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. An asset which ceases to generate income for the bank. Interest debited to the borrower account has to be realized by the bank.Refers to the sum of non-performing loans (NPL) and real and other properties owned and acquired (ROPOA).
An NPA or non-performing asset is a classification used by financial institutions that refers to loans that are in jeopardy of being in default. 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. The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource.
Asset Classification:-
The RBI has issued guidelines to banks for classification of assets into four categories:-
Standard NPA:-
These are loans which do not have any problem are less risk
Substandard NPA;-
The account holder comes in this category when they dont pay three installment continuously after 90 days and up to 1year.
For this category bank has made 10%provision of funds from their profit to meet the losses generated NPA.
Loss Assets:-
 Identified as unreliable by internal inspector of bank or auditors or by RBI.
For these 100% provision is made.
When account holder comes in this category their account can be written off by the banks.
After this the assets are handed over to recovery agents for sale.
Doubtful Assets :
All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets.
Provision on types of assets:-
Provision is allocating money every year to meet possible future loss.
types of assets
Causes of NPA:-
NPA arises due to a number of factors or causes like:-
Speculation : Investing in high risk assets to earn high income.
Default : Willful default by the borrowers.
Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc.
Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business.
Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies.
External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.
Factors leading to NPAs
Lack of proper pre-enquiry by the bank for sanctioning a loan to a customer.
Non performance of the business or the purpose for which the customer has taken the loan.
Willful defaulter.
Loans sanctioned for agriculture purposes.
Change in government policies leads to NPA
Compare the data of Non Performing Assets of ICICI bank and PNB for the past five years;-
PNB
Punjab National Bank (PNB) is the third largest banking entity in the country with 6.6% share of the total non-food credit disbursals at the end of FY11. Strong growth and stellar margins has pegged the bank amongst the frontrunners in the PSU banking space. This has helped it keep its neck above its peers and increase its market share.
ICICI BANK
With 7.2% share of India's total non-food credit disbursements and 9% of the banking system's deposits in FY11, ICICI Bank is the second largest bank in the country after SBI in terms of asset size. The bank has lost its share of the banking sector's advances from 10.2% in FY07 to 6.8% in FY11. At the end of March 2011, the bank had assets of over US$ 104 bn (Rs 4.7 trillion) and a franchise of over 5,700 ATMs and 1,800 branches spread across the country. Retail assets constituted 33% of advances in FY11 as against 65% in FY07. The bank is focusing on loan origination in the large corporate, SME and agriculture segments and on non-fund based products and services. Besides the bank itself being the market leader across retail loan portfolios, its subsidiaries ICICI Life Insurance, ICICI General Insurance and ICICI AMC are leaders in their respective businesses.
PNB
ICICI BANK
PNB/
31/3/2012
31/3/2012
ICICI BANK
High
Rs
1,234
1,128
109.4%
Low
Rs
751
652
115.2%
Sales per share
Rs
1,104.1
329.6
334.9%
Earnings per share
Rs
40.5
54.1
74.8%
Cash flow per share
Rs
250.5
310.5
80.7%
Dividends per share
Rs
22.00
16.50
133.3%
Dividend yield (eoy)
%
2.2
1.9
119.6%
Book value per share
Rs
861.0
531.6
162.0%
Shares outstanding (eoy)
m
339.18
1,152.59
29.4%
Bonus/Rights/Conversions
PI
ESOS
-
Price / Sales ratio
x
0.9
2.7
33.3%
Avg P/E ratio
x
24.5
16.4
149.0%
P/CF ratio (eoy)
x
4.0
2.9
138.3%
Price / Book Value ratio
x
1.2
1.7
68.9%
Dividend payout
%
54.3
30.5
178.2%
Avg Mkt Cap
Rs m
336,636
1,025,805
32.8%
No. of employees
`000
62
58
106.6%
Total wages/salary
Rs m
47,751
51,049
93.5%
Avg. sales/employee
Rs Th
6,027.5
6,519.8
92.4%
Avg. wages/employee
Rs Th
768.6
876.0
87.7%
Avg. net profit/employee
Rs Th
808.9
1,311.5
61.7%
INCOME DATA
Net Sales
Rs m
374,473
379,949
98.6%
Other income
Rs m
42,395
286,634
14.8%
Total revenues
Rs m
416,868
666,583
62.5%
Gross profit
Rs m
338,728
365,884
92.6%
Depreciation
Rs m
71,219
295,520
24.1%
Interest
Rs m
237,414
250,132
94.9%
Profit before tax
Rs m
72,490
106,866
67.8%
Minority Interest
Rs m
-270
-2,947
9.2%
Prior Period Items
Rs m
0
0
-
Extraordinary Inc (Exp)
Rs m
0
0
-
Tax
Rs m
21,965
27,490
79.9%
Profit after tax
Rs m
50,255
76,429
65.8%
Current assets
Rs m
3,013,465
2,921,254
103.2%
Current liabilities
Rs m
0
0
-
Net working cap to sales
%
804.7
768.9
104.7%
Current ratio
x
43.0
43.0
100.0%
Inventory Turnover
Days
0
0
-
Debtors Turnover
Days
0
0
-
Net fixed assets
Rs m
32,171
54,320
59.2%
Share capital
Rs m
3,392
11,528
29.4%
"Free" reserves
Rs m
182,077
438,127
41.6%
Net worth
Rs m
292,038
612,765
47.7%
Long term debt
Rs m
426,454
1,612,966
26.4%
Total assets
Rs m
4,704,454
6,041,914
77.9%
Interest coverage
x
1.3
1.4
91.5%
Debt to equity ratio
x
1.5
2.6
55.5%
Sales to assets ratio
x
0.1
0.1
126.6%
Return on assets
%
6.1
5.4
113.1%
Return on equity
%
17.2
12.5
138.0%
Return on capital
%
43.1
15.9
270.9%
Exports to sales
%
0.0
0.0
-
Imports to sales
%
0.0
0.0
-
Net fx
Rs m
0
0
-
Gross profit margin
%
90.5
96.3
93.9%
Effective tax rate
%
30.3
25.7
117.8%
Net profit margin
%
13.4
20.1
66.7%
Measures to Solve Problems of NPA:-
The problems of NPA have been receiving greater attention since 1991 in India. The Narasimham Committee recommended a number of steps to reduce NPA. In the 1990's the Government of India (GOI) introduced a number of reforms to deals with the problems of NPA.
Major steps taken to solve the problems of Non-Performing Assets in India :-
Debt Recovery Tribunals (DRTs)
Narasimham 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. Securitization Act 2002
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as Securitizations 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 Securitizations 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.
3. Lok Adalats
Lok Adalats have been found suitable for the recovery of small loans. According to RBI guidelines 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.
4. 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 Willful default and fraud were excluded.
5. 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.
