Date post: | 09-Aug-2015 |
Category: |
Documents |
Upload: | tejal-pujara |
View: | 140 times |
Download: | 1 times |
EVALUATION OF NON-PERFORMING ASSETS
AT SOUTH INDIAN BANK
CHENNAI GEORGE TOWN BRANCH
CHENNAI-600 001
Submitted by
Tejal R. Pujara
(PGDMB14/088)
In partial fulfillment for the award of the degree of
POST GRADUATE DIPLOMA IN MANAGEMENT
INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH
24, Kothari Road, Nungambakkam, Chennai - 600 034
(2013-14)
CERTIFICATE
This is to certify that this project report “Evaluation of Non-Performing Assets (NPAs)” is
the bona fide work of Ms Tejal R. Pujara who carried out the project work under my
supervision.
(Signature)
Mr. Vikas Oberoi
Credit Manager,
South Indian Bank
Date
ACKNOWLEDGEMENT
I would like to thank South Indian bank for giving me this opportunity to intern at the
George Town branch of South Indian Bank. I would like to thank Mr. T. V. Joseph, Assistant
General Manager, for his guidance and support throughout my stint. I would like to sincerely
thank Mr.Vikas Oberoi, Credit Manager for mentoring me throughout my internship period
and patiently clarifying all my queries. I would like to thank Prof. Ramesh Subramanian,
Faculty IFMR for mentoring and guiding me throughout my internship period.
Tejal R. Pujara
EXECUTIVE SUMMARY
This project deals with defining Non-performing Assets (NPAs), evaluating the size of
NPAs, their impact on the banking industry, studying the causes of the existence of these,
understanding the recovery procedure of NPAs and measure its effectiveness.
Granting of credit facilities for economic activities is the primary task of banking. Apart
from raising funds through fresh deposits, borrowings, etc. recycling of funds received back
from borrowers is a major part of funding credit dispensation activities. Non-recovery of the
instalments and also the interest on loans negates the effectiveness of this process of the
credit cycle. In India NPAs are one of the major concerns for banks. NPA is the best
indicator for the health of the banking industry as it reflects the performances of banks and is
the primary indicator of credit risk. NPAs are an inevitable burden on the banking industry.
Hence the success of a bank depends upon methods of managing NPAs. Generally reduction
in NPAs shows that banks have strengthened their credit appraisal processes over the years
and increase in NPAs shows the necessity of provisions, which bring down the overall
profitability of banks. Non-recovery requires maintaining more owned funds by way of
capital and creation of reserves and provisions to act as cushion for the loan losses.
Avoidance of loan losses is one of the pre-occupations of the management of banks. While
complete elimination of loans losses is not possible, bank managements aim to keep it at a
low level. In fact, it is the level of NPAs, which, to a great extent, differentiates between a
good bank and a bad bank.
The Indian banking sector is facing a serious problem of NPA, which are considered to be at
higher levels than those in other countries, have of late attracted the attention of public and
also international financial institutions. The magnitude of NPA is comparatively higher in
public sectors banks than private sector banks. To improve the efficiency and profitability of
banks the NPA need to be reduced and controlled. This has gained further prominence in the
wake of transparency and disclosure measures initiated by the RBI recently.
Concrete efforts have to be made to improve recovery performance. The main reasons of
increasing NPAs are the target-oriented approach, which deteriorates the qualitative aspect of
lending by banks and willful defaults, ineffective supervision of loan accounts, lack of
technical and managerial expertise on the part of borrowers.
Contents
SOUTH INDIAN BANK – AN INTRODUCTION.......................................................................................1
SOUTH INDIAN BANK GEORGE TOWN BRANCH – INTRODUCTION.............................................3
CREDIT APPRAISAL – INTRODUCTION................................................................................................4
MEANING..................................................................................................................................................... 4TYPES OF ADVANCES................................................................................................................................... 4
CREDIT APPRAISAL PROCESS................................................................................................................ 8
PRE-SANCTION APPRAISAL PROCEDURE & TECHNIQUES................................................................................8PROCEDURES AND TOOLS FOR ANALYSING FINANCIAL STATEMENTS – FINANCIAL STATEMENT ANALYSIS & RATIO ANALYSIS........................................................................................................................................ 12ASSESSMENT AND FINANCING OF WORKING CAPITAL.................................................................................14
FORMULA UNDER TURNOVER METHOD...........................................................................................14
ASSESSMENT OF TERM LOAN PROPOSALS...................................................................................................16
DISBURSEMENT, FOLLOW UP & POST SANCTIONING OF ADVANCES.......................................20
MONITORING/ FOLLOW UP – SOME IMPORTANT POINTS...........................................................21
LEGAL FOLLOW-UP.................................................................................................................................... 21FINANCIAL FOLLOW-UP.............................................................................................................................. 22PHYSICAL FOLLOW-UP................................................................................................................................ 23
REVIEW AND MONITORING OF WATCH & NPA ACCOUNTS........................................................25
NON-PERFORMING ASSETS (NPAS).....................................................................................................28
TYPES OF NPA.......................................................................................................................................... 31
RBI GUIDELINES FOR NPA CLASSIFICATION & PROVISIONING.................................................32
PROVISION COVERAGE RATIO (PCR).................................................................................................37
CAUSES OF NPA........................................................................................................................................ 38
IMPACT OF NPA....................................................................................................................................... 40
EARLY SYMPTOMS.................................................................................................................................. 42
PREVENTIVE MEASUREMENT FOR NPA............................................................................................43
RESTRUCTURING OF LOANS AND ADVANCES.................................................................................45
LOAN RECOVERY MEASURES:............................................................................................................. 46
SALE OF PLEDGED ITEMS............................................................................................................................ 47SARFAESI ACT 2002................................................................................................................................ 47RECOVERY THROUGH COURTS/ DRT...........................................................................................................47INSTITUTION OF CDR MECHANISM............................................................................................................. 48INCREASED POWERS TO NCLTS AND THE PROPOSED REPEAL OF BIFR:.......................................................49ONE TIME SETTLEMENT.............................................................................................................................. 49NEGOTIATED SETTLEMENT SCHEMES.......................................................................................................... 50RECOVERY CAMPS..................................................................................................................................... 50
SALE OF ACCOUNTS TO ASSET RECONSTRUCTION COMPANIES (ARCS)........................................................51WRITE-OFF/ WAIVER OF LEGAL ACTION.....................................................................................................51
OBJECTIVE OF THE STUDY................................................................................................................... 52
METHODOLOGY...................................................................................................................................... 52
ANALYSIS OF NPAS AT SOUTH INDIAN BANK (SIB).........................................................................53
ANALYSIS OF NPAS AT SOUTH INDIAN BANK (SIB) – GEORGE TOWN BRANCH......................59
FINDINGS AND RECOMMENDATIONS:...............................................................................................60
CONCLUSION............................................................................................................................................ 61
ANNEXURE 1.............................................................................................................................................. 62
REFERENCES............................................................................................................................................ 63
Evaluation of Non-Performing Assets (NPAs)
SOUTH INDIAN BANK – AN INTRODUCTION
The South Indian Bank Limited (SIB) is a private sector bank headquartered at
Thrissur City in Kerala, India. South Indian Bank has 800 branches spread across more than
26 states and union territories in India. It has set up 1006 ATMs all over India.
One of the earliest banks in South India, "South Indian Bank" was started in 1929 and came
into being during the Swadeshi movement. The establishment of the bank was the fulfilment
of the dreams of a group of enterprising men who joined together at Thrissur, a major town
(now known as the Cultural Capital of Kerala), in the erstwhile State of Cochin to provide
for the people a safe, efficient and service oriented repository of savings of the community
on one hand and to free the business community from the clutches of greedy money lenders
on the other by providing need based credit at reasonable rates of interest.
Its products include personal loan, vehicle loans, educational loan, gold loan, agricultural
loan, Recurring Deposit Scheme (NRE), Portfolio Investment Scheme (PIS) for NRI’s,
Debit Card, Credit Card, Mutual Fund, Insurance, Travel Card, Internet and Mobile Banking
Services for retail and corporate clients. It also provides online value added services like
stock trading, ticket booking, mobile recharges, shopping, utility payments, offerings etc.
During the year 2013-14, the bank has earned a net profit of Rs. 507.5 crore. The Bank could
achieve this healthy growth in net profit essentially on account of higher scale of operations,
better management of assets and liabilities and focus on enhancement of non-interest revenue
of the Bank.
During the year, the Bank opened 50 new branches and 137 ATMs across the country. The
Bank has been successful in widening its coverage across the country with 7 branches
transforming it into a pan India institution. The branch network now covers 29 states/union
territories and has a network of 1006 ATMs.
Financial Highlights:
Operating Profit registered a y-o-y growth of ₹ 35.76 Crore (4.21%) and was higher
at ₹ 884.35 Crore for year ended 31.3.2014 as against ₹ 848.59 Crore for year ended
31.3.2013.
Net Profit of the Bank for the year ended 31.03.2014 stood at ₹ 507.50 Crore against
₹ 502.27 Crore for the year ended 31.03.2013.
Tejal R. Pujara (PGDMB14/088) Page 1
Evaluation of Non-Performing Assets (NPAs)
The Bank’s total income recorded a growth of ₹ 3071.50 Crore (12.88%) during the
year ended 31.3.2014 from ₹ 4769.22 Crore for the year ended 31.3.2013 to ₹
5383.53 Crore for the year ended 31.3.2014.
Net Interest Income improved to ₹ 5015.07 Crore for 2013-14 as compared to ₹
4434.29 Crore for 2012-13, registering a growth of 13.1%.
The Other Income during 2013-14 increased to ₹ 368.46 Crore from ₹ 334.93 Crore
for 2012-13, a growth rate of 10%.
Gross NPA stood at ₹ 432.62 Crore as on 31.03.2014 as against ₹ 433.87 Crore as
on 31.03.2013 and in percentage terms, the Gross NPA ratio was 1.19% as on
31.03.2014 as against 1.36% as on 31.03.2013.
Net NPA stood at ₹ 281.67 Crore as on 31.03.2014 as against ₹ 249.53 Crore as on
31.03.2013. In percentage terms, the Net NPA ratio was 0.78% for both the years.
Milestones
The FIRST among the private sector banks in Kerala to become a scheduled bank in
1946 under the RBI Act.
The FIRST bank in the private sector in India to open a Currency Chest on behalf of
the RBI in April 1992.
The FIRST private sector bank to open a NRI branch in November 1992.
The FIRST bank in the private sector to start an Industrial Finance Branch in March
1993
The FIRST among the private sector banks in Kerala to open an "Overseas Branch" to
cater exclusively to the export and import business in June 1993.
The FIRST bank in Kerala to develop an in-house, fully integrated branch automation
software in addition to the in-house partial automation solution operational since
1992.
The FIRST Kerala based bank to implement Core Banking System
The THIRD largest branch network among Private Sector banks, in India, with all its
branches under Core banking System.
Tejal R. Pujara (PGDMB14/088) Page 2
Evaluation of Non-Performing Assets (NPAs)
SOUTH INDIAN BANK GEORGE TOWN BRANCH – INTRODUCTION
This branch is headed by the Assistant General Manager which is opposite to the Madras
High Court in George Town and is one of the oldest branches of the bank in the city. The
following table summarizes the size of this branch.
Particulars Amount (in ₹ Crores)
Total Income 62,02,38,992.16
Total Deposits 2,96,70,32,402.52
Total Advances 6,23,65,45,047.67
Secured by Tangible Assets
Covered by Bank/ Govt. Guarantees
Unsecured
6,07,38,86,217
1,41,89,755
14,39,69,075.62
Net Profit 49,20,62,080.96.
Tejal R. Pujara (PGDMB14/088) Page 3
Evaluation of Non-Performing Assets (NPAs)
CREDIT APPRAISAL – INTRODUCTION
Meaning
Credit appraisal means an investigation/assessment done by the bank before providing any
loans & advances/project finance & also checks the commercial, financial & technical
viability of the project proposed, its funding pattern & further checks the primary &
collateral security cover available for recovery of such funds.
