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The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans. The reason being mounting non-performing assets (NPAs). An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a bank cannotbook interest on an NPA on accrual basis. In other words, such interests can be booked only when it has been actually received. Therefore, this has become what is called as a 'critical performance area of the banking sector as the level of NPAs affects the profitability of a bank.
Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and loss account, but their carrying cost is also increased which result s in excess & avoidable management attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby slowly eroding the net worth.
Today the Net NPAs of Indian PSBs (which account for around three-fourths of the total assets of Indian banking industry) are as low as 0.72 percent and gross NPAs are at 2.5 percent. However, Nitsure (2007) contends that once there is a slowdown in private expenditure and corporate earnings growth, companies on these banks' books will not be in a position to service their debts on time and there is a strong likelihood of generation of new NPAs. Moreover, he also suggests that with rising interest rates in the government bond market, the banks' treasury incomes have declined considerably. So banks will not have enough profits to make provisions for NPAs. Under these circumstances, management of NPAs is a difficult task.
Comparison of Non-Performing Assets of ICICI bank and PNB for the past five years
Tables and Figures
Gross NPA ratio(%)
An asset becomes non-performing when it ceases to generate income for the bank. Earlier an asset was considered as non performing asset based on the concept of "past due".
A NPA was defined as credit in respect of which interest and/or installment of principal has remained "past due" for a specific period of time. The specific period of time was reduced in a phased manner as under:à
Year ended March,31
An amount is considered as past due, when it remains outstanding for 30 days beyond the due date. However, with effect from March31, 2001 the "past due" concept has been dispensed with and the period is reckoned from the due date of payment.
NORMS FOR IDENTIFICATION OF NPA
With an intense to use the international best practice and to ensure greater transparency, "90 days" overdue norms are accepted for the identification of NPA from the year ended March 31, 2004.
With effect from March 31, 2004, a NPA shall be counted on loan and advances where:à
Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.
The account remains out of order for a period of 90 days, 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.
Any amount to be received remains overdue for a period of more than 90 days in respect of any other accounts.
Tier 2 bank like all the Urban Co-Operative Banks (UCBs) other than the Tier 1 bank i.e. Unit bank shall classify their loan accounts as NPA as per 90 day norm as hitherto.
FACTORS RESPONSIBLE FOR NPA
Improper selection of borrower's activities
Weak credit appraisal system
Inefficiency in management of borrower
Slackness in credit management & monitoring
Lack of proper follow up by bank
Recession in the market
Due to natural calamities and other uncertainties
INDIAN ECONOMY AND NPA
Gross NPAs (non-performing assets) in Indian banking sector have declined sharply to close to 3.0 per cent in 2006 (15.7 per cent at end-March 1997). Net NPAs of the banking sector are now at close to one per cent and the gap between the gross and net NPAs has narrowed over the years. Recovery of dues is also more than the fresh slippages.
The decline in NPAs is particularly significant as income recognition, asset classification and provisioning norms were tightened over the years. For instance, banks now follow 90-day delinquency norm as against 180-day earlier. Banks are also required to make general provisioning (0.40 per cent) for standard advances.
According to Reserve Bank of India, improved profitability, underpinned by robust macroeconomic environment and upturn in interest rate cycle, has enabled banks
to reduce the backlog of NPAs.
The committee on financial system, also known as Narsimhan Committee, under the chairmanship of Shri M. Narsimhan, appointed by the RBI recommended the introduction of these prudential accounting norms by Indian Banks in its report submitted in December 1991. The committee was of view of that
If banks want to know the true and fair financial health of bank then they should observed the prudential accounting norms while making balance sheet and profit & loss account.
Classification of assets has to be done on the basis of objective criteria.
Provisioning should be made on the basis of classification into four different categories.
The income recognition, Assets Classification and provisioning norms also known as Prudential Accounting Norms, provided that a bank should not show profit which is merely a book profit by resorting to practice like debiting interest to a loan account irrespective of its chance of recovery and booking the same as income or by not making provisions towards loan losses.
NARSIMHAN COMMITTEE'S RECOMMENATIONS
Committee has suggested that banks should operate on the basis of financial autonomy and operational flexibility.
