Npa

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Non Performing Assets

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  • Npa

    1. 1. NON-PERFORMING ASSETS
    2. 2. What is NPA …… <ul><li>Non performing advances or non-performing </li></ul><ul><li>Assets (or non-performing loans) are loans </li></ul><ul><li>that are not being repaid or serviced through Interest payments on time. </li></ul><ul><li>def : when interest or other dues to a bank remain unpaid for more than 90 days the entire bank loan automatically turns a “ Non-Performing Asset ” </li></ul>
    3. 3. Indian Economy and NPA’s <ul><li>The Indian Economy has been much affected due to lack of infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FII’s,etc. </li></ul><ul><li>Under such a situation it goes without saying that banks are no exception and are bound to face the heat of a global downturn. </li></ul><ul><li>Banks and FII’s in India hold NPA’s worth around Rs 1,10,000 crores. </li></ul>
    4. 4. Global Developments and NPA’s <ul><li>The core banking business is of mobilizing the deposits and utilizing it for lending to industry. </li></ul><ul><li>Lending business is encouraged which helps in productive purposes which results in economic growth. </li></ul><ul><li>However lending also carries credit risk, which arises from the borrower’s inability to repay it . </li></ul>
    5. 5. How much risk can a bank afford to take? <ul><li>Recent happenings in the business world-Enron, Worldcom, Xerox, global crossing do not give much confidence to banks. </li></ul><ul><li>The history of FII’s also reveals the fact that the biggest banking failures were due to credit risk. </li></ul><ul><li>Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. </li></ul>
    6. 6. Why NPA’s have become an issue for banks and FII’s in India? <ul><li>The origin of the problem of burgeoning NPA’s lies in the quality of managing credit risk by the banks concerned. </li></ul><ul><li>What is needed is having adequate preventive measures in place namely, fixing pre-sanctioned appraisal responsibility & having an effective post-disbursement supervision. </li></ul><ul><li>Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. </li></ul>
    7. 7. Resolution of NPA’s <ul><li>At present, local banks are saddled with the management of NPA’s for which they do not have management time for proper resolution. </li></ul><ul><li>As a result, they are reluctant to make new loan to industrial or commercial enterprises as NPA’s have strained their resources. </li></ul><ul><li>The unavailability of new loans has therefore hindered economic growth and development. </li></ul>
    8. 8. Contd…… <ul><li>ADB intends to assist local banks resolve their problems with NPA’s by facilitating the financing of SPV’s and other mechanisms designed to acquire and service such assets. </li></ul><ul><li>This will enable the local banking system to focus on its core operations and provide financing to productive sectors of economy. </li></ul><ul><li>In addition ADB will assist distressed companies in their restructuring & rehabilitation efforts. </li></ul>
    9. 9. Indian Banking systems – some hard facts <ul><li>Gross NPA’s of the financial system is placed at Rs 1,35,000 crore, of which, over Rs 98,000 crore pertains to Scheduled Commercial Banks (SCB’s) and FII’s. </li></ul><ul><li>Gross NPA’s showed increasing trend over the yrs and accretion to gross NPA’s by SCB’s during last two fiscals were Rs 24,824 crore(2001-02) & Rs 21,862 crore(2002-03). </li></ul>
    10. 10. Contd……. <ul><li>This accretion is not considering the cases restructured through CDR mechanism during 2002-03 and thereafter (Rs 46,000 crore). </li></ul><ul><li>On account of low “Loan to GDP Ratio” (around 60%) in India, the enormity of NPA’s in India in GDP term appears to be low in comparison with china, korea, etc. </li></ul><ul><li>43% of the capital base of the financial system stands eroded on account of net NPA’s. </li></ul>