Credit Appraisal is a process to ascertain the risks associated with the extension of the credit
facility. It is generally carried by the financial institutions which are involved in providing
financial funding to its customers. Credit risk is a risk related to non-repayment of the credit
obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the
customer in order to mitigate the credit risk. Proper evaluation of the customer is performed,
which measures the financial condition and the ability of the customer to repay back the loan
in future. Generally the credit facilities are extended against the security know as collateral.
But even though the loans are backed by the collateral, banks are normally interested in the
actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are
ascertained to ensure the timely payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant. Factors like age,
income, number of dependents, nature of employment, continuity of employment, repayment
capacity, previous loans, credit cards, etc. are taken into account while appraising the credit
worthiness of a person. Every bank or lending institution has its own panel of officials for
this purpose.
Types Of Advances
Advances can be broadly classified into:
Fund-based facilities: Includes overdrafts, cash credits, term loans, project finance,
bills purchased and bills discounted. These are divided into three categories:
o Long-term loans – These are advance granted for more than 36 months.
o Medium-term loans – These are advances granted for more than 12 months
but less than 36 months.
o Short-term Loans – These are advances granted for up to 12 months.
Tejal R. Pujara (PGDMB14/088) Page 4
Evaluation of Non-Performing Assets (NPAs)
Non-fund based facilities: Includes Letter of Credit (LC), Bank Guarantee, Co-
acceptances of bills/ deferred payment guarantee.
Term Loans: Term Loan is a single transaction limit where the loan amount is
disbursed either in a lump sum or in stages and the same is repaid in installments
along with interest. Unlike in an operative account, the facility of reinstating the limit
to the extent of repayment is not available in a term loan. This is due to the fact that
the loan is availed for a specific purpose/ project.
Short Term Loans and Working Capital Limits: The short term finances are
mainly extended for working capital requirement which are employed as current
assets of the business. Banks may also extend short term personal loans to individuals
both as clean loans and secured loans. Working Capital finance for trade and industry
is extended by banks by way of inventory limits in the form of overdrafts, cash credit,
WCTL etc. Post sales limits are extended by way of discounting of bills/ cheques,
advances against book debts etc.
Based on the security available, advances can be fully secured, partly secured and clean or unsecured.
Overdrafts:
Overdraft is a facility whereby the current account is allowed to be overdrawn up to
the sanctioned limit. The borrower may remit funds into the account reducing the
debit balance or he may draw on the account up to the limit. It is sanctioned to
individuals, traders and industrial concerns. Overdraft maybe unsecured (clean),
partly secured or fully secured against pledge, mortgage or hypothecation of
securities acceptable to the bank.
Cash Credit:
It is a drawing account against credit granted by the bank and is operated in exactly
the same manner as a current account on which an OD has been sanctioned.
Loans (Secured/ Unsecured):
These are advances or fixed amounts and no further debits maybe rose in the account
Tejal R. Pujara (PGDMB14/088) Page 5
Evaluation of Non-Performing Assets (NPAs)
subsequent to the initial debit except by way of interest, insurance premium and other
charges. Loans can be fully secured (FSL) against gold, Government Securities, LIC
policies, shares and other securities acceptable to the bank.
The remittances made under the loan amount will be appropriated in the loan account
in the chronological order of demand for charges, interest or principal, by the system.
This practice is followed to avoid the situation of the account technically becoming
an NPA, for non-satisfaction of a demand towards a small charge for more than 90
days.
Clayton’s Rule: In this case, The Court held that the first credit in an account would
go towards adjusting the first debit in the said account, and so on. In the case of a
Banking firm, under partnership constitution, upon the death of one partner, credits
made by a customer in his account would become the responsibility of the remaining
partners, and could not be repaid out of the estate of the deceased partner.
Bills Purchased & Discounted/ Cheques Purchased:
This type of advance can be classified into 3 distinct groups:
o Bills purchased (B.P): These maybe in the nature of on demand Clean or
Documentary bills being bills payable on Demand drawn on outstation centers
for which immediate credit is afforded to party’s account less our discount and
handling charges.
o Usance Bills Discounted (USB)/ Drawee Bill Discounted (DBD):
Usance Clean or Documentary bills are bills payable on due date after expiry
of the usance period drawn on drawees/ payees against which immediate
credit is given to the party’s account less interest for the usance period,
handling charges postage etc.
o Cheques purchased (C.P): Outstation cheques or drafts drawn on branches
of our Bank or other banks are purchased and immediate credit is afforded to
party’s account less our discount/ commission. Due to the advent od ‘speed
clearing’ in which the outstation cheques and other instruments drawn on any
CBS enabled bank branch is payable at any clearing house in the country,
which has implemented the ‘Speed Clearing’, the necessity for this type of
Tejal R. Pujara (PGDMB14/088) Page 6
Evaluation of Non-Performing Assets (NPAs)
facility has reduced to a great extent.
Letters Of Credit (LC)
Credit means any arrangement however named or described that is irrevocable and
thereby constitutes a definite undertaking of the issuing bank to honour a complying
presentation. Honor means:
o to pay at sight if the credit is available by sight payment.
o To incur a deferred payment undertaking and pay at maturity if the credit is
available by deferred payment.
o To accept a bill of exchange (draft) drawn by the beneficiary and pay at
maturity if the credit is available by acceptance.
Thus Letter of Credit is a written undertaking by a bank (issuing bank)given to the seller
(beneficiary) at the request and in accordance with the instructions of the buyer (applicant) to
effect payment of a stated amount within a prescribed time limit and against stipulated
documents provided all the terms and conditions of the credit are complied with.
Bank Guarantee
Contract of guarantee can be defined as a contract to perform the promise, or
discharge the liability of a third person in case of his default. The contract of
guarantee has three principal parties:
o Principal Debtor: The person who has to perform or discharge the liability and
whose default the guarantee is given
o Principal Creditor: The person to whom the guarantee is given for due
fulfilment of contract by principal debtor. Principal Creditor is also sometimes
referred to as beneficiary.
o Guarantor or Surety: The person who gives the guarantee.
Tejal R. Pujara (PGDMB14/088) Page 7
Evaluation of Non-Performing Assets (NPAs)
CREDIT APPRAISAL PROCESS
The Credit Appraisal process is divided into 3 stages:
Flowchart 1
Pre-Sanction Appraisal Procedure & Techniques
Branch Manager/ Officer In charge granting or recommending the grant of advances
for business, trade, industry, personal, agriculture or for any other purposes satisfy
themselves of the following 6 C’s of credit of the applicant to be examined by
discrete enquiries from outside parties engaged in similar line of business and full
records of these are maintained in the personal file of the borrower.
Flowchart 2
Tejal R. Pujara (PGDMB14/088) Page 8
Pre-sanction Appraisal
Sanctioning of Loan
Post-sanction
Monitoring6
C's
of C
redi
t
Character
Capacity
Cash Flow
Capital
Collateral
Condition
Evaluation of Non-Performing Assets (NPAs)
Individual worth statements for all the signatories in the capacity as the borrower, co-
obligator/ guarantor should be obtained. The value of assets stated in the form such as
cash, goods, investments, buildings, landed property etc. should be ascertained by
obtaining documentary proof compulsorily in the case of landed properties and
investments as far as possible in the case of other assets.
The nature and extent of liabilities should be verified by in dependent enquiry and
wherever possible by examination of existing bank accounts and other books of
accounts.
The value of the liquid assets or easily realizable assets such as cash, book debts,
stocks, outstanding’s considered good etc. should ordinarily exceed, with an ample
margin, the total of the short-dated liabilities such as sundry creditors, short-term
borrowings etc.
The applicants should have personal/ commercial integrity and should be respectable.
The purpose for which the advance is required should be enquired and confirmed.
The plan and source of repayment should be enquired and satisfied.
The advance should be proportionate to applicant’s means:
o The amount of advance should be related to the owned capital/ independent
means of the borrower.
o It should also be possible by a reference to the past 2 or 3 years’ financial
statements, to ascertain the quantum of stocks that would be carried by the
business or raw materials required to be stored for the purpose of carrying on
the business.
o Projected turnover, inventory levels and credit limits proposed should
compare level with past trend.
o Sufficient reasons to justify any large variations in projections, from the past
trend should be adduced.
Exposure to sister concerns, Close relatives:
o While considering advances, credit facilities enjoyed by allied and associate
firms or partners/directors individually should also be put on record, showing
the exposure for each individual/ firm/ company.
o If facilities are enjoyed at other offices by connected firms or partners/
directors, the fact should be ascertained and details given in the proposal.
Tejal R. Pujara (PGDMB14/088) Page 9
Evaluation of Non-Performing Assets (NPAs)
The integrity of the borrower and capacity to repay:
o Branch managers must make sure that borrowers are men/women of integrity
and had the capacity to repay.
The borrower’s knowledge of business:
o A borrower cannot thrive unless he knows all aspects of the business and it
may also be difficult in such cases to recover the bank dues. Due importance
should be given to the managerial competency.
o The applicant must be adequately technically qualified or continued technical
assistance should be ensured.
o Satisfactory marketing arrangements should be ensured:
- Examine the proposal from the angles of safety, feasibility and
national priority etc.
- Make a critical study of the financial statements, project report
and other information submitted by the borrower.
- Do not enter into propositions which are likely to land the bank
even into the slightest loss.
Government policies, licenses and permissions:
o Gather the govt. policies relevant to the industry. Consider the impact of any
change in the current Govt. policy for the industry and the unit to be financed.
o Ensure that all license/ quota/ permission required is obtained and a copy of
the same is available on record along with the proposal.
o Ensure that the clearance from the local govt. authority, factories, inspectors,
local body, electricity board, pollution control board etc. is obtained.
Sources of Credit Information:
Confidential opinion from existing bankers.
Opinion from reliable sources who knew the borrower well.
Opinion based on the existing account
Financial Statements
Enquiry from Competitors and NBFC’s/ money lenders.
Independent assessment by the branch head
Tejal R. Pujara (PGDMB14/088) Page 10
Evaluation of Non-Performing Assets (NPAs)
Appraisal of the Primary Security and Collateral Security offered:
In case of advances against goods:
o The amount announced to anyone borrower should commensurate with the
extent of his resources, as margin have to be maintained out of these
resources, if prices fall.
o The commodities should be readily saleable and not be subject to rapid
deterioration.
o They should be stored in such a way as to permit periodical inspections.
o Hypothecation of goods as security should be taken only from parties of very
good standing and except in very exceptional cases such limits should have
additional collateral security.
o Only approved goods should be considered as security by way of pledge.
Loans/Overdrafts against Company shares/ debentures:
o These should be granted to persons who are able to pay up margins without
delay in event of a fall in the market price of the script.
o Shares must be fully paid and should stand registered in the borrower’s name
or is held in the Demat account of the borrower.
Loans/ Overdrafts against Surrender Value of an Insurance Policy:
o The surrender value should be ascertained from the concerned office of the
Insurer.
o The policy should be assignable in the bank’s favour and the assignment can
be registered with the Insurer.
Advance against deposits:
o Deposits with other banks should not be taken as security.
o An undertaking should be taken from the depositor agreeing to adjust the
deposit on maturity towards adjustment of the loan/ overdraft..
Tejal R. Pujara (PGDMB14/088) Page 11
Evaluation of Non-Performing Assets (NPAs)
Procedures and Tools for Analysing Financial Statements – Financial Statement Analysis & Ratio Analysis
Note: The procedure below can be used to for the assessment of both working capital and
term loans.
Ratio analysis: It is based on the fact that if a relationship between two accounting figures is
created, useful information relating to performance, strengths and weaknesses can be derived.
