The document discusses Non-Performing Assets (NPAs) in the Indian banking sector. It defines an NPA as an asset that ceases to generate income for the bank. It provides data showing that public sector banks had the highest NPA ratio in FY2010 at 2.27%, while foreign banks had the lowest at 4.26%. The criteria for classifying different types of loans as NPAs, including term loans, cash credits, project loans and more, are explained in detail. NPAs are further classified as substandard, doubtful or loss assets based on the period of delinquency. Banks are required to make provisions against NPAs as per RBI guidelines.

1. Non Performing Assets
(NPA)
Prudential Norms on Asset
Classification
Aditya Lathe

2. What is an NPA?
A simplified definition:
 An asset becomes non performing when it ceases
to generate income for the Bank.

3. 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 Ratio
Public 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%

4. 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 Net
Year to Gross Net NPAs
NPAs Advances Advances Advances
Advances
2011 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%

5. 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,

6. Criteria for NPA recognition: Cash Credit
In case of cash credit / overdraft accounts, a NPA is an loan or advance where
the account remains ‘out of order’.
An account should be treated as 'out of order' if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power.
In cases where the outstanding balance in the principal operating account is
less than the sanctioned limit/drawing power, but there are no credits
continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period, these accounts
should be treated as 'out of order'.

7. Criteria for NPA recognition: General
Guidelines
The availability of security or net worth of borrower/ guarantor should not be
taken into account for the purpose of treating an advance as NPA or
otherwise, as income recognition is based on record of recovery.
The classification of an asset as NPA should be based on the record of
recovery. Bank should not classify an advance account as NPA merely due to
the existence of some deficiencies which are temporary in nature such as
non-availability of adequate drawing power based on the latest available
stock statement, balance outstanding exceeding the limit temporarily, non-
submission of stock statements and non-renewal of the limits on the due
date, etc.

8. Criteria for NPA recognition: General
Guidelines
Banks should ensure that drawings in the working capital accounts are
covered by the adequacy of current assets, since current assets are first
appropriated in times of distress. Drawing power is required to be arrived at
based on the stock statement which is current. However, considering the
difficulties of large borrowers, stock statements relied upon by the banks for
determining drawing power should not be older than three months. The
outstanding in the account based on drawing power calculated from stock
statements older than three months, would be deemed as irregular.
A working capital borrowal account will become NPA if such irregular
drawings are permitted in the account for a continuous period of 90 days
even though the unit may be working or the borrower's financial position is
satisfactory.

9. Criteria for NPA recognition: General
Guidelines
Regular and ad hoc credit limits need to be reviewed/ regularized not later
than three months from the due date/date of ad hoc sanction. In case of
constraints such as non-availability of financial statements and other data
from the borrowers, the branch should furnish evidence to show that
renewal/ 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 general
discipline. Hence, an account where the regular/ ad hoc credit limits have not
been reviewed/ renewed within 180 days from the due date/ date of ad hoc
sanction will be treated as NPA.
All the facilities granted by a bank to a borrower and investment in all the
securities issued by the borrower will have to be treated as NPA/NPI and not
the particular facility/investment or part thereof which has become irregular.

10. Criteria for NPA recognition: General
Guidelines
Government guaranteed advances
The credit facilities backed by guarantee of the Central Government though
overdue may be treated as NPA only when the Government repudiates its
guarantee when invoked. However, With effect from the year ending 31
March 2006 State Government guaranteed advances and investments in
State Government guaranteed securities would attract asset classification
and provisioning norms if interest and/or principal or any other amount due
to the bank remains overdue for more than 90 days.
Advances against Term Deposits, NSCs, KVP/IVP, etc
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and
life policies need not be treated as NPAs, provided adequate margin is
available in the accounts. Advances against gold ornaments, government
securities and all other securities are not covered by this exemption.

11. Criteria for NPA recognition: Project Loans
Two things to remember:
What is a Project Loan: Any term loan which has been sanctioned for the
purpose of setting up of an economic venture.
For all projects financed by the FIs/ banks after 28th May, 2002, the date of
completion of the project should be clearly spelt out at the time of financial
closure of the project. Therefore, a Commercial Operation Date (COD) must
be fixed at the time of loan sanction / financial closure for Project Loans.

12. Criteria for NPA recognition: Project Loans
Project 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,

13. Criteria for NPA recognition: Project Loans
Project 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,

14. NPA Sub categories
Non Performing
Assets
Substandard Assets Doubtful Assets Loss Assets

15. 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.

16. 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.

17. NPA Provisioning norms
Doubtful •100% of the extent to which the advance is not covered by
Assets 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

18. Light at the end of the tunnel- Upgradation
of 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.

19. Thank You