Introduction of The Topic

NON-PERFORMING OF THE ASSETS
INTRODUCTION
A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or
installment of principal has remained past due for a specified period of time.
NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default.
Once the borrower has failed to make interest or principle payments for 90 days the loan is
considered to be a non-performing asset. Non-performing assets are problematic for financial
institutions since they depend on interest payments for income. Troublesome pressure from the
economy can lead to a sharp increase in non-performing loans and often results in massive writedowns.
Classification of NPA
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 realisability of the
dues:
1. Sub-standard assets: a sub standard asset is one which has been classified as NPA for a
period not exceeding 12 months.
2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12
months.
3. Loss assets: where loss has been identified by the bank, internal or external auditor or
central bank inspectors. But the amount has not been written off, wholly or partly.
Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets
which are considered as non-performing for period of more than 12 months are called as Doubtful
Assets. All those assets which cannot be recovered are called as Loss Assets.
Reasons for Occurrence of NPA

NPAs result from what are termed Bad Loans or defaults. Default, in the financial parlance, is the
failure to meet financial obligations, say non-payment of a loan installment. These loans can occur
due to the following reasons:
Usual banking operations /Bad lending practices
A banking crisis (as happened in South Asia and Japan)
Overhang component (due to environmental reasons, business cycle, etc.)
Incremental component (due to internal bank management, like credit policy, terms of credit,
etc...)
The Problems caused by NPAs

NPAs do not just reflect badly in a banks account books, they adversely impact the national
economy. Following are some of the repercussions of NPAs:
Depositors do not get rightful returns and many times may lose uninsured deposits. Banks
may begin charging higher interest rates on some products to compensate Non-performing
loan losses
Bank shareholders are adversely affected
Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy
suffers due to loss of good projects and failure of bad investments
When bank do not get loan repayment or interest payments, liquidity problems may ensue.
Result of NPAs on an organization

1. They decrease profitability.
2. They reduce capital assets and lending limits.
3. They increase loan loss reserves.

4. They bring unwanted attention from government regulators.
ASSET CLASSIFICATION
IDENTIFICATION OF POTENTIAL NPA / STRESSED ASSETS

1. Reckoning of NPA :
A NPA account to be identified based on its status / position of the accounts
erosion in security as on the date of balance sheet of the bank. Nevertheless, the date of a NPA
account would be the actual date on which the slippage occurred. If an account is regularized
before the balance sheet date by repayment of overdue amount through genuine sources (not
by sanctioning of additional facilities or transfer of funds between accounts), the account need
not be treated as NPA.
It has, however, to be ensured that in the account remains in order subsequently
and a solitary or few credits made in the account on or before the balance sheet date which
extinguishes the overdue amount of interest or installment of principal is not reckoned as the
sole criterion for treating the asset as standards one.
2. Identification and monitoring of potential NPA / stressed assets:

Indention of potential NPA account as its incipient stage of sickness and initiating
immediate corrective measures is the most important step for preventing an
asset from becoming NPA. The guidelines issued by Credit Monitoring Cell
(CMC) CAD, HO should be followed in this regard.
3. Constitution pf NPA Prevention Cell at the ROs.

It has been decided to constitute a NPA Prevention cell at the ROs to
monitor the Standard-B accounts and to ensure the prevention of their slippage
to NPA. The cell headed by Regional Manager would comprise Regional
Manager, Dy. Regional Manager and Credit Officer. It will conduct its meeting
every fortnight.
ITS FUNCTION WILL BE AS UNDER:
To examine the information received from branches relating to Standard B

(based on 60 days norms), NPA accounts and identify the accounts for
restructuring. The entire process should be completed within a time frame of 30
days.
To review the performance of the existing restructured accounts including BIFR

and CDR cases.
The cell will send information on fortnightly basis to CMC, CAD Head Office.
Regional Manager to cell for the explanation from the Branch Managers whose
performance in recovery is far from satisfactory.
4. Review and reporting of potential NPA / Stressed assets