Different ratios used for analysing financial statements can be grouped as revenue ratios,
balance sheet ratios and mixed ratios. Some of the important financial ratios used in the
appraisal of working capital credit facilities and term loans are given below:
a) Current Ratio = Current Assets/ Current Liabilities
Minimum Requirement
For export oriented units (EOU’s) – 1.10 & above
o MSME Sector:
Limits below Rs. 1 crore – 1.10
Limits Rs. 1 crore & above – 1.33 (Turnover Method 1.25)
o For others – 1.33 and above except where RBI guidelines stipulate otherwise.
b) Quick Ratio = (CA – Inventory) / (CL – Borrowings)
o Should be at least 1
c) Inventory Turnover Ratio = CGS/ Avg. Inventory
o A decrease in this ratio is a danger signal
d) Debtor Velocity Ratio = (Receivables/ Credit Sales) x 360 days
e) Creditor Velocity Ratio = (Sundry Creditors/ Credit Purchases) x 360 days
f) Asset Turnover Ratio = Gross Sales/ Operating Assets
g) Debt Equity Ratio = Term Liabilities/ Tangible Net Worth
Minimum Requirement
o Facility upto Rs. 100 lakhs – 1.50:1
Tejal R. Pujara (PGDMB14/088) Page 12
Evaluation of Non-Performing Assets (NPAs)
o Facility Rs. 100 lakhs & above – 2:1
h) TOL/ TNW = Total Outside Liabilities/ Total Net Worth
A desirable TOL/ TNW:
o Facility upto Rs. 100 lakhs – 2.50:1
o Facility Rs. 100 lakhs & above – 3:1
o TOL/ TNW ratio upto 10:1 is approved for considering credit limits to
NBFC’s.
o Aggregate non-fund based limits to any single borrower shall not exceed 5
times of the Tangible Net Worth (TNW) of the borrower and aggregate of
funded plus non-funded exposure shall not exceed 10 times of the TNW.
i) Fixed Assets Coverage Ratio = (Fixed Assets + Non-Current Assets)
(Long term liabilities + TNW)
j) Debt-Service Coverage Ratio =
Net Profit + Depreciation + Interest on Term Loan/ Deferred Credit
Int. on Term Loan/Deferred Credit + Installments of Term Loan/Def. Credit
It measures the capacity of the Company to repay its debt.
o Desirable Minimum = 1.75:1 each year
o Below 1.50:1 is not allowed
o Avg. DSCR is taken into account
Financial Statement Analysis: It is a tool of financial analysis in which significant
relationships of different items of financial statements are created and highlighted. These
relationships are then interpreted in simple words. For Example, the earning data is related
with investments.
Two types of financial statement analysis are important. One is horizontal analysis and
second is vertical analysis. In horizontal analysis, one compares all items of Balance Sheet
and Profit & Loss account with previous year’s balance sheet and Profit & Loss items. In
vertical analysis one converts each element of the information into percentage of the total
amount of statement so as to establish relationship with other components of the same.
Tejal R. Pujara (PGDMB14/088) Page 13
Evaluation of Non-Performing Assets (NPAs)
Assessment and Financing of Working Capital
Bank sanctions working capital credit facilities to borrowers for the purpose of building up
current assets required for the day to day operations of the business/ manufacturing unit.
Working Capital finance extended to Industry/ trade/ business must be within the Maximum
Permissible Bank Finance (MPBF).
Turnover Method: Under the turnover method, assessment of total working capital
is to be based on the basis of estimated turnover, while the margin is to be taken at
actual level. But if the available margin (Net Working Capital) is more than 5% of the
projected turnover, the bank finance will be correspondingly reduced from 20% so
that the total working capital requirement comprising the bank finance and
borrower’s contribution is maintained at 25% of the turnover, as bank finance is only
intended to support the need-based requirement of a borrower.
FORMULA UNDER TURNOVER METHOD
A. Projected Turnover (A)
B. 20% of (A)
C. Margin Requirement at 5% of (A)
D. Margin (NWC = CA – CL)
E. Surplus/ Shortfall (C-D)
F. Eligible Minimum Bank Finance (20% of A)
G. Bank Borrowings (F-G)
Table 1: Calculation of WCR under Turnover Method:
Particulars 20012-13 (Rs.
Lakhs)
2013-14
(Rs. Lakhs)
Annual Turnover 320.61 485.00
NWC (Margin of WC) 25.25 27
Total WCR @ 25% Turnover 80.15 121.25
Minimum Margin to be brought by borrower
(20% of total WCR or 5% of total turnover)
16.03 24.25
Tejal R. Pujara (PGDMB14/088) Page 14
Evaluation of Non-Performing Assets (NPAs)
Actual NWC available with unit Nil 25.25
WC (fund based) limits to be sanctioned by bank –
80% of total requirement or 20% of turnover
Nil 97
The bank in this case will sanction total fund based WC limit of Rs. 97 lakhs
Second Method of Lending: Under this method, the borrower has to provide a
minimum of 25% of current assets out of owned funds and term borrowings.
MPBF = (WCG – Actual NWC) or (WCG – Stipulated NWC) whichever is less.
The MPBF shall be arrived at based on the Projected Balance Sheet and Profit & Loss
Account. If the borrower needs higher limits than assessed as per turnover method,
the eligible working capital may be calculated under the ‘Second Method of
Lending’. The higher of the two limits may be allowed to the borrower. Actual
disbursement will be regulated through availability of Drawing Power (D.P) in the
account.
Table 2: Calculation of WCR under Second Method of Lending:
Particulars Year1
(Rs.
Lakhs)
Year 2
(Rs.
Lakhs)
i) Total Current Assets 1957.42 2169.63
ii) Total Current Liabilities other than bank borrowing 624.99 624.99
iii) Working Capital Gap 1332.43 1544.64
iv) Min. required margin being 25% of Total CA 489.36 542.40
v) Actual/Projected NWC 200.98 200.98
vi) (iii) – (iv) 843.07 1002.24
vii) (iii) – (v) 1131.45 1343.66
viii
)
MPBF (Min. of (vi) or (vii)) 843.07 1002.24
ix) Excess Bank Borrowings 288.38 341.42
The margin of 25% under both the methods is the minimum requirement. If a
borrower has more liquid surplus, the MPBF will be reduced accordingly.
Tejal R. Pujara (PGDMB14/088) Page 15
Evaluation of Non-Performing Assets (NPAs)
Tejal R. Pujara (PGDMB14/088) Page 16
Evaluation of Non-Performing Assets (NPAs)
Cash Budget Method
o Cash budget containing cash receipts and cash payments for a particular period
is obtained from the borrower.
o The difference of cash receipt and payments for individual month represents
surplus/ deficit.
o The opening cash surplus/deficit and the surplus /deficit for individual months
are carried forward from month to month, with cumulative effect.
o The limit is fixed based on the peak cumulative deficit and drawings for
individual months are allowed within the deficit for the respective month.
When to use the appropriate method:
The above methods are used in the following ways:
Turnover Method to be used for:
o Small borrowers
o Small scale and tiny industries – Total credit limits maybe extended up to Rs.
5 crores
Cash Budgeting System to be adopted in respect of large borrowers.
The computation of MPBF is done based on the projected figures whether under
turnover method or Second Method of Lending. However, we should accept only
realistic projections.
Assessment of Term Loan Proposals
There are 6 broad aspects of valuation of term loans:
Technical FeasibilityThe examination of technical feasibility requires a detailed assessment of the type of technology proposed for the unit. It should be examined:
i. Whether the technology is latest or outdated?
ii. Whether the unit is capital intensive or labor intensive?
iii. What will be the impact on the firm in case of the change of technology?
iv. In case of changes in product or shift in consumer preference, whether the unit
will be able to meet the situation by diversifying its production activities?
v. Whether the proposed plant is of the right size based on capital requirements,
cost-benefit analysis and present and future demand of the product?
Tejal R. Pujara (PGDMB14/088) Page 17
Evaluation of Non-Performing Assets (NPAs)
vi. What is the level of optimum capacity utilisation and the capacity at which the
plant will operate? Break-even analysis reveals the required information in
this regard
vii. The reputation of the machinery supplier and the quality of the machinery?
viii. The location of the project/ unit – whether adequate supply of raw material.
Power, water, labor and other infrastructural facilities aare available at
reasonable cost?
ix. Issues of socio-economic factors, strategic considerations and Government
policies like balanced regional development.
x. Fulfilment of the rules and regulations of the government as far as the
technical and social considerations are concerned.
xi. Availability of suitable technical personnel to implement the project and the
facility for training for its personnel to implement the project on technical the
side.
Commercial Feasibility
This involves study of the project for analyzing:
i. The present and future demand for the product to be produced
ii. Share of the product in the total market (present and future)
iii. Any possible fluctuations in demand due to changes in consumer preferences
or change in technology.
Mere production will not complete the cycle and the products should be sold in the
market. The propensity and capacity to repay the loan amount is entirely dependent
on sales revenue of the project.
The demand for the commodity should be estimated on the basis of macro and micro
analysis of the data available through market surveys and other methods available.
After estimating the present size of the market, projections should be made in respect
of seasonal variations and cyclical variations of demand, fluctuations in demand due
to technology, prices, consumer taste or preference and availability of substitutes.
The present supply position of the same commodity and similar commodities should
be assessed because it is an important ingredient to know the acceptability of the
product in the market
Tejal R. Pujara (PGDMB14/088) Page 18
Evaluation of Non-Performing Assets (NPAs)
Financial Feasibility
It is necessary for bankers to study and examine the projected financial statements of
the unit to evaluate the project. There are four important techniques of financial
evaluation for lending decisions namely
i. Ratio Analysis: The ratios mentioned above include the leverage or solvency
ratios which give a measure of the long-term financial stability of the
Company.
ii. Break-even Analysis: Banker is interested in getting hi money back from
loanees out of the surplus generated. The first question that comes to his mind
is: When does this surplus start in the unit? The break-even point is a level at
which the unit is able to raise its output ata total cost which will be equal to
the sales revenue of the output. Repayment of the term loans granted by banks
is generally scheduled to begin after the unit braeks-even.
iii. Cash Flow and Funds Flow Analysis: Cash flow estimates are drawn up to
indicate the inflow and outflow of funds of the concern year by year covering
the entire period of term advance. The cash flow estimate helps the banker to
fix a proper repayment schedule and to grant repayment holidays, if
necessary. The appraisal technique should also be helpful to find out how the
funds came and how they were applied. If the funds are properly applied, then
only the working results will be good and financial position satisfactory to
effect timely payment.
iv. Return on Investment: There are four method to measure return on
investments
Payback Approach
Accounting Rate of Return
Incremental Rate of Return
Discounted Cash Flow Method
By using these techniques the banker can evaluate and rank the projects according
to their profitability. Discounted cash-flow method is ideal to be used for the
purpose of selection of projects as it takes into account the time value of money
and considers net cash flow being recovery of the original investment plus
required rate of return on invested capital. This is much useful to the banker since
the recovery of original investment with required rate of return on capital revelas
Tejal R. Pujara (PGDMB14/088) Page 19
Evaluation of Non-Performing Assets (NPAs)
the project’s ability to meet the debt obligations to the banks. The repayment
capacity of the borrower is most important.
Managerial Feasibility:
managerial ability and honesty are the most essential factors which should be
considered by the banker while scrutinizing the loan applications. Even if the project
is technically sound, commercially viable and financially profitable it will not be a
worthwhile venture for financing if the project cannot be managed properly. Nothing
can be substituted for efficient management and a weak management results in failure
of even a well-conceived project. It is the management that runs a project and it is
through the management that a banker can ensure the end-use of the loan and
determine the character of the borrowing unit. The past history of the promoters can
give some useful hints.
Socio-economic Feasibility:
The object of this evaluation is to undertake social cost benefit analysis of the project
under consideration with a view to determine the contribution of the project towards
fulfilment of the national objectives and in assessing the social return on the project.
The major criteria in this are national objectives, economic life of the project and
social cost-benefit analysis.
Global Competence of the Industry
Study of the projects thoroughly from these five angles should be done and select only those
which will be technically sound, commercially feasible, financially profitable, managerially
competent and economically and socially viable to meet its financial obligations.
Tejal R. Pujara (PGDMB14/088) Page 20
Evaluation of Non-Performing Assets (NPAs)
DISBURSEMENT, FOLLOW UP & POST SANCTIONING OF ADVANCES
The post-sanction credit process can be broadly classified into three stages viz., follow-up,
supervision and monitoring, which together facilitate efficient and effective credit
management and maintaining high level of standard assets. The objectives of the three stages
of post sanction process are detailed below.
Table 3: Stages of Post Sanction Process
Basis of a good lending is sound appraisal and assessment of capacity/ intention to repay.
Past record of good performance and integrity are no guarantee for future performance. Even
a loan granted on the basis of sound appraisal may go bad if the borrower did not carry out
his promises regarding performance. To realise this fact a proper supervision and follow-up
of advance is essential. Pre-sanction appraisal and post-sanction monitoring are two sides of
the same coin and both are essential for the timely repayment.
