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Banking Non Performing Assets 1

Commercial Banking : NPAs

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NON PERFORMING ASSETS

INCOME RECOGNITION,ASSET CLASSIFICATION

AND

PROVISIONING NORMS

(IRAC NORMS)

&Asset Reconstruction Companies

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Bank Credit (% to GDP)

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Why Loan accounts go bad ?

BORROWER-SIDE

Lack of Planning

Diversion of Funds

Disputes within

No contribution

No modernisation

Improper monitoring

Industrial Relations..

Natural Calamities ...

BANKER SIDE Defective Sanction

No post-sanctionsupervision, etc

Delay in releases

Directed lending

Slow decisionmaking process

Etc etc etc .

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Health Code System inIndian Banks during 1980s

1. Satisfactory Accounts2. Irregular Accounts

3. Sick-viable : Under Nursing

4. Sick Non-viable : Sticky accounts

5. Advances Recalled

6. Suit Filed Accounts

7. Decreed Debts and

8. Debts classified by the Bank asBad/Doubtful Accounts

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Asset Classification 4 way - 1993

Standard Assets All regular loan accounts &

investments (Performing Assets)

Non-Performing Assets

1. Sub-Standard Assets

2. Doubtful Assets3. Loss Assets

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Performing Asset defined

An account (loan or investment) isclassified as Performing Asset if itdoes not disclose any problems andcarry more than normal riskattached to the business

All loan facilities which are regular !

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N P As : Definition

An asset, including a leased asset,becomes non-performing when itceases to generate income for thebank.

A credit facility in respect of whichthe interest and/or instalment of

principal has remained past duefor a specified time.

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Non Performing Assets

In accounting, originally Bad & Doubtful Debts

In 1980s, RBI followed 8 point Health Code

Also called Non Performing Loans (NPLs)

or Stressed Assets

An advance where interest and / or instalment ofprincipal remain overdue for a period of morethan 90 days in respect of Term Loan / OD / CC/BP / BD / other accounts investments, exportfinance, SSI/SME/ agricultural, housing loan,

educational loan, lease and hire purchase . Etc.

Sub-standard, Doubtful and Loss Assets

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Recovery of Loans

Field Visits, Personal persuasion, Stock

Statements Notices on due dates Ordy, Regd, Legal

Civil Procedure, Winding Up Notices,

Seizure and disposal of assets thro auctions Criminal Action per Sec 138 of NI Act

Compromises Interest reduction / waiver,deferment, Simple or Compound calculation

Lok Adalat, DRT / BIFR Awards, OTS, CDR

Asset Securitisation under SARFAESI Act

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Defn of NPAs Chronologically

Mar 31, 1993 4 quarters



Mar 31, 2004 1 quarter only ???

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Sticky Loans in Banks in India

Year Loss Doubtful Sub-std

1998 6,242 27,146 17,428

1999 7,444 31,350 19,928

2000 7,558 33,688 19,594

2001 8,001 37,756 18,206

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Sticky Loans in Banks in India(Rs. In crores)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1998 1999 2000 2001

LossDoubtful

Sub-Std

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% NPAs to Total Advances(Rs in crores)

Year NPAs Total Loans %

1998 50,816 3,52,696 14.4

1999 58,722 3,99,436 14.7 2000 60,840 4,75,757 12.8

2001 63,962 5,58,679 11.4

(Source : Trends & Progress : RBI, 2001)

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NPAs as % to Total Advances

0

100000

200000

300000

400000

500000

600000

1998 199 2000 2001

NPAsTotal Loans

% to Total

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NORMS

Master circular dated 17th July, 2004.

Superceded earlier master circular dated 22ndAugust, 2003.

Status-quo of classification in respect of earth-quake affected accounts available upto15/07/2004.

Natural Calamities Floods, Cyclones, Earthquakes, Failure of Monsoon, Fire Accidents, etc...

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ASSETTYPE

STANDARD ASSET / PERFORMINGASSET

The account is not non-performing and doesnot carry more than the normal risk

attached to the business.

NON-PERFORMING ASSET (NPA)The asset ceases to generate income for thebank. (Para 2 of the Master Circular)

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IDENTIFICATION OF NPACash Credit / Overdrafts Account remains

out oforder for 90days or more.

The account is treated as out oforder if :

* Outstanding Balance remains continuously inexcess of sanction limit/drawing power for 90days or more.

