Definition, Classification, Reasons, Problems Caused, Effects Explained, Methods for Recovering Losses for NPA's. Conclusion.

1. Non-Performing Assets
(NPA's)
A Group Effort by :-
1. Hardik Bhaavani
2. Alan Naeem
3. Shubh Tiwari
4. Sagar Pujara
5. Rajkumar Kushwaha
6. Hit Alodariya
7. Utsav Haldar
8. Suresh Dangar

2. NPA ? What is it ?
• Simple View :- An Asset becomes Non-Performing when it ceases to
generate income for the Bank.
• A Non-performing asset (NPA) is defined as a credit facility (Ex;
Overdraft, Cash Credit, Gold Loan, Mortgaged Loans, etc.) in respect
of which the interest and/or installment of Bond/Principal has
remained ‘past due’ for a specified period of time.
• Detailed View :- A Non-Performing Asset (NPA) refers to a
classification for loans or advances that are in default or are in
arrears on scheduled payments of principal or interest.

3. Conditions for Assets/Debt to become NPA :-
In most cases, Debt is classified as nonperforming when loan
payments have not been made for a period of 90 days.
While 90 days of Non-Payment is the standard, the amount of
elapsed time may be shorter or longer depending on the terms
and conditions of each loan. ( i.e. it depends on the Bank to
classify a Loan as an NPA based on the Situation )

4. Conditions for Classification of Assets/Debt as
NPA in India :-
With Effect from 31st March, 2004, an NPA shall be a Loan or an
Advance. The Following are the Conditions for Classification of
Assets/Debt as an NPA :-
• Interest and/or Installment of Principal remains overdue for a
period of more than 90 days in respect of a Term Loan ( Loans
for Pre-Negotiated Period ranging from 3 months to 30 years
with Un-Fixed interest rates ).
• The Account remains "Out of Order" in respect of an Overdraft/
Cash Credit.

5. The Bill remains overdue for a period of more than 90 days in
the case of bill purchased and discounted.
Interest and/or Installment of Principal remains overdue for Two
Harvest Seasons but for a period not exceeding two and a half
year in the case of an advance granted for agricultural purposes
Any Amount to be received remains overdue for a period of
more than 90 days in respect of other accounts.

6. Reasons for Occurrence of NPAs :-
These
loans can
occur
due to
the
following
reasons :-
Usual banking operations /Bad lending practices
A banking crisis (as happened in USA, South Asia and
Japan)
Overhang component (due to Environmental Reasons,
Natural Calamities, Business Cycle, Disease Occurrence...)
Incremental component (due to internal bank
management, like credit policy, terms of credit, etc...)

7. Problems caused by NPAs :-
Depositors do not get rightful returns and many times may lose uninsured deposits.
Banks may begin charging higher interest rates on some products to compensate
NPA losses.
Bank shareholders are adversely affected.
Bad loans imply redirecting of funds from good projects to bad ones. Hence, the
economy suffers due to loss of good projects and failure of bad investments.
When bank do not get loan repayment or interest payments, liquidity problems
may ensue.

8. The NPA Effects Explained :-
• Non-Performing assets are typically listed/shown on the Balance
Sheets of Banks. This is an Important Measure of Performance of
Banks when compared with the Profitability Ratio. ( i.e., More Profit +
Less NPA = High Performance and Better Growth Possibility of the
Bank )
• The NPA's as mentioned above affect the Performance of the Bank
and thus, it affects the Market Value of Shares ( i.e., Market
Capitalization ) of the Bank.
• Thus, they adversely affect the National Economy.

9. • It Creates Three Distinct Burdens on the Lending Bank :-
• The Non-Payment of Interest or Principal reduces Cash Flow for
the Lender, which can disrupt Budgets and Decrease Earnings.
• Loan Loss Provisions, which are set aside to cover potential
losses, Reduce the Capital available to provide Subsequent
Loans. ( Capital Blocked in NPA Provisions = Lesser Loans
available for Dispersion = Lesser Business Opportunities )
• Once the Actual Losses from Defaulted Loans are determined,
they are Written Off against Earnings.
• It is the Main Reason for Bankruptcy of many Co-Operative Banks
because NPA's are mostly created by Willful Defaulters and/or
Borrower's without adequate Securities Mortgaged.

10. Classification of Assets which are Non-
Performing :-
•Sub-Standard Assets
•Doubtful Assets
•Loss Assets
Banks are Required to
classify Non-
Performing Assets into
three categories
according to the
period for which the
asset has remained
non-performing and
the realizability of the
dues :-

11. 1.) Sub-Standard Assets
• A Sub-Standard Asset would be one which has remained NPA for a
Period Less than or Equal to 12 Months.
• Sub-Standard Asset is the Asset in which Bank have to maintain 15%
of its reserves.
2.) Doubtful Assets
• A Doubtful Asset is one which has remained NPA for a period
exceeding 12 months. ( i.e. After it has remained in the Sub-Standard
Category for 12 Months )

12. 3.) Loss Assets
• All those assets which cannot be recovered are called as Loss Assets.
• Loss assets are Assets where Loss has been identified by the Bank,
through internal or external auditor or central bank inspectors, but
the amount has not been written off, wholly or partly.