Some of the important general procedures to be followed in the monitoring of working
capital and term loan credit facilities are as below:
Opening of Loan Account and Disbursement:
The terms of sanction have to be thoroughly understood and fully complied with. The
disbursement should be made only after the completion of documentation and
complying with all the terms of the sanction order. If stage release is stipulated, the
time schedule has to be adhered to and no installment should be released before the
time in which it is to be made. Working capital limit to be disbursed only at the time
of requirement i.e generally after the construction of the building , installation of the
machinery and power connection is obtained.
Disbursement of WC/ TL should be made after ensuring that our disbursements are in
tune with :
a. Borrower’s investment/ Promoter’s Contribution
Tejal R. Pujara (PGDMB14/088) Page 21
Evaluation of Non-Performing Assets (NPAs)
b. Disbursement made by term lending financial institutions/ other banks/
c. Raising outside loans/ unsecured creditors and subordinating the same to bank
(wherever stipulated)
Wherever necessary/ stipulated the following should be ensured while disbursing the
loan amount itself.
a. Subordination of unsecured loans/ other creditors etc. where stipulated.
b. Raising of promoters contribution
c. Availment of State/ Central subsidy etc.
d. Securing power connection, water connection, Pollution Control Clearance
etc.
Wherever refinance is a precondition to the release of the loan, the same should be
ensured without fail. Periodical disbursement under the loan is to be reported to Head
Office for obtaining refinance.
MONITORING/ FOLLOW UP – SOME IMPORTANT POINTS
Monitoring is to start soon after the disbursement and to continue till the advance is
liquidated. Monitoring can be broadly divided into legal, financial and physical follow-up:
Legal Follow-up
Documentation:
In the correct formats
Adequately stamped
Properly executed by right persons
Complete in all respects
AOD/ renewal documents obtained in time
In the case od equitable mortgage, assure correct title deeds a comprehensive legal
opinion and obtain up-to-date EC and tax paid receipts.
Approval of legal opinion by RO/HO legal officers.
Registration of letter listing title deeds, wherever necessary and obtentation of the
registered deed from the SRO.
Verification of documentation by legal officers
Obtain necessary declarations as prescribed.
Compliance with all terms and conditions of the sanction order
Tejal R. Pujara (PGDMB14/088) Page 22
Evaluation of Non-Performing Assets (NPAs)
In Company Accounts:
Registration of charge with ROC within stipulated time.
Board resolution for borrowings
Insurance:
Risks fully covered
Policy with bank clause
Policy renewed in time
ECGC cover - for all eligible export
Vehicle Loans:
Registration of Bank’s charge with RTA
Obtain blank transfer forms
Financial Follow-Up
1. Monitoring the end use of funds lent:
End use of funds to be ensured and documentary proof to be kept, wherever required
without fail and as far as possible in all cases. Some of the situations, pointing out to
diversion of the funds are:
a. Crediting of term loan disbursements to Current/ Cash credit accounts of
borrowers and utilization thereof for day-too-day operations, instead of, for
the purpose for which the term loan was given.
b. Exclusive reliance on CA’s certification both in regard to infusion of
promoter’s contribution and deployment of bank’s funds.
c. No meaningful scrutiny of periodical progress reports and operating/ financial
statements of the borrowers. For eg, whether there is sufficient stock to cover
the drawings in CCOL accounts, is sometimes not scrutinized.
d. No regular visits to the assisted units and inspection of securities charged/
hypothecated to the bank.
e. No periodical scrutiny of books of accounts of borrowers.
f. No periodical stock audit as stipulated by the bank.
2. Scrutinize:
No indiscriminate ad hoc/ TOD, as the sanctioning of TOD/ Adhoc points out to
inadequate or incorrect assessment of the working capital needs of the party.
Tejal R. Pujara (PGDMB14/088) Page 23
Evaluation of Non-Performing Assets (NPAs)
a. Ledger accounts/ drawings by cheques (to find out diversion, if any)
b. Liability registers, stock statements
c. Compare stock statements with earlier ones – verify accumulation
d. Regulate DP as per the value of the stock in the stock statement as verified
during the monthly stock/ unit verification.
3. Where applicable:
a. Call for QIS statements
b. Fix quarterly operative limits
c. Monitor performance with budgets
d. Ensure compliance with inventory norms (where applicable) and lending
norms
e. Take note of early warning signals
4. Call For:
a. Financial Statements when due and examine them.
b. Required date to carry out the renewal exercise in time.
5. Execute:
a. Send the renewal credit reports in time
b. Take-up reschedulement nursing proposals (where necessary) before the
account turns NPA
c. Send the control returns in time to RO/ HO.
Physical Follow-up
A. Qualitative:
a. Be prudent with due care
b. Inspect the system of maintenance of books and registers
c. Probe the age and quality of goods, sundry creditors and debtors.
d. See that stock and machinery are insured
e. Verify whether rent and other Govt. dues are paid upto date
f. See whether the bank’s name board is properly placed.
g. Discuss with partners/ directors/ about the unit’s progress/ problems etc.
Tejal R. Pujara (PGDMB14/088) Page 24
Evaluation of Non-Performing Assets (NPAs)
h. Probe if frequent change of personnel is there.
B. Quantitative:
a. Inspect (even by random check) stock/machinery etc.
b. Compare quantity of goods with stock registers/ statements.
c. Find out unpaid stock, if any.
d. Verify turnover/ accumulation of stock.
e. Stocking pattern to be noted.
f. Verify method of valuation if necessary compare with invoices.
g. If there is a spurt or decline, from the usual activity, probe into it.
C. Unit Visits:
Unit visits and periodical inspection of securities under hypothecation/ pledge to the
bank play a vital role in effective credit monitoring, especially on the following
fronts:
a. Bank can satisfy that the unit is functioning well.
b. Bank can satisfy that there is adequate merchandise/ inventory to cover our
advance.
c. Satisfy that the fixed assets for which we have financed the units are still in
the custody of the parties and are in good working condition
d. Bank can interact with the borrowers and find out whether they are
experiencing any difficulties and if so, take remedial steps like nursing/
reschedulement and ensure that the borrowers’ grievances in conduct of
accounts are reduced to the extent possible.
e. Satisfy that our bank’s name board continues to be displayed in the unit
premises, and name painted on the machineries/ vehicles and ensure that there
is no dual finance in existence.
f. Collect information about potential deposit/ advance customers in the locality.
g. The stocks hypothecated must be verified by the manager before disbursement
of the working capital and thereafter periodically by manager or other officers
and record such inspections in the Unit Visit Diary. Periodical stock
statements should be obtained and DP arrived.
h. Units of all NPA and border line accounts should be visited by the manager
frequently and followed up. Ways and means of regularization or settlement
of such accounts are to be discussed and initiated for implementation and
Tejal R. Pujara (PGDMB14/088) Page 25
Evaluation of Non-Performing Assets (NPAs)
consultation and concurrence with the RO approval of the sanctioning
authority.
i. Branches should also identify NPA/ Watch accounts with scope of settlement,
by visiting the units along with a senior officer from RO, if required and
pursue the units for settlement.
By regular unit visits of the borrowers, signs of sickness of borrowal accounts can be
identified in the very beginning itself and bank will be able to initiate corrective steps
immediately.
Unit visit is the most important monitoring tool to prevent the incidence of NPA.
REVIEW AND MONITORING OF WATCH & NPA ACCOUNTS
All loan/ advance accounts will have to be followed up scrupulously to avert accounts
slipping into NPA category.
In the present economic scenario there is possibility of delayed cash realisation for
business enterprises impacting prompt repayment of loans and servicing of interest.
Hence, ideally, the follow up of loans and advances must start from the date of
disbursal
The initial signals for concern start after an overdue position of 30 days in an account.
Watch category accounts is a prelude to NPA. Loan/ limit accounts are classified as
“Standard Watch Accounts” where either principal or interest is overdue for 30 days
or more.
The following accounts are to be classified as Standard Watch Accounts:
o Accounts where installment defaulted by 30 days or more after the due date.
o Accounts which have become overdue for closure.
o Accounts in which interest is not remitted within 30 days, from date of
charging.
o Slight bills purchased outstanding be;yond 30 days or retention period
whichever is later.
o Cheques discounted outstanding beyond 30 days.
o OPG/ Bills co-accepted in which one installment is defaulted.
o Invoked guarantee/ devolved LC’s (Advance bill a/c)which have not been
honored by our party within one week.
Tejal R. Pujara (PGDMB14/088) Page 26
Evaluation of Non-Performing Assets (NPAs)
o Key loans outstanding beyond the storage period allowed or 6 months where
storage period is not specified.
o Temporary OD accounts o/s beyond the stipulated period.
o Accounts in which there is no operation for 30 days.
o Accounts where serious irregularities (i.e. shortage of stock, closing down of
business, mis-utilisation/ diversion of funds, etc.) are observed.
o Usance bills discounted and not realized within 30 days after the due dates.
o Gold loans outstanding beyond 13 months. (conditional to the point that gold
loans are sanctioned for 12 months)
Advances which have already been classified as NPA should not be reported as
Standard Watch Accounts.
Close monitoring of the advances – whether they are big or small – at the very
beginning itself will enable the branches to ensure that their advance accounts are
maintained satisfactorily.
Fresh advances extended can be avoided from slippage, by close monitoring from the
initial stage itself. Monitoring efforts should be intensified when the account turn
standard watch.
There maybe some cases where accounts become sticky at the initial stage due to
delay in project implementation, delay in getting power connection, cost escalation
and other unforeseen circumstances. Such cases should be carefully studied by the
Branch officials and suggest remedial measures/ reschedulement/ nursing well in
advance and at appropriate time supported by reasons justifying the same.
As the interest rate is now linked to Base Rate and Spread and subject to fluctuations,
there is every chance that installments are not sufficient to liquidate the loans. In case,
where rephrasing or rescheduling is essential for various reasons, such proposals
should be taken up sufficiently in advance before the account turns NPA.
Standard Watch Accounts and NPA accounts with balance outstanding =< Rs. 1 lakh
should be reviewed and followed up at the Branch Level and reviewed periodically.
A certificate for having reviewed all the NPA and standard watch accounts with
balance =< Rs. 1 lakh along with the number and total amount outstanding under such
accounts should be submitted to the Regional Office every quarter, immediately after
the course of the quarter.
Tejal R. Pujara (PGDMB14/088) Page 27
Evaluation of Non-Performing Assets (NPAs)
Standard Watch accounts and NPA accounts with balance outstanding <= Rs. 10
lakhs should be followed up at the RO level.
The review of standard watch accounts and NPA accounts with balance e outstanding
>= Rs. 10 lakhs should be done by the Recovery-cum-monitoring cell at RO, face to
face with the Branch Manager, during the quarterly business review meetings.
All regional offices should form an NPA-cum-Monitoring Cell under the supervision
of one Chief Manager, one or more of the Credit officers and the Legal Officer.
The Recover-cum-Monitoring Cell will be responsible for closely monitoring
payment of installment/ servicing of interest on due dates, contacting the borrowers
and reminding them well in advance.
Recovery-cum-Monitoring Cell will take all possible steps from preventing the watch
accounts turning into NPA and ensure prompt repayment, servicing of interest in
other accounts as well.
The credit officers at branches shall inform the concerned officers at HOC Credit
Monitoring Department regarding progress made in the recover/ up gradation/ further
slippage of accounts with all relevant details on an on-going basis.
Tejal R. Pujara (PGDMB14/088) Page 28
Evaluation of Non-Performing Assets (NPAs)
NON-PERFORMING ASSETS (NPAs)
When loans and advances made by a bank or financial institution turn out non-productive or
non-rewarding, they become NPAs. According to SARFAESI Act 2002, NPA is an asset or
account of a borrower which has been classified by a bank or a financial institution as a
Standard asset, Doubtful or Loss Asset, in accordance with the guidelines relating to asset
classification issued by the RBI.