    11. 11. RBI Guidelines on classification of bank advances <ul><li>According to RBI guidelines, bank advances are mainly classified into: </li></ul><ul><li>Standard assets: such an asset is not a Non-Performing Asset. </li></ul><ul><li>Sub-standard assets : it is classified as NPA for a period not exceeding 18 months. </li></ul><ul><li>Doubtful assets: Asset that has remained sub standard for a period of 12 months (w.e.f. March 31, 2005). </li></ul><ul><li>Loss Assets: here loss is identified by the banks concerned or by internal auditors or by RBI inspectors. </li></ul>
    12. 12. Financial statements in assessing the risk of default for lenders <ul><li>For banks and Financial Institutions, both the balance sheet and income statement have a key role to play by providing valuable information on a borrowers ability </li></ul><ul><li>The key accounting ratios generally used for the purpose of ascertaining the creditworthiness of a business entity are that of debt-equity ratio & interest coverage ratio. </li></ul>
    13. 13. Measures to reduce NPA’s <ul><li>Provision of bad debts from net profit. </li></ul><ul><li>Implementation of Securitisation Act 2002. </li></ul><ul><li>Increasing the share of Retail business i.e., personal loans, vehicle loans, home loans, credit cards, etc. </li></ul><ul><li>Increasing the deposits. </li></ul><ul><li>Increase lending share to priority sector. </li></ul>
    14. 14. High cost of funds due to NPA <ul><li>Quite often genuine borrowers face difficulties in raising funds from banks due to mounting NPA’s. </li></ul><ul><li>With the enactment of the Securitiastion and Reconstruction of Financial Assets and enforcement of Security Interest Act, 2002, banks can issue notices to pay up the dues </li></ul><ul><li>And the borrowers will have to clear the dues within 60 days. </li></ul><ul><li>If the defaulters don’t pay the dues, then the banks can takeover the possession of assets & also takeover the management of the company. </li></ul>
    15. 15. Credit Risk And NPA <ul><li>NPAs are a result of past action whose effects are realized in the present </li></ul><ul><li>Credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place </li></ul>
    16. 16. Credit Rating <ul><li>Credit rating has been explained as forming an opinion of the future ability, legal obligation and willingness of a bond issuer or obligor to make full and timely payments on principal and interest due to the investors </li></ul>Definition by Moody
    17. 17. Tangled By Huge NPAs……..WHY <ul><li>Indian banks so far were encircled by the chains of regulation and aegis of protection </li></ul><ul><li>No formal policies, procedures, systems, tools and techniques of credit risk assessment </li></ul>
    18. 18. At The Mercy Of Balance Sheet <ul><li>Operating margin </li></ul><ul><li>Current ratio </li></ul><ul><li>cash flow </li></ul><ul><li>Fund flow </li></ul>
    19. 19. Perception and reality may differ 180* <ul><li>Accounting policies has loopholes </li></ul><ul><li>Chartered Accountants make their balance sheet look as they want it to look like </li></ul><ul><li>Past performance is no indicator of the future performance ideally </li></ul>
    20. 20. Darling Of Bourses Takes A Hit <ul><li>Hasty commitments to expand rapidly by rediff have brought it to red </li></ul><ul><li>Its share price is ruling well below its issue price </li></ul><ul><li>So relying completely on the past ratios meant no monitoring of the management decisions and no control over their decisions </li></ul>
    21. 21. Collateral-A Defensive Approach <ul><li>Collateral was another way to judge the credit quality </li></ul><ul><li>A client is good if she had attractive assets to put as collateral and bad otherwise. </li></ul><ul><li>Poor decision making-accepted clients of poor quality and rejected the clients of good quality </li></ul><ul><li>Collateral is hardly a security </li></ul>
