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PRESENTATION BYTEAM 6

PRATEEK GUPTA

SAMIR RUSTOGI

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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 inrespect of a term loan,

The account remains outof orderin respect of anoverdraft/ cash credit

The bill remains overdue for a period of more than90 days in the case of bills purchased anddiscounted

The installment or interest remains overdue for twocrop seasons in case of short duration crops andfor one crop season in case of long duration crops

Presented by Team 62

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Substandard Assets Which has remainedNPA for a period less than or equal to 12months.

Doubtful Assets Which has remained in

the sub-standard category for a period of 12months

Loss Assets where loss has beenidentified by the bank or internal or external

auditors or the RBI inspection but theamount has not been written off wholly.

Presented by Team 63

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Standard Assets general provision of aminimum of 0.25%

Substandard Assets 10% on total outstandingbalance, 10 % on unsecured exposures identified

as sub-standard & 100% for unsecureddoubtful

assets. Doubtful Assets 100% to the extent advance not

covered by realizable value of security. In case ofsecured portion, provision may be made in the

range of 20% to 100% depending on the period ofasset remaining sub-standard

Loss Assets 100% of the outstanding

Presented by Team 64

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Poor Credit discipline Inadequate Credit & Risk Management Diversion of funds by promoters Funding of non-viable projects

In the early 1990s PSBs started suffering fromacute capital inadequacy and lower/ negativeprofitability. The parameters set for theirfunctioning did not project the paramount need forthese corporate goals.

The banks had little freedom to price products,cater products to chosen segments or invest fundsin their best interest

Presented by Team 65

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Since 1970s, the SCBs functioned as units cut offfrom international banking and unable toparticipate in the structural transformations andnew types of lending products.

Audit and control functions were not independentand thus unable to correct the effect of seriousflaws in policies and directions

Banks were not sufficiently developed in terms ofskills and expertise to regulate the humongous

growth in credit and manage the diverse risks thatemerged in the process

Presented by Team 66

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Inadequate mechanism to gather and disseminatecredit information amongst commercial banks

Effective recovery from defaulting and overdue

borrowers was hampered on account of sizeableoverhang component arising from infirmities in theexisting process of debt recovery, inadequate legalprovisions on foreclosure and bankruptcy anddifficulties in the execution of court decrees.

Presented by Team 67

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Drain on Profitability

Impact on capital adequacy

Adverse effect on credit growth as the bankers

prime focus becomes zero percent risk and asa result turn lukewarm to fresh credit.

Excessive focus on Credit Risk Management

High cost of funds due to NPAs

Presented by Team 68

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All SCBsaverage Net NPA Ratio for 2005-06 is 1.22(As per RBIsStatistics)

The banks have been able to report lower NPApercentage 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 assetportfolio/ book size.

Presented by Team 69

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Formation of the Credit Information Bureau(India) Limited (CIBIL)Release of Wilful Defaulters List. RBI also

releases a list of borrowers with aggregateoutstanding of Rs.1 crore and above againstwhom banks have filed suits for recovery oftheir funds

Reporting of Frauds to RBINorms of Lenders Liability framing of Fair

Practices Code with regard to lenders liabilityto be followed by banks, which indirectlyprevents accounts turning into NPAs onaccount of banksown failure

Presented by Team 610

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Risk assessment and Risk managementRBI has advised banks to examine all cases of

wilful default of Rs.1 crore and above and filesuits in such cases. Board of Directors arerequired to review NPA accounts of Rs.1 crore

and above with special reference to fixing ofstaff accountability.Reporting quick mortality casesSpecial mention accounts for early

identification of bad debts. Loans and

advances overdue for less than one and twoquarters would come under this category.However, these accounts do not needprovisioning

Presented by Team 611

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Banks are free to design and implementtheir own policies for recovery and writeoff incorporation compromise andnegotiated settlements with board

approvalSpecific guidelines were issued in May

1999 for one time settlement of smallenterprise sector.

Guidelines were modified in July 2000for recovery of NPAs of Rs.5 crore andless as on 31stMarch 2007.

Presented by Team 612

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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 theselling bank

The NPA must be held by the purchasing bank at least for aperiod of 15 months before it is sold to other banks but notto 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 ofpurchase and thereafter it would depend on the record ofrecovery with reference to cash flows estimated whilepurchasing

The bank may purchase/ sell NPA only on without recoursebasis

If the sale is conducted below the net book value, the shortfall should be debited to P&L account and if it is higher, theexcess provision will be utilized to meet the loss onaccount of sale of other NPA.

Presented by Team 613

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Presented by Team 614

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Presented by Team 615

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BANKS 2001-

2

2002-

3

2003

-4

2004-

5

2005-

6

87

SCBs

4.60 4.00 3.30 2.52 1.86

28 PSBs 4.89 4.21 3.50 2.73 2.09

20 OPBs 5.20 4.34 3.64 3.15 2.50

9 NPBs 3.90 3.76 2.42 1.56 0.96

30 FBs 2.41 2.44 2.13 1.43 0.96

16

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BANKS 2001-

2

2002-

3

2003

-4

2004-

5

2005-

6

87

SCBs

2.30 1.90 1.20 0.92 0.66

28 PSBs 2.42 1.93 1.28 0.95 0.72

20 OPBs 3.23 2.51 1.17 1.39 0.91

9 NPBs 2.10 2.116 1.10 0.80 0.43

30 FBs 0.81 0.79 0.66 0.42 0.40

17

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BANKS 2001-

2

2002-

3

2003

-4

2004-

5

2005-

6

87

SCBs

10.40 8.80 7.20 5.20 3.30

28 PSBs 11.09 9.36 7.79 5.53 3.70

20 OPBs 11.01 8.86 7.59 5.97 4.30

9 NPBs 8.86 7.64 4.99 3.59 1.70

30 FBs 5.38 5.25 4.62 2.85 1.90

18

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BANKS 2001-

2

2002-

3

2003

-4

2004-

5

2005-

6

87

SCBs

5.50 4.40 2.90 2.00 1.20

28 PSBs 5.82 4.53 2.99 2.06 1.30

20 OPBs 7.13 5.54 3.85 2.74 1.60

9 NPBs 4.94 4.63 2.36 1.85 0.80

30 FBs 1.89 1.76 1.48 0.86 0.80

19

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Presented by Team 620