* No credit continuously for 90 days or more ason the date of Balance Sheet.

* Credits in the account are not sufficient to coverinterest debited during the same period.

IDENTIFICATION OF NPA

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IDENTIFICATION OF NPA

Term Loans Interest and/or instalment

remains overdue for 90days or more.

Bills Purchased and Bill remains overdue for 90Discounted days or more.

Agricultural Advances Interest and/or installmentremains overdue for twoharvest seasons for shortduration crop, one harvestseason for long durationcrop.

Others Any amount to be receivedremains overdue for 90 daysor more .

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CLASSIFICATIONNORMS

Standard Asset

The account is not non-performing.

Sub-Standard AssetA sub standard Asset is one which has remained NPA

for a period less than or equal 12 months. (w.e.f.31st March 2005)

Loss AssetsThese are accounts, identified by the bank or internal

or external auditors or by RBI Inspectors as whollyirrecoverable but the amount for which has not been

written off.

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CLASSIFICATIONNORMS

Doubtful Asset - Three Categories

Category Period

Doubtful - I up to One Year

Doubtful - II Up to Three Years

Doubtful - III More than Three Years

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PROVISIONING NORMS

STANDARD ASSET 0.25% on Standard Assets on Global loan

portfolio basis

SUB-STANDARD ASSET

10% of total outstanding

20% of total outstanding if loan is unsecured abinitio (new guidelines)

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PROVISIONING NORMS

SUB-STANDARD (Contd)

Banks are permitted to phase the additional

provisioning upon reduction in transition period

from 18 to 12 months Over a period of four years

with minimum 20% each year (new guidelines)

LOSS ASSET:

100% should be provided for

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PROVISIONING NORMSDOUBTFUL ASSETS

Period Provision (Secured +Unsecured)

Upto 1 year 20% + 100%

1to 3 years 30% + 100%

More than 3 years 100% + 100%(effective from 31st March 2005)

Outstanding as on 60%, 75%, 100% on secured portion.

31st March 2004 2005 2006 2007

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PROVISIONINGNORMS

Provision Under Special circumstances

Normal provision on Governmentguaranteed advances.

In case of advances guaranteed byDICGC/ECGC, Provision should be madeonly for balance in excess of the amount

guaranteed by these corporations.

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IMPORTANTASPECTS

Exempted Category (Para 4.2.10 of

Master Circular)Advances against term deposits, NSCs, IVPs,

KVPs and Life Insurance Policies need notbe treated as NPAs, till security cover is

sufficient to cover outstanding balance.Income to be recognised subject to

availability of margin.

Advance against gold ornaments /

Government securities not exempt.

O S C S

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IMPORTANTASPECTS

Classification ofa Borrower (Para 4.2.6 ofMaster Circular)

All facilities granted to a borrower shall betreated as NPA & not only that facility which hasbecome irregular.

Obtain cross-branch confirmation forclassification.

Exception: Credit facility to Primary AgriculturalCredit Society (PACS) and Farmers

Service Societies (FSS) under onlending arrangement.

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IMPORTANTASPECTSConsortium Advances (Para 4.2.7 of Master

Circular)

Member banks shall classify the accountsaccording to their own record of recovery.

Bank needs to arrange to get their share ofrecovery or obtain an express consent from theLead Bank.

Bank may obtain Lead Bank confirmation &

cognizance of the same may be taken?

IMPORTANT ASPECTS

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IMPORTANT ASPECTSCorporate Debt Restructuring (CDR) - (Para 4.2.15 of Master

Circular)

CDR is an institutional mechanism for evolving financialsolution.

CDR will be available only in respect of multiplebanking/syndication/consortium accounts with outstandingexposure of Rs.20 Crores & above. (Not available for sole bankingaccounts)

Accounting treatment for restructuring under CDR will besame as applicable to otherwise restructured accounts.

Projects under implementation Treatment to be in line with Para 4.2.16 of Master Circular

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GREENING ISSUES

Sanction/extension of Additional facility /Adhoc facility.

Enhancement of Limit.

Conversion of Overdue Limits.

Frequent Re-schedulement of Term Loans.

Adjusting Loan of one borrower against other

borrower.

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INCOME RECOGNITION

Income RecognitionFor NPA accounts income should be recognised on realisation basis.

