This document discusses non-performing assets (NPAs) in banks. It classifies NPAs into sub-standard, doubtful, and loss categories, with different provisioning requirements for each. It then outlines various internal and external factors that can lead to NPAs. The document also discusses strategies banks use to control and manage NPAs, including preventive measures like monitoring and curative measures like debt restructuring, loan settlements, and using legal tools like the SARFAESI Act to recover assets.

2.  Sub-standard : The account holder belonging to this category
don't pay three installment continuously after 90 days and up to
1year. Bank has made 10% provision of funds for this category to
meet the losses generated from NPA from their profit.
 Doubtful NPA : Doubtful NPA are classified into three sub
categories :
20% provision is made by the banks for D1 i.e. up to 1 year
30% provision is made by the bank for D2 i.e. up to 2 year
100% provision is made by the bank for D3 i.e. up to 3 year.
 Loss Assets : When account holder belongs to this category 100%
provision is made by the banks to write off their accounts. After this
the assets are delivered to recovery agents for the purpose of sale.

3. Fig 1: Asset Classification
Assets
Performing
Assets
Standard
Assets
Non Performing Assets
(NPA)
Sub -Standard
Assets
Doubtful
Assets
Loss
Assets

4.  NPA arises due to a number of factors or causes like:-
 Speculation : Investing in high risk assets to earn high income.
 Default : Willful default by the borrowers.
 Fraudulent practices : Fraudulent Practices like advancing loans
to ineligible persons, advances without security or references,
etc.
 Diversion of funds : Most of the funds are diverted for
unnecessary expansion and diversion of business.
 Internal reasons : Many internal reasons like
inefficient management, inappropriate technology, labour
problems, marketing failure, etc. resulting in poor performance
of the companies.
 External reasons : External reasons like a recession in the
economy, infrastructural problems, price rise, delay in release of
sanctioned limits by banks, delays in settlements of payments by
government, natural calamities, etc.

5.  Indian Banks are pursuing variety of
strategies to control NPAs, which can be
studied under two broad categories as
under :
◦ a. Preventive Management
◦ b. Curative Management

6. a. Preventive Management -
 Developing ‘Know Your Client’ profile (KYC)
 Monitoring Early Warning Signals
 Installing Proper Credit Assessment and
Risk Management Mechanism
 Reduced Dependence on Interest
 Generating Watch-list/Special Mention
Category

7. b. Curative Management
 Pursuing Corporate Debt Restructuring
(CDR)
 Encouraging rehabilitation of potentially
viable units
 Encouraging acquisition of sick units by
healthy units
 Entering compromise schemes with
borrowers / Entering one time settlement

8.  Using Lok Adalats for compromise settlement
for smaller loans in “doubtful” and “loss”
category.
 Using Securitization & SARFAESI Act
(THE SECURITISATION AND RECONSTRUCTION OF THE FINANCIAL
ASSET AND ENFORCEMENT OF SECURITY ACT 2002.)
 Using Asset Reconstruction Company (ARC)
 Approaching Debt Recovery Tribunals (DRTs).
 Recovery Action against Large NPAs
 Circulation of Information of Defaulters-
Strengthening Database of Defaulters

9.  The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security
Interest Act, 2002 empowers Banks /
Financial Institutions to recover their non-
performing assets without the intervention of
the Court.
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10.  The Act provides three alternative methods
for recovery of non-performing assets,
namely: -
 Securitisation
 Asset Reconstruction
 Enforcement of Security without the
intervention of the Court.
 The provisions of this Act are applicable only
for NPA loans with outstanding above Rs.
1.00 lac.
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11.  Banks have a specific cell for NPA, which is
called as Stress Asset Recovery Cell.
 This cell continuously works on “How
Recoveries Can Be Done”.
 Bank does its recovery by sending notices, by
bidding, and by taking a legal action.
 “DECREE” is a paper of court or the permission
given by the court to sell the land or any asset.
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12.  This is the account which is made before
NPA.
 When a customer’s account comes under this
account then immediate follow up is done by
the respective bank.
 Warning signals are given by the bank.
(when a bank has a doubt on a customer
although they have standard accounts)
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13.  When bank has a doubt on the intension of the
customer it ask for the whole money to be paid
back even, if he has not paid two or three
installments.
 Notices are sent to the customer.
 On recalled assets bank can take legal action
also.
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14.  Recovery agent : they are agents hired by the
banks for the recovery of the non-performing
assets at 10% commission.
 Enforcement agent: they are the agents hired by
the bank after filing the case in court. They are
hired under SARFAESI act at 10% commission.
 Self help group(SHG): SHG is a group of 10 to 15
people in rural areas which is appointed by the
banks especially SBI as recovery agent for govt.
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15.  ARCs are meant to maximise recovery value
while minimizing costs.
 The Asset Reconstruction Company
Limited(ARCIL),
 India’s first ARC with an initial equity of Rs.10cr
with ICICI bank, IDBI and SBI to pick up 24.5%
stake each(and remaining to be acquired by
HDFC, IDBI Bank and UTI Bank).
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