A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments.
For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.
NPA is defined as an advance for which interest or repayment of principal or both remain outstanding for a period of more than two quarters w.e.f. march 31st,2011, a non performing assets shall be an advance where:-
Interest and/or instalment remain overdue for a period of more than 180 days.
Account remains out of order for a period of more than 180 days.
The bill remains overdue for a period of more than 180 days in case of bills purchase and discounted.
Interest and/or investment of principal remain overdue for 2 harvest season.
With a view to moving towards greater transparency, it has been decided to adopt the 90 days norm for identification of NPAs.
Accordingly w.e.f. 31st march, 2004 NPA shall be a loan or advance where:-
Interest and/or instalment remain overdue for a period of more than 90 days.
Account remains out of order for a period of more than 90 days.
The bill remains overdue for a period of more than 90 days in case of bills purchase and discounted.
Interest and/or investment of principal remain overdue for 2 harvest season.
Types of non-performing assets
RBI has issued guidelines to banks for classification of assets into four categories:-
Standard assets: - these are loans which do not have any problem and are less risky.
Sub-standard assets: - assets which come under the category of NPA for a period of less than 12 months.
Doubtful assets :- these are NPAs exceeding 12 months
Loss assets:- these are NPAs which are identified as unreliable by internal inspector of bank or auditor or by RBI,
REASONS BEHIND NPA
Lack of proper pre-enquiry by the bank for sanctioning a loan to the customer
Non-performance of the business or the purpose for which the customer has taken the loan.
Wilful defaulter
Loans sanctioned for agriculture purposes
Change in government policies lead to NPA.
EFFECTS OF NPA ON BANKS AND FI
Restriction on flow of cash done by banks due to the provision of fund made against NPA
Drain of profit
Bad effect on goodwill
Bad effect on equity value
STATUS OF NPA IN PNB BANK
From Rs 4,379 crores in the beginning of fiscal 2011-12, gross NPAs have gone up to Rs 8,719 crores as of end-March 2012. As a percentage of advances, it stood at 2.93 per cent in end March 2012, much higher than the 1.79 % at end-March 2011. Net NPAs more than doubled to Rs 4,454.24 crores (Rs 2,038.68 crores).
STATUS OF NPA IN ICICI BANK
Net non-performing assets decreased by 23% to ` 1,894 crore (US$ 372 million) at March 31, 2012 from ` 2,459 crore (US$ 483 million) at March 31, 2011. The Bank's net non- Performing asset ratio decreased to 0.62% at March 31, 2012 from 0.94% at March 31, 2011 and 0.70% at December 31, 2011. The Bank's provision coverage ratio computed in accordance with the RBI guidelines at March 31, 2012 was 80.4% compared to 76.0% at March 31, 2011. Net restructured assets at March 31, 2012 were ` 4,256 crore (US$ 836 million).
ICICI BANK
PNB BANK
2010-2011
3,192 crore
3,214 crore
2011-2012
2,459 crore
4,379 Crore
End- march 2012
1,894 crore
8,719 crore
CASE:-
Kingfisher, an NPA for PNB
The debt-laden Kingfisher Airlines is now an NPA for PNB. This bank has an exposure of about Rs 600 crore in Kingfisher Airlines. This account was restructured in the third quarter and became a NPA for the bank in the March quarter.
In 2011-12, PNB had restructured advances to the tune of Rs 15,334 crore, of which, Rs 6,874 crore was for power and Rs 2,245 crore for the aviation sector. Three State electricity boards (Uttar Pradesh, Rajasthan and Tamil Nadu) and two aviation companies benefited from the restructuring move, bank officials said.
Meanwhile, aided by write-back of depreciation in investments, PNB has reported a 18.58 per cent increase in net profit for the quarter ended March 31,2012, at Rs 1,424.06 crore (Rs 1,200.89 crore).
PNB's Board of directors on Wednesday declared a dividend of 220 per cent (Rs 22 per share), the same as in the previous year.
SUGGESTIONS TO REDUCE NPA
The issue of Non-Performing Assets (NPAs) in the financial sector has been an area of concern for all economies and reduction in NPAs has become synonymous with functional efficiency of financial intermediaries. Although NPAs are a balance sheet issue of individual banks and financial institutions, it has wider macroeconomic implications. It is important that, if resolution strategies for recovery of dues from NPAs are not put in place quickly and efficiently, these assets would deteriorate in value over time and only scrap value would be realized at the end.
It should, however, be kept in mind that NPAs are an integral part of the business financial sector and the players are in as they are in the business of taking risk and their earnings reflect the risk they take.
They operate in an environment, where there would be defaults as well as deterioration in portfolio value, as market movements can never be predicted with certainty. It is in this context, that countries have adopted regulatory measures and the guiding structure has been provided by the Basel guidelines.
There are various reasons for assets turning non-performing and there can be alternative resolution strategies. Identification of the reasons and timely action are the key to improved profitability of financial sector intermediaries. In this context, the details of the CAMEL model that RBI introduced for evaluating performance of banks and the need for this arose from the systemic generation of large volume of NPAs. CAMEL covers capital adequacy, asset quality, management quality, earnings ability and liquidity.
Major steps taken to solve the problems of Non-Performing Assets in India:-
1. Debt Recovery Tribunals (DRTs):
Narasimha Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established. There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient to solve the problem all over the country (India).
2. Lok Adalats
Lok Adalats have been found suitable for the recovery of small loans. According to RBI guidelines which are issued in 2001. They cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed are covered. Lok Adalats avoid the legal process. The Public Sector Banks had recovered Rs. 40 Crores by September 2001.
3. Compromise Settlement:
Compromise Settlement Scheme provides a simple mechanism for recovery of NPA. Compromise Settlement Scheme is applied to advances below Rs. 10 Crores. It covers suit filed cases and cases pending with courts and DRTs (Debt Recovery Tribunals). Cases of Wilful default and fraud were excluded.
4. Credit Information Bureau:
A good information system is required to prevent loans from turning into a NPA. If a borrower is a defaulter to one bank, this information should be available to all banks so that they may avoid lending to him. A Credit Information Bureau can help by maintaining a data bank which can be assessed by all lending institutions.
5. Securitisation Act 2002:
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as Securitisation Act. This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the borrower cannot sell or dispose the assets without the consent of the lender. The Securitisation Act further empowers the banks to take over the possession of the assets and management of the company. The lenders can recover the dues by selling the assets or changing the management of the firm. The Act also enables the establishment of Asset Reconstruction Companies for acquiring NPA. According to the provisions of the Act, Asset Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10 crores has been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank.