When an account becomes non-performing, unrealised interest of theprevious year to be derecognised/ reversed.

Adjustment of Recoveries - Priority

Unrealised Expenses

Unrealised Interest

Amount of Principal Outstanding

Clarification vide Master Circular - in the absence of clear agreement

between the Bank and the Borrower, an appropriate policy to befollowed in uniform and consistent manner.

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DISCLOSURE

At Branch Level Auditor needs to report the compliance with IRAC norms of RBI withrespect to classification & provisioning for NPA and incomerecognition in Long Form Audit Report (LFAR) of the branch.

At Head Office Level Advances are disclosed net off NPA provisions & Interest

Suspense.

Accounting policy for classification, provisioning & incomerecognition need to be disclosed.

Disclosure needs to be made as required in terms of the guidelinesissued by the Reserve Bank of India in connection with Percentage

of Net NPAs to Net Advances, Provision for Standard Assets & NPAs,Movements in NPAs, Movement in Provision for NPAs.

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A R i C i

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Asset Reconstruction Companies

Experience abroad

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Experience abroad

Spain - Dep Guarantee Fund : 1977-80 Chile - Cash Purchase of Bad Loans1982

USA - Resolution Trust Corpn, 1989

Japan - Coop Cr Purchasing Co 1993 Poland : Rescheduled Bad Loans : 1994

Eastern Europe : Govt Bonds : 1994

(Hungary)

Experience abroad

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Experience abroad... Tanzania - 1988

Ghana - NPA Recovery Trust 1989

Sweden - SECURUM - January 1993

Uganda - 1995 Philippines - Asset Privatisation Trust

Malaysia - Soft loans by Central Bank

Colombia, Czech, Slovak, etc too

Asset Reconstruction

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Asset ReconstructionCompanies

Capital from Banks/Financial Instns ARCs in private sector like an SPV

Staff from Banks/Financial Instns

Issue Bonds in lieu of Assets taken over Guaranteed by Government of India

Stamp Duty to be exempted

On par with Venture Funds for Inc. Tax

Developments in India

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Developments in India Ordinance in June 2002 on Securitisation Law

Enacted by Parliament in December 2002 Securitisation and Reconstruction of

Financial Assets and Enforcement of

Security Interest Act (SARFAESI) 2002 Powers to Lenders To Seizure of Assets,

Change of Management, Securitisation ofFinancial Assets, etc

Challenged in Supreme Court by M/s. MardiaChemicals Ltd., against right of ICICI Bank

Setting up of AR Companies in India

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Setting up of AR Companies in India

1. Asset Reconstruction Company India Ltd(ARCIL) (SBI+ HDFC+ IDBI+ ICICI Bk)

2. Asset Care Enterprise (ACE) (IFCI +PNB)

3. ARC to be floated by Kotak Mahindra Bank?

4. ASREC Andhra Bank, Stanchart,Deutsche and UTI Bk?

5. Corp Bank, ING Vysya and Actis to start?

Definition of ARCs (RBI April 2003)

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Definition of ARCs (RBI _ April 2003)

A company which is set up with theobjective of taking over distressed assets

(Non Performing Assets) from banks or

financial institutions and to reconstruct or

re-pack these assets to make those assets

saleable

Objectives of ARCs in India

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Objectives of ARCs in India

To buy out troubled loans from banks and makespecial efforts at recovering value from the assets,

if necessary by special legislation, with special

powers for recovery.

Restructuring of weak banks to divest the bad loan

portfolio essential for a comprehensive

restructuring strategy of weak banks.

ARCIL

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ARCIL

www.arcil.co.in Sponsored by SBI, ICICI Bank Ltd., IDBI Ltd. and

Punjab National Bank

Vision - Mission Statement

Vision Be a major contributor to the Indian economy by

capturing value from the impaired assets

Mission Maximise value through innovative resolution

Establish fair and transparent business practices Facilitate development of market for distress debt

ARCIL : Shareholding Pattern
http://www.arcil.co.in/http://www.arcil.co.in/

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ARCIL : Shareholding Pattern

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Developments in 2004

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p

Revised Definition of NPA to 90 Days

Banks managed to bring down NPAs < 3% SARFAESI Act, 2002 amended in Dec 2004

To set up Asset Reconstruction Companies

Take possession of secured assets of borrowers

Right to lease out, sell and realize such assets

Right to take over the management of borrowers

60 days notice by lenders is adequate

No appeal permissible unless borrowers deposit50% amount due and approach DRT / DRAT

