Non-performing assets (NPAs) are loans classified by banks as sub-standard, doubtful, or loss assets due to borrower defaults. Factors contributing to NPAs include economic conditions, poor risk management, and mismanagement of funds. Strategies for managing NPAs encompass preventive measures, such as credit assessments, and curative actions like corporate debt restructuring and recovery through legal channels.

1. By
Meka Santosh

2. What is Non Performing Asset?
INTERES
T
NPA/
stressed loan
-Liability
-Assets

3. Non Performing Assets
• Non Performing Asset means a loan or an account of borrower, which
has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by RBI

4. Before a loan account turns into a NPA, banks are required to identify
incipient stress in the account by creating three sub-categories under the
Special Mention Account (SMA) category as given in the table below:
Special Mention
Account
Principal/ Interest Payment &
Partly/ Wholly due
SMA-0 1-30 days
SMA-1 31-60 days
SMA-2 61-90 days
NPA >90 days
Stressed
Assets

5. CLASSIFICATION OF NPA(ASSETS)
A substandard asset would be one, which has remained
NPA for a period less than or equal to 12 months
Substandard
Assets
An asset would be classified as doubtful if it has
remained in the substandard category for a period of 12
months.
Doubtful
Assets
A loss asset is one 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.
Loss Assets

6. Gross NPA in Rs cr.
10,03,404
Gross NPA Report NPA in RS Cr. As on June 2018
PSB 8,74,071
Private Banks 1,29,333
Gross 10,03,404

7. Reason Behind the NPA
• Default - One of the main reason behind NPA is default by borrowers.
• Economic conditions - The Economic condition of a region affected by
natural calamities or any other reason may cause NPA.
• No more proper risk management - Speculation is one of the major
reason behind default. Sometimes banks provide loans to borrowers
with bad credit history. There is a high probability of default in these
cases.
• Mis-management - Often ill-minded borrowers bribe bank officials to
get loans with an intention of default.
• Diversion of funds - Many times borrowers divert the borrowed funds
to purposes other than mentioned in loan documents. It is very hard
to recover from this kind of borrowers.

8. IMPACT OF NPA: -
• Profitability
• Liquidity & Opportunity Cost
• Waste of valuable Management time
• Loss of credibility as high NPA reflect poorly on Management
• Impact on Share Price
• The price of loans, interest rates will shoot up badly.
• Finally, it will lead to lower growth and higher inflation because of the
higher cost of capital

9. Types Of NPAs
• Gross NPA
It is the total number of NPAs of the bank simply added. Banks would
continuously assess this by evaluating their loan payments and decide
the NPAs.
• Net NPA
Net NPA is simply the total bad assets (actual) minus the provision left
aside.
Ex. You have lent $100 Cr. ,Provision $20 Cr. ,Collected amount $50 Cr.
Ans. 50Cr. Loss but less $20Cr. (Provision) = NET NPA is $30 Cr.

10. NPA Management Strategies
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

11. A. Preventive Management
• It is rightly said that prevention is better than cure.
• 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

12. B. Curative Management
• Re-phasement of loans
• Pursuing Corporate Debt Restructuring (CDR)
• Encouraging acquisition of sick units by healthy units
• Using Lok Adalats for compromise settlement for smaller loans in
“doubtful” and “loss” category.
• Using Securitization & SARFAESI Act
• Using Asset Reconstruction Company (ARC)
• Approaching Debt Recovery Tribunals (DRTs).
• Recovery Action against Large NPAs

13. TOOLS FOR RECOVERING NPA: -
LOK ADALATS
DEBT RECOVERY TRIBUNALS (DRT)
SARFAESI ACT, 2002 (Securitization & Reconstruction of Financial
Assets & Enforcement of Security Interest Act, 2002)
ASSET RECOVERY CONSTRUCTION COMPANY INDIA LIMITED (ARCIL)
CORPORATE DEBT RESTRUCTURING (CDR)

14. SARFESI Act 2002
• The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act has provisions for the
banks to take legal recourse to recover their dues.
• When a borrower makes any default in repayment and his account is
classified as NPA; the secured creditor has to issue notice to the
borrower giving him 60 days to pay his dues.
• If the dues are not paid, the bank can take possession of the assets
and can also give it on lease or sell it; as per provisions of the SAFAESI
Act.

15. Asset Restructuring Companies

16. Asset Restructuring Companies
• An Asset Reconstruction Company is a specialized financial institution that buys
the NPAs or bad assets from banks and financial institutions so that the latter can
clean up their balance sheets
• If a bad loan remains NPA for at least two years, the bank can also resale the
same to the ARC such as ARCIL.
• These sales are only on Cash Basis and the purchasing bank/ company would
have to keep the accounts for at least 15 months before it sells to other bank.
• ARCs clean up the balance sheets of banks when they sells these to the ARCs
• They purchase such loans on low amounts and try to recover as much as possible
from the defaulters.
• Their revenue is difference between the purchased amount and recovered
amount.
• This helps banks to concentrate in normal banking activities.
• Banks rather than going after the defaulters by wasting their time and effort, can
sell the bad assets to the ARCs at a mutually agreed value.

17. NPA Problem

18. Government Solution
• 5: 25 Scheme
• SARFESI Act
• Mission Indradhanush
• (ABCDEFG)

19. RBI Solution
Tier 1
• Stressed Account under 1000 Cr.
• Sold to ARC
Tier 2
• Upto 5000 Cr.
• Resolved through various RBI schemes
Tier 3
• Above 5000 Cr.
• Will taken by National Company Law Tribunal (NCLT) 2016

20. Reference
• https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8754&Mode=0
• https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7357#
• http://blog.forumias.com/non-performing-assetsnpas-and-its-impact-on-indian-
economy
• http://www.ijmbs.com/13/bhawani.pdf
• https://www.firstpost.com/business/bank-bad-loans-pile-crosses-rs-10-lakh-
crore-up-rs-139-lakh-crore-in-march-quarter-the-nap-mess-explained-in-7-
charts-4496431.html