An asset, including a leased asset, becomes non performing when it ceases to generate
income for the bank. A non-performing asset (NPA) is a loan or an advance where:
interest and/ or instalment 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 (OD/CC),
the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
the instalment of principal or interest thereon remains overdue for two crop seasons
for short duration crops,
the instalment of principal or interest thereon remains overdue for one crop season for
long duration crops,
the amount of liquidity facility remains outstanding for more than 90 days, in respect
of a securitisation transaction undertaken in terms of guidelines on securitisation
dated February 1, 2006.
in respect of derivative transactions, the overdue receivables representing positive
mark-to-market value of a derivative contract, if these remain unpaid for a period of
90 days from the specified due date for payment.
In case of interest payments, banks should, classify an account as NPA only if the interest
due and charged during any quarter is not serviced fully within 90 days from the end of the
quarter.
‘Out of Order’ status
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
Tejal R. Pujara (PGDMB14/088) Page 29
Evaluation of Non-Performing Assets (NPAs)
are not enough to cover the interest debited during the same period, these accounts should be
treated as 'out of order'.
‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due
date fixed by the bank.
Accounts with temporary deficiencies
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. In the
matter of classification of accounts with such deficiencies banks may follow the following
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.
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
Tejal R. Pujara (PGDMB14/088) Page 30
Evaluation of Non-Performing Assets (NPAs)
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.
Income Recognition Policy
The policy of Income Recognition has to be objective and based on the record of
recovery. Internationally income from NPA is not recognized on accrual basis but is
booked as income only when it is actually received. Therefore, the branches should
not charge and take to income account interest on any NPA. However, interest on
deposits against term deposits, NSC’s, IVP’s, KVP’s and life policies may be taken to
income account on the due date, provided adequate margin is available in the
accounts.
Fees and Commission earned by the bank as a result of renegotiations or rescheduling
of outstanding debts should be recognized on an accrual basis over the period of time
covered by the renegotiated or rescheduled extension of credit.
If government guaranteed advances become NPA, the interest on such advances
should not be taken to income account unless the interest has been realised.
Reversal of Income
If any advance including bills purchased and discounted, becomes NPA, the entire interest
accrued and credited to income account in the past periods, should be reversed if the same is
not realised. This will apply to Government guaranteed accounts also.
In respect of NPA’s, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed with respect to past records, if
uncollected.
Appropriation of Recovery in NPA’s
Interest realised on NPA’s maybe taken to income account provided the credits in the
accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the
borrower concerned.
Appropriation of recoveries in NPA’s (i.e. towards principal or interest due), is done in a
uniform and consistent manner as per the finacle system at SIB.
Tejal R. Pujara (PGDMB14/088) Page 31
Evaluation of Non-Performing Assets (NPAs)
Interest Application
On an account turning NPA, banks should reverse the interest already charged and not
collected by deleting P&L account and stop further application of interest.
Note: However, as per SIB’s practice, Finacle system continues to debit such accrued
interest in the loan accounts. However, for the purpose of computing Gross Advances,
interest debited in such NPA accounts will not be credited in the Interest account, but will be
credited in ‘Interest on NPA’ account, by the system.
TYPES OF NPA
Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per the
RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans
made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful,
and loss assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs / Gross Advances
Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank
balance sheets contain a huge amount of NPAs and the process of recovery and write
off of loans is very time consuming, the provisions the banks have to make against
the NPAs according to the central bank guidelines, are quite significant. That is why
the difference between gross and net NPA is quite high. It can be calculated by
following:
Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions
Tejal R. Pujara (PGDMB14/088) Page 32
Evaluation of Non-Performing Assets (NPAs)
RBI GUIDELINES FOR NPA CLASSIFICATION & PROVISIONING
Flowchart 3
Asset Classification
Assets are classified into following four categories:
Standard Assets
Sub-standard Assets
Doubtful Assets
Loss Assets
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here it is also very important
that in this case the arrears of interest and the principal amount of loan do not exceed 90
days at the end of financial year. If asset fails to be in category of standard asset that is
amount due more than 90 days then it is NPA and NPAs are further need to classify in
sub categories.
Provisioning Norms:
Tejal R. Pujara (PGDMB14/088) Page 33
Assets
Non-Performing Assets
Sub-standard Assets Doubtful Assets
Loss Assets
Performing/ Standard Assets
Evaluation of Non-Performing Assets (NPAs)
From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.40 per cent on standard assets on global loan portfolio basis. The
provisions on standard assets should not be reckoned for arriving at net NPAs. The
provisions towards Standard Assets need not be netted from gross advances but shown
separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and
Provisions - Others' in Schedule 5 of the balance sheet.
Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
reasonability of the dues:
Sub Standard Assets
Doubtful Assets
Loss Assets
Sub Standard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained
NPA for a period less than or equal to 12 month. The following features are exhibited by
substandard assets: the current net worth of the borrowers / guarantor or the current
market value of the security charged is not enough to ensure recovery of the dues to the
banks in full; and the asset has well-defined credit weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.
Provisioning Norms:
A general provision of 10 percent on total outstanding should be made without making
any allowance for DICGC/ECGC guarantee cover and securities available.
Doubtful Assets:
A loan classified as doubtful has all the weaknesses inherent in assets that were classified
as sub-standard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently known facts, conditions and values – highly
questionable and improbable. With effect from March 31, 2005, an asset would be
classified as doubtful if it remained in the sub-standard category for 12 months.
Provisioning Norms:
Tejal R. Pujara (PGDMB14/088) Page 34
Evaluation of Non-Performing Assets (NPAs)
100 percent of the extent to which the advance is not covered by the realizable value
of the security to which the bank has a valid recourse and the realizable value is
estimated on a realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20% to 50% of the secured portion depending upon the period for
which the asset has remained doubtful.
Loss Assets:
A loss asset is one which considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted- although there may be some salvage or
recovery value. Also, these assets would have been identified as” loss assets “by the bank
or internal or external auditors or the RBI inspection but the amount would not have been
written-off wholly.
Provisioning Norms:
The entire asset should be written off. If the assets are permitted to remain in the books
for any reason, 100 percent of the outstanding should be provided for.
Table 4: Classification of NPAs
Classification of
NPA’s
Guidelines for classification
from 31-3-2001
Provisioning Norms
Sub-standard
Assets
NPA’s for a period less than
or equal to 18 months
10% of outstanding principal +
Entire outstanding Interest
Doubtful Assets NPA’s for a period exceeding
18 months
For advances not covered by
realizable securities – provide
100% advances.
For advance covered by
realizable securities provide at:
20% of advances, if
doubtful or below 1 year.
30% of advances, if
doubtful for 1-3 yrs.
50% of advances, if
Tejal R. Pujara (PGDMB14/088) Page 35
Evaluation of Non-Performing Assets (NPAs)
doubtful for 3 & above
years.
Loss Assets Identified as lost by the bank
or auditors or RBI on
inspection
Write-off entire asset or provide
at 100%
Standard Assets Which are not NPA’s but has
business risks.
A minimum of 0.25% on ‘Global
Portfolio’ but not on ‘Domestic
Portfolio’.
Guidelines for Classification of Assets:
Broadly speaking, classification of assets into above categories should be done taking into
account the degree of well-defined credit weaknesses and the extend of dependence on
collateral security for realisation of dues,
As per the RBI guidelines, banks should establish appropriate internal systems to eliminate
the tendency to delay or postpone the identification of NPA’s, especially in respect of high
value accounts.
Accordingly SIB is classifying NPA accounts as at every quarter end, reckoning the 91 st day
of default as the NPA date. Now, with a view to avoid any divergence in asset classification/
shortfall in provisioning of NPA accounts, with effect from the quarter ended June 30, 2011,
SIB has switched over to automated classification of NPA accounts, using the NPA software
“iRAC”.
Availability of Security/ Net worth of Borrower/ Guarantor
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 the record of recovery.
Up gradation of Loan Accounts classified as NPA’s
If arrears of interest and principal are fully paid by the borrower in the case of loan accounts
classified as NPA’s, the account should no longer be treated as non-performing and maybe
Tejal R. Pujara (PGDMB14/088) Page 36
Evaluation of Non-Performing Assets (NPAs)
classified as ‘standard’ accounts. As per SIB’s guidelines in respect of NPA borrowers with
total exposure of Rs. 5 lakhs and above, up gradation can be done through CDMC.
Asset classification to be borrower-wise and not facility-wise
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 and not the particular facility/
investment or part thereof which has become irregular.
If the debits arising out of devolvement of letters of credit or invoked guarantees are
parked in a separate account, the balance outstanding in that account also should be
treated as a part of the borrower’s principal operating account for the purpose of
application of prudential norms on income recognition, asset classification and
provisioning.
Advances against Consortium Arrangements
Asset classification of accounts under consortium should be based on the record of recovery
of the individual member banks and other aspects having a bearing on the recoverability of
the advances. Where the remittances by the borrower under consortium lending arrangements
are pooled with one bank and/ or where the bank receiving remittances not parting with the
share of other member banks, the account will be treated as not serviced in the books of the
other member banks, and therefore, be treated as NPA. The banks participating in consortium
should therefore arrange to get their share of recovery transferred from the lead bank for the
transfer of their share of recovery, to ensure proper asset classification in their respective
books.
Accounts where there is erosion in the value of security/ frauds committed by borrowers:
In respect of accounts where there are potential threats for recovery on account of
erosion in the value of security or non-availability of security and existence of other
factors such as frauds committed by borrowers, it will not be prudent that such
accounts should go through various stages of asset classification. In cases of such
serious credit impairment the asset should be straightaway classified as doubtful or
loss asset as appropriate.
Erosion in the value of the security can be reckoned as significant when the realisable
value of the security is less than 50% of the value assessed by the bank or accepted by
Tejal R. Pujara (PGDMB14/088) Page 37
Evaluation of Non-Performing Assets (NPAs)
RBI at the time of last inspection, as the case maybe. Such NPA’s maybe
straightaway classified under doubtful category and provisioning should be made as
applicable to doubtful debts.
If the realisable value of the security as assessed by the bank/ approved valuers/ RBI
is less than 10% of the outstanding in the borrowal accounts, the existence of security
should be straightaway classified as loss asset. It maybe either written off or fully
provided for by the bank.
Agricultural Advances:
A loan granted for short duration crops will be treated as NPA, if the instalment of
principal or interest thereon remains overdue for 2 crop seasons.
A loan granted for long duration crops will be treated as NPA, if the instalment or
principal or interest thereon remains overdue for one crop season.
For the purpose of the above guidelines “long duration” crops would be crops with
crop season longer than one year and crops which are not “long duration” crops will
be treated as “short duration” crops. The crop season for each crop, which means the
period up to harvesting of the crops raised, would be determined by the State Level
Bankers Committee in each state. Depending on the duration of crops raised by an
agriculturalist, the above NPA norms would also be made applicable to agricultural
term loans availed of by him.
PROVISION COVERAGE RATIO (PCR)
PCR is essentially the ratio of provisioning to gross non-performing assets and
indicates the extent of funds a bank has kept aside to cover loan losses.
From a macro-prudential perspective, bank should build up provisioning and capital
buffers in good times i.e when the profits are good, which can be used for absorbing
losses in a downturn. This will enhance the soundness of individual banks, and also
the stability of the financial sector. It was therefore, decided that banks should
augment their provisioning cushions consisting of specific provisions against NPA’s
as well as floating provisions, and ensure that their total PCR, including floating
provisions is not less than 70%.
Computation of Gross NPA and Net NPA is given in Annexure 1.
Tejal R. Pujara (PGDMB14/088) Page 38
Evaluation of Non-Performing Assets (NPAs)
CAUSES OF NPA
The causes can be categorized into 3:
Banks
Borrowers
Government
Banks
Improper Selection of Borrower:
Selection of borrower is a very important part in financing as the whole story starts
with it. Selection of borrower should be done very cautiously. It would be right to say
that the most important factor, which needs to be studied, is a borrower, his character
and competency, but very little has been said regarding the character and competency,
of borrowers in the context of loaning.
Inordinate Delay in Financing:
Owing to delay the borrower does not get loan at the time of need, this would
normally upset his plant of investment. Obviously, this will have a bearing the
borrower’s plan of returning the loan and as a consequence the assets may turn into
NPA.
