Non performing assets & bad banks

1. Banking Management
Topic : Non-Performing Assets
&
Bad Banks
By
M M KARTHIK B.COM; MBA.

2. MEANING : NON PERFORMING ASSETS(NPA)
• NPA is a classification used by the financial institution that refers to
loans that are in jeopardy(loss) of default.
• Loans which given by banks to borrowers, once borrower fail to repay
either interest or sum after 90 days it is treated as a NPA.

3. A SHORT HISTORY OF NPA
• The Narasimham committee(1991) identified NPA as one of the
possible causes/effects of the malfunctioning of the public sector
banks(PNBs). NPAs are those categories of assets like advances, bills
discounted, overdraft, cash credits which cease to generate income
for the bank.
• Basis for treating a credit facility as NPA :
1. where interest on instalments on a term loan overdue for 90 days
2. any bill overdue for a period of 90 days
3. any cash credit remains overdue for 90 days

6. STRESSED ASSETS = NPAs + RESTRUCTURED LOANS
+ WRITTENOFF ASSETS.
• RESTRUCTURED LOANS
•
• EXTENDED REPAYMENT PERIOD
• REDUCED INTEREST RATE
• CONVERTING A PART OF THE LOAN INTO EQUITY
• PROVIDING ADDITIONAL FINANCING
• OR SOME COMBINATION OF THESE MEASURES

7. WRITTEN OFF ASSETS
• THE LENDER DOES NOT COUNT THE MONEY, BORROWER OWES TO
HIM
• IT DOES NOT MEAN THAT THE BORROWER IS PARDONED OR
EXEMPTED

9. MANAGEMENT OF NPAs
• Debt Recovery Tribunals
• Debt Recovery Appellate Tribunal(DRAT)
• SARFAESI Act
• Asset Reconstruction Company(ARC)

10. SARFAESI Act(2002)
• Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act.
• Upon loan default, banks can seize the securities(except agricultural
land) without intervention of the court

11. Debts Recovery Tribunals(DRTs) and Debts
Recovery Appellate Tribunal(DRATs)
• Have been established by the govt of india under Act 51 of 1993 for
expeditious adjudication and recovery of debts due to banks and
financial institutions
• Deals NPAs above 10 lakhs

12. Assets Reconstruction Company
• It is a specialized financial institutions that buys the NPAs or bad
assets from the bank and financial institutions so that the latter can
clean up their balance sheets. Or in other words, ARCs are in the
business of buying bad loans from banks.
• Example : ARCIL , Reliance Assets Reconstruction company ltd

13. NPA provision norms

14. Calculating NPAs
• GNPA:
Gross Not Performing Assets is an absolute amount. It tells you the
total value of the gross non performing assets for the bank in a particular
quarter or financial year.
• NNPA:
Net Non performing Assets subtracts the provisions made by the bank
from the GNPA. Exact value after provisions.
• NPA Ratios:
Expressed as a percentage of total advances.
GNAP=Total GNPA/total advances
NNPA= Total NNPA/total advances

15. BAD BANKS
• A bad bank is a financial entity set up to buy Non-Performing Assets
(NPAs), or Bad Loans, from banks.
• The aim of setting up a bad bank is to help ease the burden on banks by
taking bad loans off their balance sheets and get them to lend again to
customers without constraints.
• After the purchase of a bad loan from a bank, the bad bank may later try to
restructure and sell the NPA to investors who might be interested in
purchasing it.
• A bad bank makes a profit in its operations if it manages to sell the loan at
a price higher than what it paid to acquire the loan from a commercial
bank.
• However, generating profits is usually not the primary purpose of a bad
bank — the objective is to ease the burden on banks, of holding a large pile
of stressed assets, and to get them to lend more actively.

16. • Pros:Single Exclusive Entity:
• It can help consolidate all bad loans of banks under a single exclusive entity.
• The idea of a bad bank has been tried out in countries such as the U.S., Germany, Japan and
others in the past.
• The troubled asset relief program, also known as TARP, implemented by the U.S.
Treasury in the aftermath of the 2008 financial crisis, was modelled around the idea of
a bad bank.
• Freedom to Use Freed-up Capital:
• By taking bad loans off the books of troubled banks, a bad bank can help free
capital of over Rs 5 lakh crore that is locked in by banks as provisions against these
bad loans.
• This will give banks the freedom to use the freed-up capital to extend more
loans to their customers.

17. cons
• Merely Shifts one Pocket of Government to another:
• Bad bank backed by the government will merely shift bad assets from the hands of
public sector banks, which are owned by the government, to the hands of a bad bank,
which is again owned by the government.
• There is little reason to believe that a mere transfer of assets from one pocket of
the government to another will lead to a successful resolution of these bad
debts when the set of incentives facing these entities is essentially the same.

18. THANKYOU