It has recommended "Capital Adequacy Norm" of 8%
These norms are applicable to all UCB's from 1st April, 1992.
The first committee had made recommendations in 1991, which had resulted in basic changes in the matter of treatment of income, assets classification and provisioning norms, etc. It was considered necessary for government to continue the improvement with striker rules in future also and for that second committee was made to continue changes with certain modifications.
The second committee includes the following points:à
If bank is working in foreign countries at presently then for them the "Capital Adequacy Norm" is 9% which was 8% earlier.
Banks can't classify the account as NPA which are guaranteed by the Central / State government, effective from the year 2000-2001.
As per the existing norms, no provisions for standard assets but from March 31st 2000, there is a norm of 0.25 percent on standard assets.
Banks have to make a provision of 2.5% on their investment in Government securities with effect from the year ending 31st March, 2000. In future, this provision is likely to be raised to 5%.
The present norm is of 180 days for the account to be treated as NPA but after 31st March, 2000, this period is reduced to 90 days only.
Banks have been asked to reduce the level of NPA to 5% of their total advances till 31st March, 2000. The percentage has to be brought down to less than 3% with effect from 31st March, 2002.
CHART OF ASSETS CLASSIFICATION
PERFORMING ASSETS NON-PERFORMING
SUB-STANDERED DOUBTFUL LOSS
ASSETS ASSETS ASSETS
LESS THAN 1 TO 3 ABOVE
1 YEAR YEARS 3 YEARS
DEFINITION AS PER THE CLASSIFICATION OF ASSETS
Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with respect to bank advances. In terms of these guidelines, bank advances are mainly classified in to following categories:à
Standard assets are one which does not carry any problems and which does not carry more than normal risk attached to the business.Such assets should not be an NPA.
These assets involved the two types of view as followsâ€¦
à In respect to the norms of March 31, 2005 an asset would be classified as Sub standard if it remained NPA for a period less than or equal to 12 months.
àAn assets where the terms of the loan agreement regarding interest & principal have been regenerated or rescheduled after commencement of production, should be classified as sub-standard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated terms.
In respect to the norms of March 31, 2005 an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months.
A loan which is classified as doubtful has all the weaknesses inherent as that classified as Sub-standard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently known facts, conditions and values, highly questionable and improbable.
Some types of these assets are
Less than 1 year
1 to 3 year
3 year and above
A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation department or by the RBI inspection but the amount has not been written of, wholly or partly.
READY RECKONER FOR ASSET CLASSIFICATION
WHEN DATE OF NPA FALLS?
ASSET CLASSIFICATION AS ON 31-03-2007
Between 1-10-2006 &31-03-2007
Between 1-10-2005 &30-09-2006
Doubtful up to 1 year
Between 1-10-2003 &30-09-2002
Doubtful asset of 1 year to 3 year
On or before 30-09-2003
Doubtful asset of more than 3 year
No NPA date
No security or salvage value of security is less than 5%
Chance of realization of dues from all available sources is practically negligible or zero.
Account has been identified by the bank or internal/external auditors or RBI inspectors as loss assets, which has not been written off.
GUIDELINES FOR CLASSIFICATION OF ASSETS
1. BASIC CONSIDERATION:à
à In simple terms the classification of assets should be done by considering the well defined credit weaknesses & extent of dependence on collateral security for realization of dues.
à In accounts where there is a potential threat to recovery on account and existence of other factor such as fraud committed by borrowers it will not be prudent for bank to classify that account first as sub-standard and then as doubtful. Such account should be straight away classified as doubtful asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA.
2. ADVANCES GRANTED UNDER REHABILITATION PACKAGES:à
à Banks are not permitted to do classification of any advances in respect of which the term have been re-negotiated unless the package of re-negotiated terms has worked satisfactory for a period of one year.
à A similar relaxation is also made in respect of SSI units which are identified as sick by banks themselves and where rehabilitation packages programs have been drawn by the banks themselves or under consortium arrangements.
3. INTERNAL SYSTEM FOR CLASSIFICATION OF ASSETS AS NPA:à
à Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut-off point to decide what would constitute a high value account depending upon their respective business levels. The cut-off point should be valid for the entire accounting year.