Poor Interaction with the Borrowers:
It has been found that the interactions with the borrowers are very poor. While
interacting, many information can be taken, like his thinking regarding loan, views
regarding repayment, his earning, family back ground etc. After disbursement, when
bankers do not meet the borrowers periodically, they tend to forget the bank and their
repayment liability to the bank also out of sight, out of mind, thus goes a saying.
Other Reasons:
o Unrealistic terms and conditions.
o Lengthy and time taking procedure of lending.
o Lack of supervision and follow up.
Tejal R. Pujara (PGDMB14/088) Page 39
Evaluation of Non-Performing Assets (NPAs)
o Lack of management information system.
o No direct inquiry at the time of sanction.
Borrowers
Diversion of Funds:
Diversion of funds means the loan are not used for the purpose for which it is
sanctioned, many areas have been identified where he can divert the loan. Chief
among them are:
o Utilization of loan to repay the old debt.
o Utilization of loans towards other purposes such, as house purpose etc.
o Utilization of loan towards death rituals in rural areas.
o Utilisation of loans for comfort of life.
Wilful Defaulters:
According to the RBI. “Any borrower, who has the ability to pay but does not pay
could be termed as a wilful defaulter”. A “wilful default” would be deemed to have
occurred, if any of the following events is noted:
o The unit has defaulted in meeting its payment/ repayment obligations to the
lender even when it has the capacity to honour the said obligations.
o The unit has defaulted in meeting its payment/ repayment obligations to the
lender and has not utilised the finance from the lender for the specific purpose
for which finance was availed of but has diverted the funds for other purpose.
o The unit has defaulted in ;meeting its payment/ repayment obligations to the
lender and has siphoned off the funds so that funds have not been utilised for
the specific purpose for which finance was availed for, nor are the funds
available with the unit in the form of other assets.
o The unit has defaulted in meeting its payment/ repayment obligations to the
lender and has also disposed off or removed the movable fixed assets or
immovable property given by him or it for the purpose of receiving a term
loan without the knowledge of the bank/ lender.
Government
Tejal R. Pujara (PGDMB14/088) Page 40
Evaluation of Non-Performing Assets (NPAs)
Causes, which are attributable to Government:
Political interference in sanctioning of loans.
Political patronage to defaulters.
Announcement of debt relief scheme.
One time settlement scheme of RBI.
Over regulated environment.
IMPACT OF NPA
Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong
choice of client. Because of the money getting blocked the prodigality of bank
decreases not only by the amount of NPA but NPA lead to opportunity cost also as
that much of profit invested in some return earning project/asset. So NPA doesn’t
affect current profit but also future stream of profit, which may lead to loss of some
long-term beneficial opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current earning of bank.
The quality of assets is an important indicator of banks’ financial health. It also
reflects the efficacy of banks’ credit risk management and the recovery environment.
A study of the asset quality of banks was carried out based on data submitted by
banks, covering their domestic operations, through off-site returns.
The study indicated that gross non-performing assets, which declined from 700
billion at end-March 2003 to 500 billion at end-March 2007, recorded an average
growth of 24.7 per cent during the last six years to reach to 1,839 billion at end-
March 2013. Similarly, net NPAs have recorded an average growth of 29.0 per cent
since March 2007 and reached 883 billion by end-March 2013. The gross NPA and
net NPA ratios have been increasing since March 2008, except during 2010-11, and
reached 3.42 per cent and 1.46 per cent, respectively, by end-March 2013. The high
level of NPAs cost the banks by way of loss of interest income, besides provisioning,
recovery and litigation costs.
Tejal R. Pujara (PGDMB14/088) Page 41
Evaluation of Non-Performing Assets (NPAs)
According to the analysis, the loss to banks due to NPAs has been more than 60 per
cent of their net profit since March 2010. In addition, about 18 per cent of banks’ net
interest income is used for making risk provisions and write-offs of NPAs. Had the
NPAs not been there, banks would have improved their yield on advances, on an
average, by 124 basis points (considering the position since March 2009).
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for shortest period of time which lead to additional cost to
the company. Difficulty in operating the functions of bank is another cause of NPA
due to lack of money. Routine payments and dues.
Involvement of management:
Time and efforts of management is another indirect cost which bank has to bear due
to NPA. Time and efforts of management in handling and managing NPA would have
diverted to some fruitful activities, which would have given good returns. Nowadays
banks have special employees to deal and handle NPAs, which is additional cost to
the bank.
Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of
market credit. It will lose its goodwill and brand image and credit which have
negative impact to the people who are putting their money in the banks.
The RBI has summarized the finer factors contributing to higher level of NPAs in the Indian banking sector as:
Diversion of funds, which is for expansion, diversification, modernization,
undertaking new projects and for helping associate concerns. This is also coupled
with recessionary trends and failures to tap funds in capital and debt markets.
;Business failures (such as product, marketing etc.), which are due to inefficient
management system, strained labour relations, inappropriate technology/ technical
problems, product obsolescence etc.
Tejal R. Pujara (PGDMB14/088) Page 42
Evaluation of Non-Performing Assets (NPAs)
Recession, which is due to input/ power shortage, price variation, accidents, natural
calamities etc. The externalization problems in other countries also lead to growth of
NPAs in Indian banking sector.
Time/ cost overrun during project implementation stage.
Governmental policies such as changes in excise duties, pollution control orders etc.
Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation,
promoters/ directors disputes etc.
Deficiency on the part of banks, viz, delays in release of limits and payments/
subsidies by the Government of India.
EARLY SYMPTOMS
By which one can recognize a performing asset turning in to non-performing asset Four
categories of early symptoms:-
Financial:
Non-payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that partial amount is diverted to sister
concern or parent company.
Operational and Physical:
If information is received that the borrower has either initiated the process of winding
up or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower
conduct his business.
Frequent changes in plan.
Tejal R. Pujara (PGDMB14/088) Page 43
Evaluation of Non-Performing Assets (NPAs)
Nonpayment of wages.
Attitudinal Changes
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners
Others
Change in Government policies.
Death of Borrower
Competition in the Market
PREVENTIVE MEASUREMENT FOR NPA
Early Recognition of the Problem:
Invariably, by the time banks start their efforts to get involved in a revival process,
it’s too late to retrieve the situation- both in terms of rehabilitation of the project and
recovery of bank’s dues. Identification of weakness in the very beginning that is :
When the account starts showing first signs of weakness regardless of the fact that it
may not have become NPA, is imperative. Assessment of the potential of revival may
be done on the basis of a techno-economic viability study. Restructuring should be
attempted where, after an objective assessment of the promoter’s intention, banks are
convinced of a turnaround within a scheduled timeframe. In respect of totally
unviable units as decided by the bank, it is better to facilitate winding up/ selling of
the unit earlier, so as to recover whatever is possible through legal means before the
security position becomes worse.
Identifying Borrowers with Genuine Intent:
Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones who have
intelligent inputs with regard to promoters‟ sincerity, and capability to achieve
turnaround. Based on this objective assessment, banks should decide as quickly as
possible whether it would be worthwhile to commit additional finance. In this regard
banks may consider having “Special Investigation” of all financial transaction or
business transaction, books of account in order to ascertain real factors that
Tejal R. Pujara (PGDMB14/088) Page 44
Evaluation of Non-Performing Assets (NPAs)
contributed to sickness of the borrower. Banks may have penal of technical experts
with proven expertise and track record of preparing techno-economic study of the
project of the borrowers. Borrowers having genuine problems due to temporary
mismatch in fund flow or sudden requirement of additional fund may be entertained
at branch level, and for this purpose a special limit to such type of cases should be
decided. This will obviate the need to route the additional funding through the
controlling offices in deserving cases, and help avert many accounts slipping into
NPA category.
Timeliness and Adequacy of response:
Longer the delay in response, greater the injury to the account and the asset. Time is a
crucial element in any restructuring or rehabilitation activity. The response decided
on the basis of techno-economic study and promoter’s commitment, has to be
adequate in terms of extend of additional funding and relaxations etc. under the
restructuring exercise. The package of assistance may be flexible and bank may look
at the exit option.
Focus on Cash Flows:
While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading
picture. Appraisal for fresh credit requirements may be done by analyzing funds flow
in conjunction with the Cash Flow rather than only on the basis of Funds Flow.
Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to
sickness and NPAs. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect that
affects a borrowing unit’s fortunes. A bank may commit additional finance to an
ailing unit only after basic viability of the enterprise also in the context of quality of
management is examined and confirmed. Where the default is due to deeper malady,
viability study or investigative audit should be done – it will be useful to have
consultant appointed as early as possible to examine this aspect. A proper techno-
economic viability study must thus become the basis on which any future action can
be considered.
Multiple Financing:
Tejal R. Pujara (PGDMB14/088) Page 45
Evaluation of Non-Performing Assets (NPAs)
o During the exercise for assessment of viability and restructuring, a Pragmatic
and unified approach by all the lending banks/ FIs as also sharing of all
relevant information on the borrower would go a long way toward overall
success of rehabilitation exercise, given the probability of success/failure.
o In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for fear of getting their cash
flows forfeited), and ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of information among
consortium members. A bank, which is not part of the consortium, may not be
allowed to offer credit facilities to such defaulting clients. Current account
facilities may also be denied at non-consortium banks to such clients and
violation may attract penal action. The Credit Information Bureau of India
Ltd.(CIBIL) may be very useful for meaningful information exchange on
defaulting borrowers once the setup becomes fully operational.
o In a forum of lenders, the priority of each lender will be different. While one
set of lenders may be willing to wait for a longer time to recover its dues,
another lender may have a much shorter timeframe in mind. So it is possible
that the letter categories of lenders may be willing to exit, even a t a cost – by
a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.
o Corporate Debt Restructuring mechanism has been institutionalized in 2001
to provide a timely and transparent system for restructuring of the corporate
debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis
and outside the legal framework. Under this system, banks may greatly benefit
in terms of restructuring of large standard accounts (potential NPAs) and
viable sub-standard accounts with consortium/multiple banking arrangements.
RESTRUCTURING OF LOANS AND ADVANCES
Restructured Accounts
A restructured account is one where the bank, for economic or legal reasons relating to the
borrower's financial difficulty, grants to the borrower concessions that the bank would not
otherwise consider. Restructuring would normally involve modification of terms of the
Tejal R. Pujara (PGDMB14/088) Page 46
Evaluation of Non-Performing Assets (NPAs)
advances / securities, which would generally include, among others, alteration of repayment
period / repayable amount/ the amount of instalments / rate of interest (due to reasons other
than competitive reasons). However, extension in repayment tenor of a floating rate loan on
reset of interest rate, so as to keep the EMI unchanged provided it is applied to a class of
accounts uniformly will not render the account to be classified as ‘Restructured account’. In
other words, extension or deferment of EMIs to individual borrowers as against to an entire
class, would render the accounts to be classified as 'restructured accounts’.
In the cases of roll-over of short term loans, where proper pre-sanction assessment has been
made, and the roll-over is allowed based on the actual requirement of the borrower and no
concession has been provided due to credit weakness of the borrower, then these might not
be considered as restructured accounts. However, if such accounts are rolled-over more than
two times, then third roll-over onwards the account would have to be treated as a restructured
account. Besides, banks should be circumspect while granting such facilities as the borrower
may be availing similar facilities from other banks in the consortium or under multiple
banking. Further, Short Term Loans for the purpose of this provision do not include properly
assessed regular Working Capital Loans like revolving Cash Credit or Working Capital
Demand Loans.
Repeatedly Restructured Accounts
When a bank restructures an account a second (or more) time(s), the account will be
considered as a 'repeatedly restructured account'. However, if the second restructuring takes
place after the period upto which the concessions were extended under the terms of the first
restructuring, that account shall not be reckoned as a 'repeatedly restructured account'.
LOAN RECOVERY MEASURES:
The basic objective of loan recovery policy is to maximise recovery of dues from NPAs. It
also aims at ensuring that all NPAs are attended to at the earliest and recovery tools are
applied expeditiously.
Strategies for Recovery: Once an account becomes non-performing, the possibility of
upgrading the account by way of recovery of over dues/ restructuring/ rescheduling or
Tejal R. Pujara (PGDMB14/088) Page 47
Evaluation of Non-Performing Assets (NPAs)
otherwise shall be examined. Recovery measures shall be initiated only if the account cannot
be upgraded by way of recovery of over dues/ restructuring/ rescheduling or otherwise.
