NPAs are a growing concern in banks. This ppt deals with concept of NPAs, RBI's prudential guidelines regarding income recognition, asset classification and provisioning, tools for NPA management available with banks

1. NPAs and their
management in banks
1

2. Index
NPAs – An Introduction
Significance of NPA reduction
Income Recognition & Asset Classification
Valuation of security & Write Off (Provisioning)
Tools of management of NPAs by Banks
2

3. NPA – An Introduction
Definition & Identification of NPA
A Non-performing asset (NPA) is defined as a credit facility
in respect of which the interest and/or instalment of principal
has remained ‘past due’ for a specified period of time.
An asset, including a leased asset, becomes a non-performing
asset when it ceases to generate income for the bank.
With a view to moving towards international best
practices and to ensure greater transparency, it was
decided to adopt the “90 days’ overdue” norm for
identification of NPAs, from the year ending March 31,
2004.
3

4. Definition & Identification of NPA (contd….)
Accordingly, with effect from March 31, 2004, a non-performing asset
(NPA) shall be a loan or an advance where –
i.Interest and/or instalment of principal remain overdue for a period of
more than 90 days in respect of a term loan.
ii.The account remains “out of Order” for a period of more than 90
days, in respect of an Overdraft/Cash Credit (OD/CC) [Balance above
limit, within limit but no credits, outstanding balance more than DP,
facility not renewed in time].
iii.The bill remains overdue for a period more than 90 days in the case
of bill purchased and discounted from the date the bill become due for
payment.
iv.Interest and/or instalment of principal remains overdue for two
harvest seasons in case of short term loans and one crop season in case
of long/medium term agricultural loans including crop loans.
v.Any amount to be received remains overdue for a period of more
than 90 days in respect of other accounts.
4

5. NNPPAA SSttaattiissttiiccss
Gross NPA level in the banking system has gone up:-
 March 31, 2010 = Rs.59,434 crore
March 31, 2011 = Rs.74,617 crore
March 31, 2012 = Rs.1,42,000 crore
March 31, 2013 = Rs.1,64,462 crore
(about 3.68% of advances).
Rating agency ICRA said banks’ NPA ratios may
see a sharp rise to 5.5-6.5% in June 30, 2015 from
the present 3.3% once the RBI’s revised guidelines
on bad asset classification come into force.

6. Significance of NPA reduction
Increase in profitability.
Consistent income generation.
Increase in free reserves.
Availability of more funds for operative purposes.
Less provisioning requirements.
Strengthens bank’s reputation.
Enhances customer confidence.
Highlights sound credit monitoring system of bank.
6

7. Income Recognition && AAsssseett CCllaassssiiffiiccaattiioonn
RBI has issued following guidelines for
recognition of income from advances and
asset classification thereof
The policy of income recognition has to be objective and based on
the record of recovery. Internationally income from non-performing
assets (NPA) is not recognised on accrual basis but is booked as
income only when it is actually received. Therefore, the banks should
not charge and take to income account interest on any NPA. This will
apply to Government guaranteed accounts also.
 However, interest on advances against Term Deposits, National
Savings Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas
Patras (KVPs) and Life policies may be taken to income account on the
due date, provided adequate margin is available in the accounts.
7

8. Sub-standard assets:
With effect from March 31, 2005, a substandard
asset would be one, which has remained NPA for a
period less than or equal to 12 months.
Doubtful Assets:
With effect from March 31, 2005, an asset would be
classified as doubtful if it has remained in the
substandard category for a period of 12 months.
D1-Up to 12 months in doubtful category
D2-Up to 36 months in doubtful category
D3-above 36 months in doubtful category
Loss Assets:
A loss asset is one where loss has been identified by
the bank or internal or external auditors or by the RBI
inspection but the amount has not been written off
wholly.

9. Valuation of security & Write Off
(Provisioning)
The assets e.g. immovable/ movable property,
current assets, shares, guarantees etc. mortgaged/
charged to the bank against loan facilities availed
by the borrowers are known as Security for loans.
The valuation of security is a critical factor for
taking appropriate decision while recovering
Bank's dues through various means viz.
OTS/NS/Assignment of Debts/Transfer of
accounts to ARC/Portfolio sale to other Banks/
FIs/ NBFCs.
9

10. Normally, valuation shall comprise book value,
fair market value, realizable value (as a going
concern) and distress sale value of the assets.
Wherever necessary, valuation of business
enterprise as a going concern may also be carried
out.
The valuation of underlying securities
(movable/immovable assets) in respect of all
assets shall be carried out before considering
proposals as stated above. The valuation shall be
of a recent date, at least not older than one
year.