NPAs in Banks : March 2005 (Rs in Cr)

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( )

Banks Total

Assets

Gross

NPAs

Net NPAs

Public(27)

16,76,847 46,380 16,135

Private(29) 4,25,802 8,715 4,038

Foreign(31)

IDBI Bank 81,360 1,216 848

CDR mechanism

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CDR mechanism

Corporate Debt Restructuring mechanism

Similar to UK, Thailand, Korea & Malaysia

RBI guidelines to Banks and FIs in Aug01

To ensure timely and transparent mecha-

nism to restructure debts, outside purviewof BIFR, DRTs and other legal proceedings

To consider all viable entities with duesabove Rs. 20 crores facing problems of

repayment ...

CIBILwww.cibil.com
http://www.cibil.com/http://www.cibil.com/

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Credit Information Bureau of India Ltd

Exchange of Credit Info among Banks/FIs

Unscrupulous borrowers cannot play onebank against another for credit facilities

Set up in January 2001 by SBI + HDFC +Dun and Bradstreet Info Pvt Ltd + TransUnion International Inc Rs 25 cr Capital

Formal set up 2005 onwards ...

Economic Times dt Jan 05, 2006

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,

Bad Loans cross 16% of Indias GDP

ARCIL puts figure at Rs. 2,36,000 crores Says unlocking value from NPAs will help

banks meet additional capital requirements

Gr NPAs in financial sector Rs 1,11,000crores; Restructured Standard Assets Rs.27,000 crores; Corporate DebtRestructring Rs. 65,000 crores; BadLoans Written off by Banks Rs. 77,000 crs.

BankingAsset Quality

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Gross NPAs as % of Total ASSETs

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Gross NPAs as % of Total ASSETs

BANKS 2001-2

2002-3

2003-4

2004-5

2005-6

87 SCBs 4.60 4.00 3.30 2.52 1.86

28 PSBs 4.89 4.21 3.50 2.73 2.09

20 OPBs 5.20 4.34 3.64 3.15 2.50

9 NPBs 3.90 3.76 2.42 1.56 0.96

30 FBs 2.41 2.44 2.13 1.43 0.96

Net NPAs as % of Total ASSETs

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Net NPAs as % of Total ASSETs

BANKS 2001-2

2002-3

2003-4

2004-5

2005-6

87 SCBs 2.30 1.90 1.20 0.92 0.66

28 PSBs 2.42 1.93 1.28 0.95 0.72

20 OPBs 3.23 2.51 1.17 1.39 0.91

9 NPBs 2.10 2.116 1.10 0.80 0.43

30 FBs 0.81 0.79 0.66 0.42 0.40

Net NPAs as % of Total Assets

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0

0.5

1

1.5

2

2.5

3

3.5

2001-2 2002-3 2003-4 2004-5 2005-6

Years

Pe

rcentages

87 SCBs

28 PSBs

20 OPBs

9 NPBs

30 FBs

Gross NPAs as % ofTotal Advancess

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Total Advancess

BANKS 2001-2

2002-3

2003-4

2004-5

2005-6

87 SCBs 10.40 8.80 7.20 5.20 3.30

28 PSBs 11.09 9.36 7.79 5.53 3.70

20 OPBs 11.01 8.86 7.59 5.97 4.30

9 NPBs 8.86 7.64 4.99 3.59 1.70

30 FBs 5.38 5.25 4.62 2.85 1.90

Net NPAs as % of Total Advances

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BANKS 2001-2

2002-3

2003-4

2004-5

2005-6

87 SCBs 5.50 4.40 2.90 2.00 1.20

28 PSBs 5.82 4.53 2.99 2.06 1.30

20 OPBs 7.13 5.54 3.85 2.74 1.60

9 NPBs 4.94 4.63 2.36 1.85 0.80

30 FBs 1.89 1.76 1.48 0.86 0.80

Net NPAs as % of Total Advances

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0

1

2

3

4

5

6

7

8

2001-2 2002-3 2003-4 2004-5 2005-6

Years

Pe

rcentages

87 SCBs

28 PSBs

20 OPBs

9 NPBs

30 FBs

Documents

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