Following steps be taken for review and reporting of potential NPA /
Stressed Assets:
Step-1: Analysis of reason of deterioration of health, signs of sickness, problem

character of the A\c.
Step-2: Close interaction with the borrower, visit to the unit, close and frequent
monitoring of the account, drawing the attention of the borrower to the irregularity /
deterioration in he asset quality / signs of weakness in the account.
Step-3: Advice the borrower to correct the irregularity immediately in a time bound
manner and obtain his categorical assurance.
Step-4: Corrective measures for prevention of slippages:
Review the account and consider sanction of need based working capital limits
on merits, if the present limits are inadequate.
Identify Stressed Assets accounts and consider restructuring / realignment / reschedulement on merits.
Early warning signal, if any, to be watched and addressed to.
Verification of (i) the documents for its correctness, enforceability, (ii) correctness
of ROD (iii) insurance covers (iv) value/marketability of prime/collateral security
eye.
Verification of existence of primary / collateral security of the borrower.
Step-5: Report to the next higher authority, the details on the above aspects and
suggesting specific corrective measures in time.
Step-6: Implement the corrective action and report to higher authority.
5. Maintaining the Assets Quality :

Post sanction monitoring, supervision, and follow up
Following measures should be put in place.
(i)
Terms and condition of the sanction:

Terms and condition of sanction have to be strictly complied with
(ii)
Verification:
Verification of end use of the funds, stocks and assets by Bank officials or
through duly appointed concurrent auditors as per norms for effective monitoring
of the accounts.
(iii)
Legal Formalities:
Formalities like obtaining / execution of documents / search certificates,
registration of charges, timely revival of the documents, completion of equitable
mortgage formalities etc. as per norms are the most important steps.
(iv)
Stock Statements:
Branches should obtain stock statements at monthly intervals regularly.
As per RBI guidelines, the outstanding in the A/C based on the drawing
powers calculated from stock statements older than 3 months would be
deemed as irregular and if such irregular drawings are permitted for 90
days continuously, the A/C will be NPA.
(v)
Stock audit:
Stock audit is to be conducted every year in every NPA account with
outstanding limit of Rs 1 crore and above. However, wherever current
assets are depleted or unit is closed, the stipulation may be exempted.
6. Management of NPA:
The RMs personally verify and ensure that all accounts, especially high
value advances are properly classified into standard, Sub-std. Doubtful or loss
categories strictly as per prudential norms. It will be their responsibility to finalize
and eliminate delay or postponed of identification of NPA.
In case of doubts due to any reason, RMs may seek guidance from HO
and settle the matter within one month from the date on which the account would
have been classified as NPA as per norms.
It may be noted that if RBI observes any divergences in asset

classification, especially in high value accounts due to willful non-compliance of
RBI guidelines by any official responsible for classification then RBI may initiate
deterrent action including imposition of monetary penalty.
7. Appropriation of recovery in NPAs:

a) Non decreed accounts:
In case of NPA accounts in all categories i.e. Sub standard, Doubtful and Loss
appropriated first against outstanding in the account and the surplus available, if
any, is to be taken to interest / income. The same norm will be applicable to the
compromised accounts also.
b) Decreed accounts:
In case of decreed accounts where there is no compromise settlement amount
recovered should be appropriated as per the decretal terms. However, if there is
no specific term as regards appropriation of recovery in the decrial terms, the
recovery should be appropriated first towards Principal and the balance towards
interest.
c) Appropriation of ECGC claim amount in NPA Accounts:

As per the existing procedure, Bank is expected to keep the claim amount
received from the ECGC in a separate memorandum account and pursue
recovery efforts against the concerned Exporter borrower for the full amount of
dues inclusive of the claim amount settled.

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NON-PERFORMING OF THE ASSETS

Reasons for Occurrence of NPA

Usual banking operations /Bad lending practices

A banking crisis (as happened in South Asia and Japan)

Overhang component (due to environmental reasons, business cycle, etc.)

The Problems caused by NPAs

Bank shareholders are adversely affected

Result of NPAs on an organization

3. They increase loan loss reserves.

IDENTIFICATION OF POTENTIAL NPA / STRESSED ASSETS

2. Identification and monitoring of potential NPA / stressed assets:

3. Constitution pf NPA Prevention Cell at the ROs.

ITS FUNCTION WILL BE AS UNDER:

To examine the information received from branches relating to Standard B

To review the performance of the existing restructured accounts including BIFR

4. Review and reporting of potential NPA / Stressed assets

Step-1: Analysis of reason of deterioration of health, signs of sickness, problem

Step-4: Corrective measures for prevention of slippages:

Early warning signal, if any, to be watched and addressed to.

Verification of existence of primary / collateral security of the borrower.

Step-6: Implement the corrective action and report to higher authority.

5. Maintaining the Assets Quality :

Terms and condition of the sanction:

It may be noted that if RBI observes any divergences in asset

7. Appropriation of recovery in NPAs:

c) Appropriation of ECGC claim amount in NPA Accounts:

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