This document discusses the management of non-performing assets (NPAs) in banks. It defines NPAs as loans or advances where interest or principal payments are overdue by 90 days or more. It outlines the classification of assets as standard, sub-standard, doubtful or loss based on delinquency period. The document also discusses provisioning norms required against different asset classifications and factors contributing to rising NPAs. It examines the impact of NPAs on bank operations and various methods used for prevention and resolution of NPAs.

1. MANAGEMENT OF
NON-PERFORMING ASSETS

2. Banking
Non Performing Assets
2
N P As : Definition
An asset, including a leased
asset, becomes non-performing
when it ceases to generate
income for the bank.
A credit facility in respect of
which the interest and/or
instalment of principal has
remained “past due” for a
specified time.

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DEFINITION OF NPAs
A NPA is a loan or an advance where;
Interest and/ or installment of principal remain
overdue for a period of more than 90 days in
respect of a term loan
The account remains “out of order” in respect
of an overdraft/ cash credit
The bill remains overdue for a period of more
than 90 days in the case of bills purchased
and discounted
The installment or interest remains overdue
for two crop seasons in case of short duration
crops and for one crop season in case of long
duration crops

4. Banking
Non Performing Assets
4
Non Performing Assets
In accounting, originally Bad & Doubtful Debts
In 1980s, RBI followed 8 point Health Code
Also called Non Performing Loans (NPLs)
or Stressed Assets
An advance where interest and / or instalment of
principal remain ‘overdue’ for a period of more
than 90 days in respect of Term Loan / OD /
CC /BP / BD / other accounts – investments,
export finance, SSI/SME/ agricultural, housing
loan, educational loan, lease and hire purchase
…. Etc.
Sub-standard, Doubtful and Loss Assets…

5. Banking
Non Performing Assets
5
ASSET TYPE
STANDARD ASSET /
PERFORMING ASSET
The account is not non-performing and
does not carry more than the normal risk
attached to the business.
NON-PERFORMING ASSET (NPA)
The asset ceases to generate income for
the bank. (Para 2 of the Master Circular)

6. Banking
Non Performing Assets
6
IDENTIFICATION OF
NPACash Credit / Overdrafts ⇒ Account remains
‘out of order’ for
90 days or more.
The account is treated as ‘out of order’ if :
* Outstanding Balance remains continuously in
excess of sanction limit/drawing power for 90
days or more.
* No credit continuously for 90 days or more as
on the date of Balance Sheet.
* Credits in the account are not sufficient to
cover interest debited during the same period.

7. Banking
Non Performing Assets
7
IDENTIFICATION OF NPA
…
Term Loans ⇒Interest and/or instalment
remains overdue for 90
days or more.
Bills Purchased and ⇒Bill remains overdue for 90
Discounted days or more.
Agricultural Advances ⇒Interest and/or installment
remains overdue for two
harvest seasons for short
duration crop, one
harvest season for long
duration crop.
Others ⇒ Any amount to be received
remains overdue for 90 days
or more .

8. Banking
Non Performing Assets
8
CLASSIFICATION
NORMS
 Standard Asset
The account is not non-performing.
 Sub-Standard Asset
A sub standard Asset is one which has remained
NPA for a period less than or equal 12
months. (w.e.f. 31st March 2005)
 Loss Assets
These are accounts, identified by the bank or
internal or external auditors or by RBI Inspectors as
wholly irrecoverable but the amount for which has
not been written off.

9. Banking
Non Performing Assets
9
CLASSIFICATION
NORMS
 Doubtful Asset - Three Categories
Category Period
Doubtful - I up to One Year
Doubtful - II Up to Three Years
Doubtful - III More than Three
Years

10. Banking
Non Performing Assets
10
PROVISIONING NORMS
STANDARD ASSET
• 0.25% on Standard Assets on Global
loan portfolio basis
SUB-STANDARD ASSET
• 10% of total outstanding
• 20% of total outstanding if loan is
unsecured ab initio (new guidelines)

11. Banking
Non Performing Assets
11
PROVISIONING NORMS
SUB-STANDARD (Cont’d)
Banks are permitted to phase the additional
provisioning upon reduction in transition period
from 18 to 12 months Over a period of four
years with minimum 20% each year (new
guidelines)
LOSS ASSET:
100% should be provided for

12. Banking
Non Performing Assets
12
PROVISIONING NORMS
DOUBTFUL ASSETS
Period Provision (Secured +Unsecured)
Upto 1 year 20% + 100%
1to 3 years 30% + 100%
More than 3 years 100% + 100%
(effective from 31st March 2005)
Outstanding as on 60%, 75%, 100% on secured portion.
31st March 2004 2005 2006 2007

13. Banking
Non Performing Assets
13
PROVISIONING NORMS
Provision Under Special circumstances
• Normal provision on Government
guaranteed advances.
• In case of advances guaranteed by
DICGC/ECGC, Provision should be made
only for balance in excess of the amount
guaranteed by these corporations.