13. Methods for Managing/Recovering Losses
from NPAs :-
One Time
Settlement
Lok Adalat
Debt Recovery
Tribunals
Corporate
Debt
Restructuring
SARFAESI Act
Asset
Reconstruction
Companies

14. a.) One Time Settlement
• Banks have to devise one-time compromise settlement scheme for
the resolution of NPAs, as a part of their Loan Recovery Policy.
• According to the One-time Settlement Formula, there is a Minimum
Amount Prescribed to be Covered.
• The Minimum Amount to be covered in case of Doubtful NPAs is 100%
of the Outstanding Balance ( without considering Interest ) in the
Account as on that date.
• The Minimum Amount to be covered in case of Sub-Standard NPAs is
100% of the Outstanding Balance plus Interest at the Existing Prime
Lending Rate till date of Final Payment. ( View :- Sub-Standard NPA will
convert into a Regular Loan after Agreement )

15. b.) Lok Adalat's
• The Indian Banks’ Association (IBA) has been issuing guidelines to
member institutions for taking up of cases for settlement through Lok
Adalat's.
• Cases involving an amount up to Rs.5 lakh may be referred to Lok
Adalat's.
• There are certain advantages in using the forum of Lok Adalat's
by banks and financial institutions in compromise settlement
of their NPAs :-
• There is no court fees involved when fresh disputes are referred to it.
• If no settlement is arrived at, the parties can continue with court
proceedings.
• Its Decrees have Legal Status and are Binding.

16. c.) Debt Recovery Tribunals & Debt Recovery
Appellate Tribunals
• The Order Passed by Debt Recovery Tribunal is appealable to a Debt
Recovery Appellate Tribunal.
• The Central Government sets up the Tribunals and provides them
with a Presiding Officer, Recovery Officers and other employees.
• Every Bank and Financial Institution can initiate the Procedure of
Recovery by making an Application to the Tribunal within the Local
Limits of whose Jurisdiction the Defaulter Company is Located.

17. d.) Corporate Debt Restructuring
• Corporate Debt Restructuring is the Reorganization of a Distressed
Company's ( a term in Corporate Finance used to indicate a condition when
promises to Creditors of a Company are broken or honored with difficulty )
outstanding obligations ( Liabilities ) to restore its Liquidity and keep it in
Business.
• It is often Achieved by way of Negotiation between Distressed companies
and their Creditors, such as Banks and other financial institutions, by
Reducing the total amount of Debt the company has, and also by
decreasing the interest rate it pays while increasing the period of time it
has to pay the obligation back.
• Occasionally, some of a company's debt may be forgiven by creditors in
exchange for an equity position in the company. Also, Mergers and
Acquisitions might take place with Substantial changes in the Management
of the Company.

18. e.) SARFAESI Act
• The Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002 is known as
the SARFAESI Act.
• It is an Indian Law which allows Banks and other Financial Institution
to Auction Residential or Commercial Properties to Recover Loans.
(Gujarati = નિલામી)
• The Act deals with the following three aspects :-
• Securitization
• Asset Reconstruction
• Security Enforcement

19. • Securitization is Conversion of a Financial or Non-Financial Asset into
Securities.
• Mortgage-backed securities ( Ex; Land ) are a perfect example of
Securitization.
• Asset Reconstruction is a Financial Tool for Corporate Debt Restructuring.
• Asset Reconstruction means Acquisition by any Securitization Company or
Reconstruction Company of any right or interest of any bank or financial institution in
any Financial Assistance ( Loans Given ) for the purpose of Realization ( Recovery ) of
such Financial Assistance.
• Enforcement of Securities Interest confers the Right on Lenders ( Banks ) to
Exercise Securitization.
• This Law is not Applicable on Unsecured Loans and when the Principal Due
is less than 20% of the amount advanced.
• It is an Effective Weapon to Recover NPA's.

20. f.) Asset Reconstruction Companies
• An Asset Reconstruction Company is a specialized financial
institution that buys the NPAs from Banks and Financial Institutions so
that the latter can clean up their balance sheets.
• In other words, ARCs are in the business of buying bad loans from
Banks.
• This helps Banks to concentrate in Normal Banking Activities.
• Banks rather than going after the defaulters by wasting their time and
effort, can sell the bad assets to the ARCs at a mutually agreed value.

21. An
Outlook
of
Figures
from =
January
4, 2016

22. A Global
View of
Data
from =
December
28, 2017

23. Conclusion
Thus, NPA is not to be taken lightly
for the Economy as it affects the
overall development of the
Economy and it is a Serious
Problem which needs to be Sorted
Systematically for the Growth of
the Nation and its People.
Constant and Continuous Efforts
are Needed in this Direction to
Solve the Problem of NPA's in India
and to achieve Sustainable
Growth.

24. Thank You
THE END