Delay in taking recovery measures may impact the recoverability of dues as the financial
position of the borrower may deteriorate and/ or value of securities may get eroded during
the period. Hence, it is necessary that recovery measures are initiated at the right time, one
Bank is satisfied that the account cannot be upgraded.
Sale of Pledged Items
In case of loans against pledge of goods, the goods pledged should be disposed of at the
earliest, after giving due notice to the borrowers. Immediate action as necessary should be
taken in this regard considering the life of the goods, fluctuation in price etc. As a general
rule any item pledged to the bank has to be disposed of within 3 months from the date on
which the account has turned NPA.
SARFAESI Act 2002
One of the major tools for recovery is the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act 2002). It was
enacted to regulate securitisation and reconstruction of financial assets and enforcement of
security interests by a secured creditor without the intervention of a Court or a Tribunal. If
any borrower fails to discharge his liability in repayment of secured debt within 60 days of
notice from the date of notice by the secured creditor, the secured creditor is conferred with
powers under the SARFAESI Act to:
Take possession of the secured asset of the borrower, including transfer by way of
lease, assignment or sale, for realizing the secured assets.
Takeover of the management of the business of the borrower including the right to
transfer by way of lease, assignment or sale, for realizing the secured assets.
Appoint any person to manage the secured assets possession of which is taken by the
secured creditor, and
Require any person, who has acquired any of the secured assets from the borrower
and from whom money is due to the borrower, to pay the secured creditor, so much
of the money as if sufficient to pay the secured debt.
Tejal R. Pujara (PGDMB14/088) Page 48
Evaluation of Non-Performing Assets (NPAs)
Recovery through courts/ DRT
The banks and FI’s can enforce their securities by initiating recovery proceeding under the Recovery of Debts due to banks and FI Act, 1993 (DRT Act) by filing an application for recovery of dues before the Debt Recovery Tribunal constituted under this act.
On adjudication, a recovery certificate is issued and the sale is carried out by an
auctioneer or a receiver.
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 the 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.
Institution of CDR Mechanism
The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for
resolution of NPAs of viable entities facing financial difficulties. The CDR
mechanism instituted in India is broadly along the lines of similar systems in the UK,
Thailand, Korea and Malaysia. The objective of the CDR mechanism has been to
ensure timely and transparent restructuring of corporate debt outside the purview of
the Board for Industrial and Financial Reconstruction (BIFR), DRTs or other legal
proceedings. The framework is intended to preserve viable corporate affected by
certain internal/external factors and minimize losses to creditors/other stakeholders
through an orderly and coordinated restructuring programme. RBI has issued revised
guidelines in February 2003 with respect to the CDR mechanism. Corporate
borrowers with borrowings from the banking system of Rs. 20crores and above under
multiple banking arrangement are eligible under the CDR mechanism. Accounts
falling under standard, sub-standard or doubtful categories can be considered for
restructuring. CDR is a non-statutory mechanism based on debtor-creditor agreement
and inter-creditor agreement. Restructuring helps in aligning repayment obligations
for bankers with the cash flow projections as reassessed at the time of restructuring.
Therefore it is critical to prepare a restructuring plan on the lines of the expected
Tejal R. Pujara (PGDMB14/088) Page 49
Evaluation of Non-Performing Assets (NPAs)
business plan along with projected cash flows.
The CDR process is being stabilized. Certain revisions are envisaged with respect to
the eligibility criteria (amount of borrowings) and time frame for restructuring.
Foreign banks are not members of the CDR forum, and it is expected that they would
be signing the agreements shortly. However they attend meetings. The first ARC to
be operational in India- Asset Reconstruction Company of India (ARGIL) is a
member of the CDR forum. Lenders in India prefer to resort to CDR mechanism to
avoid unnecessary delays in multiple lender arrangements and to increase
transparency in the process. While in the RBI guidelines it has been recommended to
involve independent consultants, banks are so far resorting to their internal teams for
recommending restructuring programs.
Increased Powers to NCLTs and the Proposed Repeal of BIFR:
In India, companies whose net worth has been wiped out on account of accumulated losses
come under the purview of the Sick Industrial Companies Act (SICA) and need to be
referred to BIFR. Once a company is referred to the BIFR (and even if an enquiry is pending
as to whether it should be admitted to BIFR), it is afforded protection against recovery
proceedings from its creditors. BIFR is widely regarded as a stumbling block in recovering
value for NPAs. Promoters systematically take refuge in SICA - often there is a scramble to
file a reference in BIFR so as to obtain protection from debt recovery proceedings. The
recent amendments to the Companies Act vest powers for revival and rehabilitation of
companies with the National Company Law Tribunal (NCLT), in place of BIFR, with
modifications to address weaknesses experienced under the SICA provisions. The NCLT
would prepare a scheme for reconstruction of any sick company and there is no bar on the
lending institution of legal proceedings against such company whilst the scheme is being
prepared by the NCLT. Therefore, proceedings initiated by any creditor seeking to recover
monies from a sick company would not be suspended by a reference to the NCLT and,
therefore, the above provision of the Act may not have much relevance any longer and
probably does not extend to the tribunal for this reason. However, there is a possibility of
conflict between the activities that may be undertaken by the ARC, e.g. change in
management, and the role of the NCLT in restructuring sick companies. The Bill to repeal
Tejal R. Pujara (PGDMB14/088) Page 50
Evaluation of Non-Performing Assets (NPAs)
SICA is currently pending in Parliament and the process of staffing of NCLTs has been
initiated
One Time Settlement
The aim of the bank is to recover loan accounts with interest in full without any
sacrifice. At times, this becomes difficult due to an adverse change in the financial
position of the borrower or erosion in the value of securities. In such cases, it would
be better to get the accounts settled by giving some concessions. For effective and
faster recovery and for utilizing the recovered funds for better deployment it becomes
necessary to offer some concessions to the borrowers for settling the accounts.
At times it also becomes necessary to allow concession/ sacrifice in accounts that
have not been classified as NPAs. It would be better to exit from an account that
shows signs of sickness, by giving some concessions, if the proposed concession /
sacrifice is lesser than the loss that the bank may suffer if the account turns into an
NPA.
Hence, NPA/ non-NPA account maybe closed under OTS Scheme, wherein the bank
allows the borrower certain concessions in principal/ interest or both, provided the
account is closed within a specified time. Staff Accountability should be examined
while considering OTS on all borrowal accounts, if not already examined.
The level of sacrifice to be allowed in an account shall be considered after taking into
account the history of the account, the nature of default (willful or otherwise) value of
securities available, resources of the borrower etc. and shall be considered on a case
to case basis.
Negotiated Settlement Schemes
The RBI/Government has been encouraging banks to design and implement policies for
negotiated settlements, particularly for old and unresolved NPAs. The broad framework for
such settlements was put in place in July 1995. Specific guidelines were issued in May
1999to public sector banks for one-time settlements of NPAs of small scale sector. This
scheme was valid until September 2000 and enabled banks to recover Rs 6.7 billion from
various accounts. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs.
Tejal R. Pujara (PGDMB14/088) Page 51
Evaluation of Non-Performing Assets (NPAs)
50 million and less. These guidelines were effective until June 2001 and helped banks
recover Rs. 26 billion.
Recovery Camps
Regional Offices shall decide to conduct recovery camps at various locations depending on
the spread of branches and NPA accounts. A committee of minimum 3 officials, one of
whom shall be from the cadre of Chief Manager or above of the Bank, shall take the
decisions at the camps. The officials attending the camps shall have extensive discretionary
powers, so that settlement decisions can be taken on the spot in respect of both NPA and
Non-NPA accounts.
Sale of accounts to Asset Reconstruction Companies (ARCs)
Recovery may be done by selling NPAs to Asset Reconstruction Companies and other banks
who are interested in purchasing the assets from the bank. Sale to ARCs/ Banks shall be
decided after considering the value of securities available, hurdles for recovery through legal
route, price offered by the ARCs/ Banks etc.
Write-off/ Waiver of Legal Action
If the borrower has no means to pay and the bank is sure that the dues are irrevocable,
bank shall waive legal action and write off the amount.
Waiver of legal action/ write-off shall be permitted only when the authorized
functionary is satisfied that the borrower has no tangible security or any attachable
assets, has no adequate income of repayment and no useful purpose will be served by
resorting to legal recourse.
Initiation of Revenue Recovery Measures (wherever applicable) shall be a
precondition to waiver of legal action.
Tejal R. Pujara (PGDMB14/088) Page 52
Evaluation of Non-Performing Assets (NPAs)
OBJECTIVE OF THE STUDY
To study the concept and procedure of Credit Appraisal in banks which is the basis if
an account becomes an NPA.
To study the follow-up and monitoring procedures of advances.
To study the concept of Non-performing Assets (NPA).
To study the NPA standards of RBI.
To study the reasons for and impact of NPA.
To understand the recovery measures used to recover advances.
To evaluate the efficiency of South Indian Bank in managing NPAs using NPA ratios
and comparing NPA with profits.
METHODOLOGY
The study was conducted using secondary data about NPA and its composition, classification
of loan assets, profits and advances of the bank which are all taken from the Reserve Bank of
India website, South Indian Bank website and the manual of South Indian Bank for Loans
and Advances.
Tejal R. Pujara (PGDMB14/088) Page 53
Evaluation of Non-Performing Assets (NPAs)
ANALYSIS OF NPAs AT SOUTH INDIAN BANK (SIB)
During the year 2013-14, as a result of the focused and sustained efforts like early recovery
of NPAs, through prompt and effective measures under the SARFAESI Act, follow up of
recovery cases pending before DRTs and civil courts, one time compromise settlements of
accounts, etc., Bank has recovered NPAs to the extent of Rs. 532.69 crore, (recovery
including upgradation Rs.301.16 crores) as against the target of Rs. 250.00 crore. The
recovery during the current year also surpassed the recovery of Rs.270.73 crore for the
previous financial year ended March 31, 2013. The thrust on selection of credit, adequate due
diligence and improvement in credit administration were maintained ensuring improvement
in quality of assets.
During the year, the Gross NPA of the Bank declined from Rs.433.87 crore as on March 31,
2013 to Rs.432.62 crore as on March 31, 2014. But Net NPA marginally increased from
Rs.249.53 crore as on March 31, 2013 to Rs.281.67 Crore as on March 31, 2014. Out of this
GNPA of Rs.432.62 crores, Rs.186.28 crores is accounted by fresh slippage and provision
requirement was only Rs.38.16 crores. In terms of percentage, GNPA improved from 1.36 %
as on March 31, 2013 to 1.19 % as on March 31, 2014 and net NPA remain unchanged at
0.78% as on March 31, 2014.
Graph 1: Net NPA of SIB (2009-10 to 2013-14)
Tejal R. Pujara (PGDMB14/088) Page 54
2009-10 2010-11 2011-12 2012-13 2013-140
50
100
150
200
250
300
0
66.02 76.51
249.53
281.67
Net NPA
Net NPA
Year
Amt i
n Rs
. Cro
re
Evaluation of Non-Performing Assets (NPAs)
From the above it is observed that Net NPA of South Indian Bank has been increasing every
year. The increase in the year 2014 was relatively lesser than the significant increase from the
year 2012 to 2013. The above increase in NPA was due to the slippage of 3 large value
accounts in the Corporate sector during the year ended March 2013.
Graph 2: % of Net NPA of SIB (2009-10 to 2013-14)
The percentage of Net NPA to advances has increased over the years. After a significant
increase in Net NPA against Net Advances from 2012 to 2013 South Indian Bank was able to
maintain this proportion at the same level in 2014, even though there was an increase in Net
Advances.