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CATEGORIES OF NPA
Substandard Assets – Which has remained
NPA for a period less than or equal to 12
months.
Doubtful Assets – Which has remained in
the sub-standard category for a period of
12 months
Loss Assets – 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.

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PROVISIONING NORMS
Standard Assets – general provision of a
minimum of 0.25%
Substandard Assets – 10% on total
outstanding balance, 10 % on unsecured
exposures identified as sub-standard & 100%
for unsecured “doubtful” assets.
Doubtful Assets – 100% to the extent
advance not covered by realizable value of
security. In case of secured portion,
provision may be made in the range of 20%
to 100% depending on the period of asset
remaining sub-standard
Loss Assets – 100% of the outstanding

16. 16
FACTORS CONTRIBUTING TO
NPAS
Poor Credit discipline
Inadequate Credit & Risk Management
Diversion of funds by promoters
Funding of non-viable projects
In the early 1990s PSBs started suffering
from acute capital inadequacy and lower/
negative profitability. The parameters set for
their functioning did not project the
paramount need for these corporate goals.
The banks had little freedom to price
products, cater products to chosen segments
or invest funds in their best interest

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FACTORS CONTRIBUTING TO
NPAS
Since 1970s, the SCBs functioned as units
cut off from international banking and unable
to participate in the structural transformations
and new types of lending products.
Audit and control functions were not
independent and thus unable to correct the
effect of serious flaws in policies and
directions
Banks were not sufficiently developed in
terms of skills and expertise to regulate the
humogeneous growth in credit and manage
the diverse risks that emerged in the process

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FACTORS CONTRIBUTING TO
NPAS
Inadequate mechanism to gather and
disseminate credit information amongst
commercial banks
Effective recovery from defaulting and
overdue borrowers was hampered on account
of sizeable overhang component arising from
infirmities in the existing process of debt
recovery, inadequate legal provisions on
foreclosure and bankruptcy and difficulties in
the execution of court decrees.

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IMPACT OF NPAS ON
OPERATIONS
Drain on Profitability
Impact on capital adequacy
Adverse effect on credit growth as the
banker’s prime focus becomes zero
percent risk and as a result turn lukewarm
to fresh credit.
Excessive focus on Credit Risk
Management
High cost of funds due to NPAs

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CURRENT STATUS OF NPAS
All SCB’s average Net NPA Ratio for 2005-06
is 1.22 (As per RBI’s Statistics)
The banks have been able to report lower
NPA percentage mostly by providing against
or writing off NPAs.
The provision to certain extent was facilitated
by higher profits on account of treasury
management
The better Net NPA ratio was also facilitated
by higher credit off take resulting in larger
asset portfolio/ book size.

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NPA MANAGEMENT – PREVENTIVE
MEASURES
Formation of the Credit Information Bureau
(India) Limited (CIBIL)
Release of Wilful Defaulter’s List. RBI also
releases a list of borrowers with aggregate
outstanding of Rs.1 crore and above
against whom banks have filed suits for
recovery of their funds
Reporting of Frauds to RBI
Norms of Lender’s Liability – framing of
Fair Practices Code with regard to lender’s
liability to be followed by banks, which
indirectly prevents accounts turning into
NPAs on account of bank’s own failure

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Risk assessment and Risk management
RBI has advised banks to examine all
cases of wilful default of Rs.1 crore and
above and file suits in such cases. Board
of Directors are required to review NPA
accounts of Rs.1 crore and above with
special reference to fixing of staff
accountability.
Reporting quick mortality cases
Special mention accounts for early
identification of bad debts. Loans and
advances overdue for less than one and
two quarters would come under this
category. However, these accounts do not
need provisioning
NPA MANAGEMENT – PREVENTIVE
MEASURES

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NPA MANAGEMENT -
RESOLUTION
Compromise Settlement Schemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Proceedings under the Code of Civil Procedure
Board for Industrial & Financial Reconstruction
(BIFR)/ AAIFR
National Company Law Tribunal (NCLT)
Sale of NPA to other banks
Sale of NPA to ARC under Securitization and
Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002
(SRFAESI)
Liquidation

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Compromise Settlement
Schemes
Banks are free to design and
implement their own policies for
recovery and write off incorporation
compromise and negotiated
settlements with board approval
Specific guidelines were issued in
May 1999 for one time settlement of
small enterprise sector.
Guidelines were modified in July
2000 for recovery of NPAs of Rs.5
crore and less as on 31st
March
2007.