    22. 22. Credit Risk Techniques <ul><li>Quantitative </li></ul><ul><ul><li>Ratio analysis </li></ul></ul><ul><ul><li>Fund flows </li></ul></ul><ul><ul><li>Mathematical models </li></ul></ul><ul><li>Qualitative </li></ul><ul><ul><li>Policies </li></ul></ul><ul><ul><li>Procedures </li></ul></ul><ul><ul><li>Concentration </li></ul></ul>
    23. 23. Playing with Precision <ul><li>Altman's Z Score predicts whether or not a company is likely to enter into bankruptcy within one or two years </li></ul><ul><li>the algorithm has been consistently reported to have a 95 % accuracy of prediction of bankruptcy </li></ul><ul><li>Consideration-current assets, total assets, net sales, interest, total liability, current liabilities, market value of equity, earnings before taxes and retained earnings </li></ul>
    24. 24. Play or Leave <ul><li>3.0 or more : Most likely safe </li></ul><ul><li>2.8 to 3.0 : Just safe </li></ul><ul><li>1.8 to 2.7 : likely to bankrupt in two years </li></ul><ul><li>Below 1.8 : Recovery least expected </li></ul>
    25. 25. Getting The Combination Right <ul><li>Credit metrics works on the statistical concepts like probability, means, and standard deviation, correlation, and concentrations </li></ul>
    26. 26. Credit Metrics-Application <ul><li>Reduce the portfolio risk : reevaluate obligors having the largest absolute size arguing that a single default among these would have the greatest impact </li></ul><ul><li>reevaluate obligors having the highest percentage level of risk arguing that these are the most likely to contribute to portfolio losses </li></ul>
    27. 27. Balancing Act <ul><li>Identifying the correlations across the portfolio so that the potential concentration may be reduced and the portfolio is adequately diversified across the uncorrelated constituents </li></ul><ul><li>Concentration may lead to an undue accumulation of risk at one point. </li></ul>
    28. 28. ARCIL <ul><li>system-wide clean up of NPAs result in creation of Asset Reconstruction Company </li></ul><ul><li>Governments may also provide special powers to ARCs that are not otherwise available to banking system </li></ul>
    29. 29. ARCIL Objectives <ul><li>Convert NPA into performing assets </li></ul><ul><li>Act as nodal agency for NPA resolution </li></ul><ul><li>Create a vibrant market for NPA estructured debt </li></ul><ul><li>Re-energize the financial sector. </li></ul>
    30. 30. Transaction Structure
    31. 31. Transaction Structure- Stage-2
    32. 32. ARCIL- International Examples <ul><li>In 1980s, U.S. used government sponsored ARC - Resolution Trust Corporation (RTC) to overcome thrift crisis. RTC acted as a “bad bank” and functioned as an effective sales mechanism for disposal of assets </li></ul><ul><li>In early 1990s Mexico and Sweden demonstrated successful use of ARC mechanism (Fobaproa and Securum respectively) as a “bad bank” and to clean and reprivatise/ recapitalise the banks </li></ul><ul><li>Korea used KAMCO as the nodal agency for acquiring and disposing NPAs. KAMCO has used securitisation and joint venture route for investor participation in the assets </li></ul>
    33. 33. Indian Financial System -2003-04
    34. 34. Quantitative Factors <ul><ul><li>Carrying Cost of NPAs 6.50% </li></ul></ul><ul><ul><li>Management Cost 0.75% </li></ul></ul><ul><ul><li>Total Cost 7.25% </li></ul></ul><ul><ul><li>Net NPAs of banks/FIs is Rs. 470 billions </li></ul></ul><ul><ul><li>Total holding Cost comes to Rs. 35 billions p.a. for banks/FIs. </li></ul></ul><ul><ul><li>Which is around 20% of the reported Net profit (i.e., including non-core income) </li></ul></ul>
    35. 35. Qualitative Factors <ul><li>Banks fail to get “Interest spread” on the net realizable value of NPAs so long they carry them in their books. </li></ul><ul><li>Reduction of Risk Adjusted Capital Adequacy Ratio (RACAR). RBI deducts net NPA from capital and risk weighted assets to compute RACAR. </li></ul><ul><li>Carrying NPAs in books affects Rating and Capital mobilization. </li></ul>