à Responsibility and validation level for proper assets classification may be fixed by bank.
à The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels with in one month from the date on which the account would have been classified as NPA as per extant guidelines.
INCOME RECOGNITION POLICY
According to the act of 1st April, 1992 the income recognition policy is as followsâ€¦
à The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis.
à However, interest on advances against term deposits, NSCs, IVPs, KVPs, and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
à Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debt should be recognized on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.
à If Government guaranteed advances becomes 'overdue' and there by NPA, the interest on such advances should not be taken to income account unless the interest has been realized.
à According to the norms the provisions should be made on the nonperforming assets on the basis of classification of assets as we have already discussed.
à Taking in to account this provisioning norms the banks have to make provision on different assets like Loss Assets, Doubtful Assets and Standard Assets as below :-
( | ). LOSS ASSETS
à The entire assets should be written off after obtaining necessary approval from the competent authority and as per the provisions act of C0-operative society Act. If the assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for.
à If expected salvage value of the loss asset is negligible then 100% provision should be made on it.
( || ). SUB-STANDARD ASSETS
à A general provision of 10% on the total outstanding should be made on the advances given.
( ||| ). DOUBTFUL ASSETS
à On doubtful assets provision is made from 20% to 100% as per the period of asset. The table below shows the provision on doubtful assets.
Period for which the advance has remained in 'doubtful' category
Up to one year
One to Three year
More than Three year
( | ) Outstanding NPA as on March 31,2007
- 50% as on March 31, 2007
- 60% as on March 31, 2008
- 75% as on March 31, 2009
- 100% as on March 31, 2010
( || ) Advances classified as 'doubtful for more than three years' on or after April1, 2007
( |V ). STANDARD ASSETS
à From the year ended March 31, 2000, the banks should make a general provision of a minimum of 0.25% on the standard assets.
à However, Tier 2 banks are required to do higher provisioning on standard assets as under:-
General provisioning requirement is 0.40% from the present level of 0.25%. But in case of agriculture or in SME investors the provisioning rate is required to be 0.25%.
( V| ). HIGHER PROVISIONS
à There is no objection if the banks create bad and doubtful debts reserve beyond the specified limits on their own or if provided in the respective State Co-operative Societies Acts.
MANAGEMENT OF NPA
It is very necessary for bank to keep the level of NPA as low as possible. Because NPA is one kind of obstacle in the success of bank so, for that the management of NPA in bank is necessary. And this management can be done by following way:à
Framing reasonably well documented loan policy and rules.
Sound credit appraisal on well-settled banking norms.
Emphasizing reduction in Gross NPAs rather then Net NPAs
Pasting of sale notice/ wall posters on the house pledged as security.
Recovery effort starts from the month of default itself. Prompt legal action should be taken.
Position of overdue accounts is reviewed on a weekly basis to arrest slippage of fresh account to NPA.
Half yearly balance confirmation certificates are obtained from the borrowers regularly.
A committee is constituted at Head Office, to review irregular accounts.
Due to lower credit risk and consequent higher profitability, greater encouragement is given to small borrowers.
Recovery competition system is extended among the staff members. The recovering highest amount is felicitated.
Adopting the system of market intelligence for deciding the credibility of the borrowers
Creation of a separate 'Recovery Department' with Special Recovery Officer appointed by the RCS.
RECOVERY OF NPA
IMPORTANCE OF RECOVERY:à
1. Increase in the income of bank.
2. Increase in the trust of share holder in bank.
3. Level of NPA reduces as the recovery done.
4. Decrease in provisioning requirements.
STEPS TAKEN BY GOVERNMENT TO RECOVERING NPA:à
1. SECURITIZATION ACT
Now this act is also applicable to all Urban Co-Operative Banks.
According to this act Bank can take direct possession of the movable and immovable property mortgages against loans and sell out the same for such recovery, without depending on legal process in the court.
Gujarat state has also by amending under co-op soc, act empower co-op bank to appoint their staff as recovery officer on getting order from the board of nominees.
Above both act are benefited to bank for the recovery of NPA.