11. For NPAs, valuation of securities shall be carried out
by the empanelled valuer as per extant guidelines of
RBI.
The valuation shall be generally done by
professionally qualified independent valuers having
no direct or indirect interest in the Bank.
In case of valuation of securities which are `Rs50
crore and above, two independent valuations are to be
carried out.
11

12. Provisioning Norms for Non-Performing Assets and
Restructured Advances
Category of Advances Revised rates
w.e.f. April
2011
Sub- standard Advances
 Secured Exposures
 Unsecured Exposures
 Unsecured Exposures in respect of
Infrastructure loan accounts where certain
safeguards such as escrow accounts are
available
15
25
20
 Doubtful Advances – Unsecured Portion 100
Doubtful Advances – Secured Portion
 For Doubtful upto 1 year
 For Doubtful > 1 year and upto 3 years
 For Doubtful > 3 years
25
40
100

13. Provisioning Norms for NPA and Restructured Advances
(contd…..)
Category of Advances
Revised rates
w.e.f. April
2011
Loss Advances 100
Restructured accounts classified as standard
2
advances
 in the first two years from the date of
restructuring ; and
 in cases of moratorium on payment of
interest/principal after restructuring – period
covering moratorium and two years thereafter.
Restructured accounts earlier classified as
NPA and later upgraded to standard category
 in the first year from the date of
Upgradation
2

14. Tools available wwiitthh bbaannkkss ttoo mmaannaaggee
tthheeiirr NNPPAAss
 OTS/ NS
 Compromise settlement through Lok Adalats.
 Restructuring including CDR
 Filing recovery suit with DRT /High court
 Sale of assets under SARFAESI Act
 Sale of NPAs to ARCs
14

15. OTS and NS
OTS means One Time Settlement of dues. Generally bank
prefers lump sum repayment at the earliest. However,
repayment period may be extended upto 12 months.
NS means Negotiated Settlement of dues. The only
difference between OTS and NS is that in NS, repayment
period exceed 12 months.
Normally if the settlement amount is received in shorter
period say within three months, no interest is charged.
However, after period of three months and for NS, interest
is charged on balance amount.
There is no specific formula or framework to arrive at OTS
amount. However, OTS/NS has to be done by each bank in
accordance with recovery loan policy approved by Board of
Directors of respective bank.
Skill of negotiation plays vital role in fetching good
OTS/NS amount.

16. Compromise settlement through Lok
Adalats
Constituted under the Legal Services Authority Act 1987
Have been set up to help banks to settle disputes involving accounts
in “Doubtful” and “ Loss “category with an outstanding balance of
Rs20 lakh
Help in resolving disputes between the parties by conciliation,
mediation,compromise or amicable settlement and thereby reduce
burden on courts
Conferred adjudicial status and every award of Lok Adalat shall be
deemed to be decree of a civil court and no appeal can be made to any
court against the award made by Lok Adalat
16

17. Compromise settlement through Lok
Adalats(concld)
DRTs/DRATs have been empowered to organise Lok
Adalats to decide on cases of NPAs of Rs10 lakh and
above to reduce the stock of NPAs
Despite being a popular method, banks find difficulty
in bringing the parties together when the Lok Adalat
meets
17

18. Restructuring including CDR
The guidelines issued by the Reserve Bank of India on restructuring of
advances (other than those restructured under a separate set of
guidelines issued by the Rural Planning and Credit Department
(RPCD) of the RBI on restructuring of advances on account of natural
calamities) are divided into the following four categories :
(i) Guidelines on restructuring of advances extended to industrial
units.
(ii) Guidelines on restructuring of advances extended to industrial
units under the Corporate Debt Restructuring (CDR) Mechanism
(iii) Guidelines on restructuring of advances extended to Small and
Medium Enterprises (SME)
(iv) Guidelines on restructuring of all other advances.
In these four sets of guidelines on restructuring of advances, the
differentiations were broadly made based on whether a borrower is
engaged in an industrial activity or a non-industrial activity. 18

19. Restructuring under CDR-OBJECTIVES OF CDR
SYSTEM
TO ENSURE TIMELY AND TRANSPARENT MECHANISM FOR
RESTRUCTURING
TO PRESERVE VIABLE CORPORATES
TO MINIMISE LOSSES TO CREDITORS AND OTHER STAKE HOLDERS
TO ENSURE ORDERLY AND COORDINATED RESTRUCTURING
PROGRAMME
OUTSIDE THE PURVIEW OF BIFR, DRT AND OTHER LEGAL PROCEEDING
FOR THE BENEFIT OF ALL CONCERNED

