About non performing assets.

1. NON-PERFORMING ASSETS AND
INCOME RECOGNITION NORMS
By
Shreshta Kotala,
Vaishnavi M S S.

2. • Nothing but an asset which ceased to
yield income.
• It is treated as an indirect loss to the
banks

3. Introduction
 The important assets for a bank are
−Cash credit
−Overdraft
−Term loans
−Bills purchased and discounted
• The cash credit and OD are considered as NPAs when
they get out of order and the remaining will become
NPAs when they remain unpaid for a period of two
quarters.

4. Classification of assets
 For a bank the loans and advances given to the
customers are treated as assets. They are..
Standard assets−that assure future economic benefits.
Sub−standard assets−that does not guarantee prompt
payment of interests or defaults in its scheduled
payments.
Doubtful assets−that have remained as NPA exceeding 12
months.
Loss assets−those that are 100% identified as loss.
 The NPA amount relating to a financial year will be
transferred to an account styled “Interest not collected
account”.

5. Factors impacting rise in NPAs
Internal factors :
• Diversion of funds for expansion/diversification/modernisation or for
taking up new projects.
• Diversion of funds for assisting or promoting associate concerns.
• Inefficiency in management, business failures, technology problems
External factors :
• Recession in economy as a whole.
• Input or power shortage.
• Exchange rate fluctuations.
• Accidents and natural calamities.,etc.

6. Early warning signals(EWS)
• The EWS show or indicate some signs of credit deterioration in the loan
account. These are of 5 types…..
1.Financial Warning Signals-Default in repayment, continuous
Irregularity in the account, deterioration in working capital or
in liquidity, declining sales compared to precious period., etc.
2.Operational Warning Signals-Underutilisation of plant capacity,
frequent labour problems, loss of important customers., etc.
3.Managerial Warning Signals-Diversion of funds and poor financial
controls, lack of cooperation from key personnel, undertaking of
undue risks., etc.
4.Banking Warning Signals-Frequent request for further loans, delays
in servicing of interest, opening of accounts with other banks., etc.
5.External Warning Signals-Economic recession, natural calamities,
introduction of new technology., etc.

7. Management of NPAs
Introducing Robust risk scoring technique to ensure better quality
of loans.
Improving the quality of credit monitoring by designating a
separate credit manager or relationship manager.
Reducing operating expenses by upgrading the banking
technology.
Monitoring EWS and taking immediate appropriate remedial
action.
Knowing a client’s profile thoroughly and preparing a credit report
by paying frequent visits to the client and his business unit.
Raising the share of non-fund income by increasing service
product offerings by better use of technology.
Adopting credit rating system to identify, measure, and monitor
the credit risk of individual proposal.

8. Remedies available for NPAs
 Non-legal remedies
 Legal remedies
 Non-legal remedies : These may be in the form of compromise,
mergers, and takeovers. The goods pledged or hypothecated may
be sold without the intervention of the court. Debts can be
assigned in favour of an agency which may come forward to collect
debts for a service charge.
 Legal remedies : According to the guidelines given by RBI, the
following are the legal remedies.
i. Filing of civil suits for recovery.
ii. Referring cases to Debt Recovery Tribunals(DRTs) and Debt
Recovery Appellate Tribunals(DRAT) set up under the
recovery of debts due to Banks and Financial Institutions
Act,1993.

9. iii. Referring cases to lok adalats constituted under Legal
Services Authorities Act, 1987, which help in resolving
disputes between parties.
iv. Resolving large loans via debt recovery mechanisms,
most notably Corporate Debt Structuring(CDR)
mechanism. One-time settlement schemes have been
tried with good results.
v. Under SRFAESI Act, banks and financial institutions can
issue demand notices to defaulting borrowers and to
take possession of secured assets, without the
intervention of courts. If the dues are not paid within 60
days from the date of such notice.
SRFAESI ACT-June 21, 2002
Project sashakt

10. INCOME RECOGNITION NORMS

11. INTRODUCTION
 The policy of income recognition has to be objective and
based on the record of recovery.
 Internationally income from Non-Performing Assets 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 also apply to
government guaranteed accounts also.
 However, interest on advances against TD, NSC,IVP, KVP
and Life policies on the due date, provided adequate
margin is available in the accounts.
 Fees and commissions on renegotiations or rescheduling
of outstanding debts should be recognised on an accrual
basis over the period of time.

12. Reversal of Income
 In case of NPA, past periods interest not realised
should be reversed.
 Fees, commissions-ceases to accrue in current period-
reverse past period if uncollected.
 Unrealised finance charge component of finance
income on leased assets should be reversed.

13. Appropriation of Recovery in NPAs
 Interest realised on NPAs may be taken to income-
provided credits are not out of fresh or additional
loans.
 Agreement to decide-in its absence, bank should
adopt accounting principle-uniform and consistent.
Usually it is in the order of priority-unrealised
expenses, unrealised interest, principal outstanding.

14. THANK YOU