MAJOR RESEARCH PROJECT

Non Performing Asset

Management
 NPA - Definition

A Non Performing Asset is a loan or advance where;

i. Interest and/or installment of principal remain overdue for a
period of more than 90 days in respect of the term loan.

ii. The account remains ‘Out of Order’, in respect of an Overdraft/

Cash Credit.

iii. The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted.
 NPA – Definition (Cont….)

A Non Performing Asset is a loan or advance where;

iv. A loan granted for short duration crops will be treated as NPA, if
the installment of principal or interest thereon remains overdue
for two crop seasons.

v. A loan granted for long duration crops will be treated as NPA, if

the installment of principal or interest thereon remains overdue
for one crop season.
 NPA in INDIA – An Overview

 Lending System

 Securing Advances

 Present Scenario

 Role of Government and RBI policies

 NPA profile : INDIA 14.82% decline
in Net NPA

Parameters 2003-04 2004-05 2005-06

Gross NPA 64785 59373 51816

Net NPA 24396 21754 18529

Gross Advances 902026 1152682 1551378

Gross NPA to Gross Advances 7.2 % 5.2 % 3.3 %

Net NPA to Net Advances 2.8 % 2.0 % 1.2 %

 Asset Classification
Asset Category Provision Required
Secured Portion Unsecured Portion

Standard Assets 0.25% 0.25%

Sub-Standard Assets 10% 20%

Doubtful Assets
1. Up to 1 year 20% 100%
2. 1 to 3 years 30% 100%
3. More than 3 years
Classified on 31-03-2004
- With effect from 31-03-2005 (Old) 60% 100%
- With effect from 31-03-2008 (Present) 75% 100%
- With effect from 31-03-2007 (Future) 100% 100%
Classified after 31-03-2004 100% 100%
Loss Assets 100% 100%
 Factors contributing to NPA

 Managing Credit Risk.

 Factors affecting individual companies.

 Market irregularities and Technological changes.

 Government policies.

 Delays in disposal process.

 Impact of NPA on Banks

 Impact on profitability.

 Impact on advances.

 Increased cost of funds.

 Impact on ability to service debt.

 Excessive focus on Credit Risk Management.

 Recovery Measures – Legal

 Debt Recovery Tribunal.

 Lok Adalat.

 Civil Court.

 SARFAESI Act.

 Corporate Debt Restructuring.

 Debt Recovery Tribunal

 Issuance of Recovery Certificate

 Appointing Recovery officer

 Injunctions against disposal or

transfer of assets.
 Civil Court

 Claims below Rs. 10 lac.

 Filing a plaint in a specified period.

 Power to attach personal assets of

borrower/gaurantor.

 Time consuming process.

 SARFAESI Act

 An effective tool for resolution of NPA

 Enforcement of security interest in the assets of the

borrower

 Simple and cost effective process,

 Service of notice to discharge outstanding dues within 60

days.
 SARFAESI Act

Failing to which bank may

- Take possession of the charged assets
- Take over the management of charged assets
- Appoint a person to manage the charged assets.
- Sell or lease the charged assets

Any proceeding under this act should have consent of secured lenders
representing 75% of the contractual dues of the borrower.
 Corporate Debt Restructuring

 Identification of potential NPAs.

 Lender’s responsibility to support the genuine borrowers.
 A strategy to reduce NPAs through upgradation.
 A mechanism for restructuring of corporate debts of
feasible entities.
 Involves - Waiver of a part of contractual dues
- Reschedule of dues
- Acceptance of one times payment
 Recovery – Informal Framework

 Compromise Settlements
- Settlement of dues reached by mutual consent
- Sacrifice of a portion of dues
- Beneficial when realisability of security & enforceability of legal
action is not fruitful.

 RBI One Time Settlement (OTS) Schemes

- RBI OTS Scheme 2000 (For NPAs up to Rs 5 crore)
- RBI OTS for Small Borrowers (up to Rs 25000)
- RBI OTS for Small and Marginal farmers (up to Rs 50000)
- RBI OTS for Small & Medium Enterprises
 Informal Framework (cont…)

Sale of Financial Assets

Portfolio Assets Portfolio Assets

Multiple
Sale Auction

Financial
Assets
Single Asset Single Asset
Single Sale Auction

Single Buyers Multiple

 Financial Asset Sale Process

• Making a formal offer

Transaction Closure
• Assignment Deed & Legal Formalities

• Due diligence by the bidder

Presale
Procedures • Dissemination of information

Identification of • Create market by approaching multiple

Potential Buyer bidders
• Expression of Interest

• Preparing Information Package

Preparing for
Sale • Lender due diligence and valuation
 Informal Framework (cont…)

 Advantages
- Saves Time, Cost & Efforts associated with carrying NPAs
- Lesser but immediate and assured cash inflow
- Opportunity to transfer domestic debt to global market
- Improved enforcement of security.

 Challenges
- Absence of specific guidelines/ rules binding buyers and sellers
- Role of foreign Investment
- Reluctance to accept lesser returns
- Used as a valuation tool by banks
 NPA Resolution Matrix

Good
Good Management Good Management Viable
Unviable Industry Industry

Settlement Restructuring
Management
Quality

Poor Management Poor Management

Unviable Industry Viable Industry
Poor
Sale of Assets Business Sale/ M&A

Unviable Industry Viability Viable

 Fundamental Shift

Market
Legal
Framework
Framework
 Present Scenario in India

Percentage change in Advances & NPA - Pu. SB

40.00%

30.00%

20.00%
advances
10.00%
NPA
0.00%
1998 1999 2000 2001 2002 2003 2004 2005 2006
-10.00%

-20.00%
year
 Present Scenario in India

Percentage change in Advances & NPA - Pr. SB

120.00%
100.00%
80.00%
60.00%
advances
40.00%
NPA
20.00%
0.00%
-20.00% 1998 1999 2000 2001 2002 2003 2004 2005 2006
-40.00%
Year
 Present Scenario in India

Percentage change in Advances & NPA - FB

80.00%

60.00%

40.00%
Advances
20.00%
NPA
0.00%
1998 1999 2000 2001 2002 2003 2004 2005 2006
-20.00%

-40.00%
year
 Present Scenario in India

Percentage change in Advances & NPA - Total

40.00%

30.00%

20.00%
advances
10.00%
NPA
0.00%
1998 1999 2000 2001 2002 2003 2004 2005 2006
-10.00%

-20.00%
year
 Present Scenario in India

NPA OF INDIAN BANKS

18000
16000
Rs. in 100 crore

14000
12000
10000 advances
8000 NPA
6000
4000
2000
0

9 97 9 98 9 99 0 00 0 01 0 02 0 03 0 04 0 05 0 06
1 1 1 2 2 2 2 2 2 2
year
Thank You