Tejal R. Pujara (PGDMB14/088) Page 55
2009-10 2010-11 2011-12 2012-13 2013-14
% of Net NPA 0 0.29 0.28 0.78 0.78
0.05
0.15
0.25
0.35
0.45
0.55
0.65
0.75
0.85
% of Net NPA % of Net NPA
Year
% o
f Net
NPA
Evaluation of Non-Performing Assets (NPAs)
Graph 3: Comparison of Net Profit & Net NPA of SIB (2009-10 to 2013-14)
2009-10 2010-11 2011-12 2012-13 2013-14
Net NPA 0 66.02 76.51 249.53 281.67
Net Profit
233.76 292.56 401.65 502.27 507.5
50150250350450550
Comparison of Net NPA and Net Profit
Net NPANet Profit
Year
Amt R
s. in
Cro
res
There is a constant rise in the Net Profit over the years with an average percentage increase
of approximately 30%. There is a constant rise in Net NPA over the years with an average
percentage increase of approximately 25%. So this shows there is a positive relationship
between the Net Profits and Net NPA of the Bank.
Tejal R. Pujara (PGDMB14/088) Page 56
Evaluation of Non-Performing Assets (NPAs)
Graph 4: Comparison of % Gross NPA to % Net NPA
2009-10 2010-11 2011-12 2012-13 2013-14
% of Net NPA 0 0.29 0.28 0.78 0.78
% of Gross NPA
0 1.11 0.97 1.36 1.19
0.10.30.50.70.91.11.31.5
% Gross NPA to % Net NPA
% of Net NPA% of Gross NPA
The difference between the % of Gross NPA and % of Net NPA was the highest in 2010-11
which reduced in the next year, 2011-12, where % Gross NPA reduced but % of Net NPA
remained the same. The difference between the two has reduced over the years which show
that the bank has reduced the amount of provision for loss assets and this gives a positive
sign. This can be considered as one of the reasons for its increased profitability.
Table 5: Asset Quality of SIB
Particulars 31.03.2014 31.03.2013Percentage of net NPAs to net advances (%) 0.78 0.78Provision Coverage Ratio (%) 62.71 53.20
The asset quality of the bank has improved over the last year with higher than industry
business growth. The slippage was largely driven by decline in slippages and higher
recoveries. PCR stands improved at 62.71% from 53.20% in the previous year.
Table 6: Sector-wise NPA
Tejal R. Pujara (PGDMB14/088) Page 57
Evaluation of Non-Performing Assets (NPAs)
Sl. No. Sector Percentage of NPAs to Total Advances in that sector
Particulars 31.03.2014 31.03.2013Gross Net Gross Net
1. Agriculture & allied activities1 0.62 0.42 7.33 3.202. Industry (Micro & Small, Medium
and Large)1.97 1.49 1.49 1.19
3. Services 0.55 0.32 0.42 0.254. Personal Loans2 0.90 0.28 0.62 0.181 Represents loan towards agriculture and allied activities that qualify for priority sector
lending.
2 Excludes retail loans towards agriculture and relied activities that qualify for priority sector
lending.
The agriculture sector saw an improvement in growth to 3.6% during the first nine months of
fiscal 2014, compared to 1.4% in the corresponding period of fiscal 2013. Strong growth in
agriculture and services sectors as well as the personal loans segment has helped to push bank
credit growth.
Table 7: NPA Position of Old Private Sector Banks in India
Bank wise Gross NPAs, Gross Advances and Gross NPA Ratio of Old Private Sector Banks
as on March 31, 2013 (Amount in Millions)
Banks Gross NPAsGross Advances
Gross NPAs to Gross Advances Ratio (%)
Catholic Syrian Bank 2109 89760 2.35City Union Bank 1731 153429 1.13Dhanalaxmi Bank 3803 78963 4.82Federal Bank 15540 451946 3.44ING Vyasya Bank Ltd 1214 318916 0.38Jammu & Kashmir Bank 6438 398537 1.62Karnataka Bank 6389 254165 2.51Karur Vyasya Bank 2859 297059 0.96Lakshmi Vilas Bank 4599 118923 3.87Nainital Bank 673 21726 3.09Ratnakar Bank 259 63592 0.4South Indian Bank 4339 320140 1.36Tamilnad Merchantile Bank 2145 163661 1.31
From the above data we find that as on 31st March 2013 among the Old Private Sector Banks
in India, Dhanalakshmi Bank has the highest % of Gross NPA to Gross Advances at 4.82%
Tejal R. Pujara (PGDMB14/088) Page 58
Evaluation of Non-Performing Assets (NPAs)
and ING Vyasya Bank Ltd has the lowest % of Gross NPA to Gross Advances at 0.38%.
South Indian Bank stands at 1.36% which is comparatively lower than that of half of the
banks mentioned above. As on 31st March 2014, the % of Gross NPA of South Indian Bank
dropped from 1.36% to 1.19%. The Managing Director of the Bank attributed this decline to
a good team in the recovery department.
Last year the bank took a conscious decision on credit sanctioning, and looked for good
proposals rather than achieving targets. Accounts were monitored consistently, and action
was taken immediately the moment the system indicated some level of stress in an account.
Tejal R. Pujara (PGDMB14/088) Page 59
Evaluation of Non-Performing Assets (NPAs)
ANALYSIS OF NPAs AT SOUTH INDIAN BANK (SIB) – GEORGE TOWN
BRANCH
Table 8: Asset classification of Portfolios
Asset Classification of Portfolio 2013-14
Standard Assets 6,22,18,16,191.67
Sub-standard Assets 1,33,05,461
Doubtful Assets 13,56,147
Loss Assets 67,248
Total Advances 6,23,65,45,047.67
This branch of the bank has Total Advance of Rs. 623.65 crores out which only Rs. 1.47
crores of the total advances have turned into NPAs. This accounts for only 0.24% of its total
advances. Most of the NPAs of the branch fall under the category of sub-standard assets.
Table 9: Break-up of NPAs
No. of Cases of NPA’s Amount Blocked No. of Years
12 8400387.22 (57.03%) Less than 3 years
3 3358372.75 (22.8%) 3-5 years
1 67215 (0.46%) 5-7 years
5 2902881 (19.71%) More than 7 years
Total – 21 14728855.97
From the above table we find that the bank totally has 21 NPA accounts out of which 12
accounts have slipped into the NPA category in the last 3 years. The remaining 9 accounts
have remained NPAs for more than 3 years. This shows that the branch has not been very
successful in recovering its old NPA accounts as there are 5 NPA accounts which have been
in this category for a very long time of more than 7 years.
Further study has shown that out of the 21 NPA accounts 15 parties to these accounts belong
to the personal sector and the remaining to the service sector.
Tejal R. Pujara (PGDMB14/088) Page 60
Evaluation of Non-Performing Assets (NPAs)
FINDINGS AND RECOMMENDATIONS:
If the maximum utilization is not up to the drawing power for the whole year, the
bank needs to ask for reasons for underutilization. If the underutilization is due to
temporary reasons, then the bank should maintain the DP. If not, it should reduce
their limit to 10% above maximum utilization and use that excess funds in another
efficient projects.
Personal loans account for most of the NPAs in the bank which can be reduced by
taking the same steps used to provide loans to other sectors. This can ensure that the
advance provided is used for a necessary purpose and is backed by enough income of
the borrower.
Unlike agriculture and industrial sector, personal loan sector does not involve any
systemic risk and involves only systematic risk. It is important to examine which
segment within this sector has not performed so that prompt action can be taken. The
home loan segment is identified risky in this sector where high interest rates affect the
repayment capacity.
Uneven scale of repayment schedule with higher repayment in the initial years
normally should be preferred.
The bank needs to focus more on the recovery of its Sub-standard accounts.
The bank can use e-auction to sell its NPAs where NPAs can be auctioned over the
internet. The bank can join www.npasource.org which is an online website to sell the
NPA accounts. Many of the major Indian banks have used this method to sell their
NPAs.
The data base of credit information companies, based on the declaration of wilful
defaulters by banks, be updated on a real time basis and not at; the end of the quarter.
Agriculture is the most vulnerable sector generating NPAs. Banks are required to lend
40% of their loans to agriculture and economically weaker sections of the society as a
step towards financial inclusion. But it becomes a contradiction when banks have to
comply with global norms of capital adequacy and quality of assets besides being
answerable to shareholders. Ideally banks should not be forced to lend to specific
sectors. But if it has to be done, then the bad assets which arise on account of say,
crop failure, should be financed through Central & State Budgets. As it is not easy to
Tejal R. Pujara (PGDMB14/088) Page 61
Evaluation of Non-Performing Assets (NPAs)
figure out what part of the NPA is due to error in judgment and what is due to climate
failure.
The bank can exercise its powers for companies from which loans need to be recovered as stated under the following sections of the Companies Act for the concerned reasons:
o Section 36 – Punishment for fraudulently inducing persons to invest money
o Section 247 – Valuation by registered valuers
o Section 180 – Restriction on Power of Board
o Section 185 – Loan to Directors
o Section 186 – Loan and Investment by a Company
CONCLUSION
NPA is one of the biggest problems that the Indian Banks are facing today. If proper
management of NPAs is not undertaken it would hamper the business of the banks. If
the concept of NPAs is taken very lightly it would be dangerous for the Indian
banking sector. NPAs would destroy the current profit, interest income due to large
provisions of the NPAs, and would affect the smooth functioning of the recycling of
the funds Banks also redistribute losses to other borrowers by charging higher interest
rates. Lower deposit rates and higher lending rates repress savings and financial
markets, which hampers economic growth. But efficient management of NPA is not
the sole factor that determines the overall efficiency of banks. According to the
Financial Stability Report of December 2013 published by the RBI, the risks to the
banking sector have further increased. All major risk dimensions captured in the
Banking Stability Indicator show increase in vulnerabilities in the banking sector.
Failure of a major corporate or a major corporate group could trigger a contagion in
the banking system due to exposures of a large number of banks to such corporates.
Asset quality continues to be a major concern for Scheduled Commercial Banks
(SCBs). The Gross Non-performing Assets ratio of SCBs as well as their restructured
standard advances ratio has increased. Therefore, the total stressed advances ratio rose
Tejal R. Pujara (PGDMB14/088) Page 62
Evaluation of Non-Performing Assets (NPAs)
significantly to 10.2 per cent of total advances as at end September 2013 from 9.2 per
cent of March 2013. Macro stress tests on credit risk suggest that if the adverse
macroeconomic conditions persist, the credit quality of commercial banks could
deteriorate further. However, under improved conditions, the present trend in credit
quality may reverse during the second half of 2014-15.
ANNEXURE 1
COMPUTATION OF GROSS ADVANCES, GROSS NPAs, NET ADVANCES, & NET NPAs
Part A
Details of Gross Advances, Gross NPAs, Net Advances and Net NPAs
(Rs. in Crore up to two decimals)
Particulars
Amount
1. Standard Advances
2. Gross NPAs *
3. Gross Advances ** ( 1+2 )
4. Gross NPAs as a percentage of Gross Advances (2/3) (in %)
5. Deductions
(i) Provisions held in the case of NPA Accounts as per asset classification (including additional
Provisions for NPAs at higher than prescribed rates).
(ii) DICGC / ECGC claims received and held pending adjustment
(iii) Part payment received and kept in Suspense Account or any other similar account
(iv) Balance in Sundries Account (Interest Capitalization - Restructured Accounts), in respect of
NPA Accounts
(v) Floating Provisions***
(vi) Provisions in lieu of diminution in the fair value of restructured accounts classified as
NPAs
(vii) Provisions in lieu of diminution in the fair value of restructured accounts classified as
standard assets
6. Net Advances(3-5)
7. Net NPAs {2-5(i + ii + iii + iv + v + vi)}
8. Net NPAs as percentage of Net Advances (7/6) (in %)
Tejal R. Pujara (PGDMB14/088) Page 63
Evaluation of Non-Performing Assets (NPAs)
* Principal dues of NPAs plus Funded Interest Term Loan (FITL) where the corresponding
contra credit is parked in Sundries Account (Interest Capitalization - Restructured Accounts), in
respect of NPA Accounts.
** For the purpose of this Statement, ‘Gross Advances' mean all outstanding loans and
advances including advances for which refinance has been received but excluding rediscounted
bills, and advances written off at Head Office level (Technical write off).
*** Floating Provisions would be deducted while calculating Net NPAs, to the extent, banks
have exercised this option, over utilising it towards Tier II capital.
REFERENCES
www.rbi.org.in
www.southindianbank.com
www.moneycontrol.com
www.thehindubusinessline.com
www.financialexpress.com
www.abhinavjournal.com
www.bankdrt.com
Tejal R. Pujara (PGDMB14/088) Page 64