    36. 36. MANAGING NPA <ul><li>There are two issues, which, if tackled properly, would efficiently solve the problem of NPAs viz. </li></ul><ul><li>(i) ‘STOCK’ ( accumulation of NPAs) problem and </li></ul><ul><li>(ii) ‘FLOW’ ( accretion ) problem. </li></ul><ul><li>Several measures like Lok Adalat, DRTs( Debt Recovery Tribunals),Strengthening of credit appraisal and monitoring system have been initiated by the regulators to tackle the ‘flow’ problem. </li></ul><ul><li>Towards resolution of the ‘stock’ problem of NPAs GOI took proactive steps and enacted the Securitasation & Reconstruction Act 2002 in December 2002. </li></ul>
    37. 37. MANAGING NPA- Models <ul><li>Globally there have been two models: </li></ul><ul><li>(i) A central disposition agency which takes </li></ul><ul><li>bad loans from all financial institutions or </li></ul><ul><li>(ii) An entity specific to a particular bank or a group of banks e.g. Arcil. </li></ul>
    38. 38. MANAGING NPA- Resolution Strategy <ul><li>There are primarily two strategies </li></ul><ul><li>(I) Loan Management Strategy </li></ul><ul><li>- Restructuring of loan on sustainable debt considerations </li></ul><ul><li>- Maximise overall recovery value </li></ul><ul><li>- Fair treatment to all stakeholders </li></ul><ul><li>- One Time Settlement </li></ul>
    39. 39. MANAGING NPA- Resolution Strategy <ul><li>(II) Asset Management Strategy </li></ul><ul><li>- Disposition by strip sale </li></ul><ul><li>- Change in management </li></ul><ul><li>- Takeover of assets </li></ul><ul><li>- Legal route / Foreclosure </li></ul>
    40. 40. MANAGING NPA-Indian Approach <ul><li>The Indian system envisages multiple ARCs(Asset Reconstruction Company) as non government entities with equity support of promoters. </li></ul><ul><li>The ARCs in India are not supported by through Govt. funding and are not structured like a Central disposition agency. </li></ul>
    41. 41. MANAGING NPA-Through ARCs <ul><li>ARCs are governed by the provisions of </li></ul><ul><li>Securitisation Act 2002 and operates within the perview of RBI guidelines. </li></ul><ul><li>The salient features of the Securitisation Act in respect of ARCs are as follows: </li></ul><ul><li>- Unfettered right to the lenders acting in majority (> 75% by value) to enforce security rights without judicial intervention </li></ul>
    42. 42. Salient Features …. <ul><li>- Establishment & empowerment of ARCs </li></ul><ul><li>No single investor / sponsor to have majority control over ARCs </li></ul><ul><li>- Paves way for debt aggregation in ARCs by enabling acquisition of assets </li></ul><ul><li>- Accords ARCs the rights of the lenders </li></ul><ul><li>- Additional rights to ARCs – not available with lenders </li></ul><ul><li>Sale or lease of businesses by superceding board powers </li></ul><ul><li>-Enables foreign investor participation </li></ul>
    43. 43. MANAGING NPA <ul><li>MEASURES FOR RECONSTRUCTION ( SECTION 9) </li></ul><ul><li>- Change in or takeover of management of business of the borrower </li></ul><ul><li>- Sale or lease of part or whole business of the borrower </li></ul><ul><li>(Above two powers not available as of now, because RBI guidelines have not been issued for the same) </li></ul>
    44. 44. MANAGING NPA <ul><li>- Rescheduling of payment of debt </li></ul><ul><li>- Enforcement of security interest in accordance with the Act </li></ul><ul><li>- Settlement of dues payable by the borrower </li></ul><ul><li>- Taking possession of secured assets in accordance with the Act </li></ul>
    45. 45. Key Isuues before ARCs <ul><li>Valuation of NPA </li></ul><ul><li>Debt Aggregation </li></ul><ul><li>Legal & Regulatory </li></ul>
    46. 46. Suggestions and Conclusion <ul><li>Siphoning off money or diversion of loans from banks should be erased from criminal offence. </li></ul><ul><li>Government funding/guarantee in some form should be available for transfer of assets to ARCs. </li></ul><ul><li>Banks should restrain itself from lending to just about anything that is in fashion. </li></ul>

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