Non Performing Assets (NPA) Prudential Norms on Asset Classification Aditya Lathe
What is an NPA?A simplified definition: An asset becomes non performing when it ceases to generate income for the Bank.
NPAs across Banking Sector (FY 10) Gross NPAs to Gross Advances Ratio (%) 5.00 4.26 4.00 3.22 2.27 2.31 3.00 2.00 1.00 0.00 Public Sector Old Private New Private Foreign Banks Banks Sector Banks Sector Banks Source: RBI Data Gross Gross Gross NPAs to Gross NPAs Advances Advances RatioPublic Sector Banks 57300 2519330 2.27%Old Pvt. Sector Banks 3612 156407 2.31%New Pvt. Sector Banks 13772 428184 3.22%Foreign Banks 7127 167438 4.26% 81813 3271361 2.50%
Kotak Bank NPAs KMBL Historical NPAs 5.0 4.3 3.6 4.0 2.9 3.0 2.4 2.0 1.8 1.7 2.0 0.7 1.0 0.0 2008 2009 2010 2011 Gross NPAs to Gross Advances (%) Net NPAs to Net Advances (%) Gross NPAs Gross Gross Net Net NPAs to NetYear to Gross Net NPAs NPAs Advances Advances Advances Advances2011 603 29722 2.03% 211 29328 0.72%2010 767 21178 3.62% 360 20824 1.73%2009 731 16959 4.31% 397 16604 2.39%2008 453 15729 2.90% 276 15515 1.78%
Criteria for NPA recognition Term Loan: If interest and/ or installment of principal remains overdue for a period of more than 90 days Bills purchased/ discounted: If the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted Derivatives: If the overdue receivables representing mark-to-market value of a derivative contract remain unpaid for a period of 90 days from the specified due date for payment. Agriculture/ Crop Loans: Case I: If the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops, Case II: If the installment of principal or interest thereon remains overdue for one crop season for long duration crops,
Criteria for NPA recognition: Cash CreditIn case of cash credit / overdraft accounts, a NPA is an loan or advance wherethe account remains ‘out of order’.An account should be treated as out of order if the outstanding balanceremains continuously in excess of the sanctioned limit/drawing power.In cases where the outstanding balance in the principal operating account isless than the sanctioned limit/drawing power, but there are no creditscontinuously for 90 days as on the date of Balance Sheet or credits are notenough to cover the interest debited during the same period, these accountsshould be treated as out of order.
Criteria for NPA recognition: GeneralGuidelinesThe availability of security or net worth of borrower/ guarantor should not betaken into account for the purpose of treating an advance as NPA orotherwise, as income recognition is based on record of recovery.The classification of an asset as NPA should be based on the record ofrecovery. Bank should not classify an advance account as NPA merely due tothe existence of some deficiencies which are temporary in nature such asnon-availability of adequate drawing power based on the latest availablestock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the duedate, etc.
Criteria for NPA recognition: GeneralGuidelinesBanks should ensure that drawings in the working capital accounts arecovered by the adequacy of current assets, since current assets are firstappropriated in times of distress. Drawing power is required to be arrived atbased on the stock statement which is current. However, considering thedifficulties of large borrowers, stock statements relied upon by the banks fordetermining drawing power should not be older than three months. Theoutstanding in the account based on drawing power calculated from stockstatements older than three months, would be deemed as irregular.A working capital borrowal account will become NPA if such irregulardrawings are permitted in the account for a continuous period of 90 dayseven though the unit may be working or the borrowers financial position issatisfactory.
Criteria for NPA recognition: GeneralGuidelinesRegular and ad hoc credit limits need to be reviewed/ regularized not laterthan three months from the due date/date of ad hoc sanction. In case ofconstraints such as non-availability of financial statements and other datafrom the borrowers, the branch should furnish evidence to show thatrenewal/ review of credit limits is already on and would be completed soon.In any case, delay beyond six months is not considered desirable as a generaldiscipline. Hence, an account where the regular/ ad hoc credit limits have notbeen reviewed/ renewed within 180 days from the due date/ date of ad hocsanction will be treated as NPA.All the facilities granted by a bank to a borrower and investment in all thesecurities issued by the borrower will have to be treated as NPA/NPI and notthe particular facility/investment or part thereof which has become irregular.
Criteria for NPA recognition: GeneralGuidelinesGovernment guaranteed advancesThe credit facilities backed by guarantee of the Central Government thoughoverdue may be treated as NPA only when the Government repudiates itsguarantee when invoked. However, With effect from the year ending 31March 2006 State Government guaranteed advances and investments inState Government guaranteed securities would attract asset classificationand provisioning norms if interest and/or principal or any other amount dueto the bank remains overdue for more than 90 days.Advances against Term Deposits, NSCs, KVP/IVP, etcAdvances against term deposits, NSCs eligible for surrender, IVPs, KVPs andlife policies need not be treated as NPAs, provided adequate margin isavailable in the accounts. Advances against gold ornaments, governmentsecurities and all other securities are not covered by this exemption.
Criteria for NPA recognition: Project LoansTwo things to remember:What is a Project Loan: Any term loan which has been sanctioned for thepurpose of setting up of an economic venture.For all projects financed by the FIs/ banks after 28th May, 2002, the date ofcompletion of the project should be clearly spelt out at the time of financialclosure of the project. Therefore, a Commercial Operation Date (COD) mustbe fixed at the time of loan sanction / financial closure for Project Loans.
Criteria for NPA recognition: Project LoansProject Loan- Non Infrastructure project:Before COD If interest remains overdue for a period of more than 90 days If it fails to commence commercial operations within 6 months from the original COD, even if it is regular as per record of recovery.After COD If interest and/ or installment of principal remains overdue for a period of more than 90 days,
Criteria for NPA recognition: Project LoansProject Loan- Infrastructure project:Before COD If interest remains overdue for a period of more than 90 days If it fails to commence commercial operations within 2 years from the original COD, even if it is regular as per record of recovery.After COD If interest and/ or installment of principal remains overdue for a period of more than 90 days,
NPA Sub categories Non Performing Assets Substandard Assets Doubtful Assets Loss Assets
Criteria for classification Sub-Standard Assets: An asset which has remained NPA for a period less than or equal to 12 months. Doubtful Assets: An asset that has remained in the substandard category for a period of 12 months. Loss Assets: An asset where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.
NPA Provisioning norms Standard •Direct advances to agriculture and SME at 0.25%, Assets •CRE at 1% •Other loans and advances at 0.40% Substandard • A general provision of 15% on total outstanding The Asset ‘unsecured exposures’ which are ‘substandard’ to attract additional provision of 10%, i.e., a total of 25% on the outstanding balance.
NPA Provisioning normsDoubtful •100% of the extent to which the advance is not covered byAssets the realisable value of the security •For the secured portion, provision to be made as follows, depending upon the period for which the asset has remained doubtful: Time spent in Provision ‘doubtful’ category requirement < 1 year 25 % 1 to 3 years 40 % > 3 years 100 %Loss Assets Write Off or provision of 100% of outstanding
Light at the end of the tunnel- Upgradationof NPAs In case of NPA accounts, if arrears of interest and principal paid by the borrower, the account to be no longer treated as non-performing and may be classified as ‘standard’. Caution: In case of accounts with inherent weakness, even if there are a few credits before the balance sheet date, the account should still be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularization of the account to eliminate doubts on their performing status.