20. STRUCTURE OF CDR SYSTEM
3-TIER STRUCTURE:
• CDR STANDING FORUM AND ITS CORE GROUP
• CDR EMPOWERED GROUP
• CDR CELL

21. CDR(contd)
ELIGIBILITY CRITERIA
• ALL REFERENCES TO BE MADE TO CDR CELL
• CORPORATES HAVING MULTIPLE BANKING
ACCOUNTS/SYNDICATION/CONSORTIUM ACCOUNTS
• CORPORATES WITH OUTSTANDING EXPOSURE OF Rs.10
CRORE(BOTH FUND BASED AND NON-FUND BASED) AND
ABOVE BY BANKS/FIs
• CATEGORY 1 CDR SYSTEM: STANDARD, SUB-STANDARD
CASES
• CATEGORY 2 CDR SYSTEM: DOUBTFUL CASES
21

22. • CONCEPT OF ‘SUPER MAJORITY’ TO
OPERATE FOR GRANTING APPROVALS TO
THE RESTRUCTURING PROPOSALS.
• IF 75% OF THE SECURED LENDERS, BASED
ON OUTSTANDING EXPOSURE AND 60% BY
NO., APPROVE THE PROPOSAL, THE SAME
SHALL BE BINDING ON OTHER SECURED
LENDERS. 22

23. LEGAL BASIS PROVIDED BY:
DEBTOR-CREDITOR AGREEMENT (DCA)
INTER-CREDITOR AGREEMENT (ICA)
DCA
DEBTORS TO EXECUTE DCA AT TIME OF ORIGINAL
LOAN DOCUMENTATION (FUTURE CASES) OR AT THE
TIME OF REFERENCE TO CDR CELL
DCA, AMONG OTHER THINGS, WOULD HAVE A
‘STANDSTILL’ CLAIM FOR 90/180 DAYS
ICA
ALL PARTICIPANTS TO EXECUTE ICA, WHICH, INTER
ALIA, HAS PROVISIONS ON ENFORCEMENT AND
PENAL CLAUSES.
23

24. Filing Recovery suits with Debt
Recovery Tribunals(DRTs)
Set up under The Recovery of Debts to Banks and FIs
Act, 1993
Under the Act, two types of Tribunals set up:DRTs
and DRATs
DRTs have been empowered to decide on cases of
advance of Rs10 lakh and above

24

25. Filing Recovery suits with Debt
Recovery Tribunals(DRTs
DRTs have become more active as they have been
vested with new powers such as power to attach
defendant’s property/assets before judgement, penal
provisions for disobedience of the tribunal’s order and
appointment of receiver with powers of realisation,
management,protection and preservation of property
At present there are 28 DRTs and 9 DRATs
25

26. Action under SARFAESI Act
GOI enacted the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act 2002 for enforcement of
security interest for realisation of dues of Banks/ FIs without the
intervention of courts or tribunals
This Act is a step towards bringing down the level of risk in the
system and encouraging banks to lend
The Act deals with the 3 concepts of securitisation, asset
reconstruction and security enforcement ,which have been
interwoven to deal effectively with the problem of NPAs
26

27. SARFAESI ACT(contd)
31. Provisions of this Act not to apply in certain cases
The provisions of this Act shall not apply to--
(a) a lien on any goods, money or security given by or under the
Indian Contract Act, 1872 (9 of
1872; or the Sale of Goods Act, 1930 (3 of 1930) or any other law for the
time being in
force;
(b) a pledge of movables within the meaning of section 172 of the
Indian Contract Act, 1872 (9
of 1872);
(c) creation of any security in any aircraft as defined in clause (1) of
section 2 of the Aircraft
Act, 1934 (24 of 1934);
(d) creation of security interest in any vessel as defined in clause (55)
27

28. Sale of NPAs to ARCs
ARCs established under SARFAESI Act 2002
As on date 14 ARCs in India, oldest being Asset Reconstruction Co
(India) Ltd, Mumbai (ARCIL) and latest being UV Asset
Reconstruction Company Ltd, New Delhi
Banks/ FIs sell NPAs to ARCs either through bilateral deals or through
auction route.
ARCs are an important constituent of financial system as
i)they isolate NPAs from the balance sheets of Banks/FIs and thereby
enable them to focus on their core activities
ii) Facilitate development of market for distressed assets
28

29. Thank you
Jyoti Sharma
Ex-DGM, IDBI Bank Ltd and
ex-VP, India SME Asset Reconstruction Company Ltd
E-mail: jyotiajay2001@yahoo.co.in
29