2006 Bad Loans cross 16% of India’s GDP ARCIL puts figure at Rs. 2,36,000 crores Says unlocking value from NPAs will help banks meet additional capital requirements Gr NPAs in financial sector – Rs 1,11,000 crores; Restructured Standard Assets – Rs. 27,000 crores; Corporate Debt Restructring – Rs. 65,000 crores; Bad Loans Written off by Banks Rs. 77,000 crs.


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Gross NPAs as % of Total ASSETs :Banking Non Performing Assets 58 Gross NPAs as % of Total ASSETs


Net NPAs as % of Total ASSETs :Banking Non Performing Assets 59 Net NPAs as % of Total ASSETs


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Gross NPAs as % of Total Advancess :Banking Non Performing Assets 61 Gross NPAs as % of Total Advancess


Net NPAs as % of Total Advances :Banking Non Performing Assets 62 Net NPAs as % of Total Advances


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