25. 25
Restructuring and Rehabilitation
Banks are free to design and implement
their own policies for restructuring/
rehabilitation of the NPA accounts
Reschedulement of payment of interest
and principal after considering the Debt
service coverage ratio, contribution of
the promoter and availability of security

26. 26
Lok Adalats
Small NPAs up to Rs.20 Lacs
Speedy Recovery
Veil of Authority
Soft Defaulters
Less expensive
Easier way to resolve

27. 27
Corporate Debt Restructuring
The objective of CDR is to ensure a timely and
transparent mechanism for restructuring of the debts
of viable corporate entities affected by internal and
external factors, outside the purview of BIFR, DRT or
other legal proceedings
The legal basis for the mechanism is provided by the
Inter-Creditor Agreement (ICA). All participants in the
CDR mechanism must enter the ICA with necessary
enforcement and penal clauses.
The scheme applies to accounts having multiple
banking/ syndication/ consortium accounts with
outstanding exposure of Rs.10 crores and above.
The CDR system is applicable to standard and sub-
standard accounts with potential cases of NPAs
getting a priority.
Packages given to borrowers are modified time &
again
Drawback of CDR – Reaching of consensus amongst
the creditors delays the process

28. 28
DRT Act
DRT has powers to grant injunctions against the
disposal, transfer or creation of third party interest by
debtors in the properties charged to creditor and to
pass attachment orders in respect of charged
properties
In case of non-realization of the decreed amount by
way of sale of the charged properties, the personal
properties if the guarantors can also be attached and
sold.
However, realization is usually time-consuming
Steps have been taken to create additional benches

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SALE OF NPA TO OTHER BANKS
A NPA is eligible for sale to other banks only if it has
remained a NPA for at least two years in the books of
the selling bank
The NPA must be held by the purchasing bank at
least for a period of 15 months before it is sold to
other banks but not to bank, which originally sold the
NPA.
The NPA may be classified as standard in the books
of the purchasing bank for a period of 90 days from
date of purchase and thereafter it would depend on
the record of recovery with reference to cash flows
estimated while purchasing
The bank may purchase/ sell NPA only on without
recourse basis
If the sale is conducted below the net book value, the
short fall should be debited to P&L account and if it
is higher, the excess provision will be utilized to meet
the loss on account of sale of other NPA.

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SARFESI Act 2002
SARFESI provides for enforcement of security
interests in movable (tangible or intangible
assets including accounts receivable) and
immovable property without the intervention of
the court
The bank and FI may call upon the borrower by
way of a written legal notice to discharge in full
his liabilities within 60 days from the date of
notice, failing which the bank would be entitled
to exercise all or any of the rights set out under
the Act.
Another option available under the Act is to
takeover the management of the secured assets
Any person aggrieved by the measures taken by
the bank can proffer an appeal to DRT within 45
days after depositing 75% of the amount claimed
in the notice.

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NEGOTIATION PROCESS FOR
SETTLEMENT OF
NON PERFORMING ASSETS

32. 32
Factors Affecting the Acceptance of
Proposal by Bank
Bank’s Documentation.
Security value. Realizable sale value.
Bank’s ability to sell.
Ability & Source of the borrower.
Ability & Source of the guarantor.
Vulnerability of the borrower/guarantor.
Time frame.
Strength and Zeal of bank's field staff.
What message is bank sending out (No in a fraud
case.)
Banks Policy.
Success rate.

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Preparation Stage
Thorough study of the case
Find out our strengths and weaknesses in
the case.
Find out the vulnerable point/weaknesses
of the borrower.
Follow-up with the Borrower and
Guarantors.
Visit factory/Collaterals/residence.
Find out properties not charged to the
bank.
Indicate that Bank is willing to
compromise.

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THANK YOU