The banking industry has undergone a sea alteration after the first stage of economic liberalisation in 1991 and hence recognition direction. While the primary map of Bankss is to impart financess as loans to assorted sectors such as agribusiness, industry, personal loans, lodging loans etc. , in recent times the Bankss have become really cautious in widening loans. The ground being mounting non-performing assets ( NPAs ) . An NPA is defined as a loan plus, which has ceased to bring forth any income for a bank whether in the signifier of involvement or chief refund. As per the prudential norms suggested by the Reserve Bank of India ( RBI ) , a bank cannotbook involvement on an NPA on accrual footing. In other words, such involvements can be booked merely when it has been really received. Therefore, this has become what is called as a ‘critical public presentation country of the banking sector as the degree of NPAs affects the profitableness of a bank.
Therefore, an NPA history non merely reduces profitableness of Bankss by purveying in the net income and loss history, but their carrying cost is besides increased which consequence s in extra & A ; evitable direction attending. Apart from this, a high degree of NPA besides puts strain on a Bankss net worth because Bankss are under force per unit area to keep a coveted degree of Capital Adequacy and in the absence of comfy net income degree, Bankss finally look towards their internal fiscal strength to carry through the norms thereby easy gnawing the net worth.
Today the Net NPAs of Indian PSBs ( which account for around three-quarterss of the entire assets of Indian banking industry ) are every bit low as 0.72 per centum and gross NPAs are at 2.5 per centum. However, Nitsure ( 2007 ) contends that one time there is a lag in private outgo and corporate net incomes growing, companies on these Bankss ‘ books will non be in a place to serve their debts on clip and there is a strong likeliness of coevals of new NPAs. Furthermore, he besides suggests that with lifting involvement rates in the authorities bond market, the Bankss ‘ exchequer incomes have declined well. So Bankss will non hold adequate net incomes to do commissariats for NPAs. Under these fortunes, direction of NPAs is a hard undertaking.
Comparison of Non-Performing Assets of ICICI bank and PNB for the past five old ages
Tables and Figures
Gross NPA ratio ( % )
An plus becomes non-performing when it ceases to bring forth income for the bank. Earlier an plus was considered as non executing plus based on the construct of “ past due ” .
A NPA was defined as recognition in regard of which involvement and/or installment of principal has remained “ past due ” for a specific period of clip. The specific period of clip was reduced in a phased mode as under: a
Year ended March,31
Specific Time period
4 Living quarterss
3 Living quarterss
2 Living quarterss
1 Living quarterss
An sum is considered as past due, when it remains outstanding for 30 yearss beyond the due day of the month. However, with consequence from March31, 2001 the “ past due ” construct has been dispensed with and the period is reckoned from the due day of the month of payment.
NORMS FOR IDENTIFICATION OF NPA
With an intense to utilize the international best pattern and to guarantee greater transparence, “ 90 yearss ” delinquent norms are accepted for the designation of NPA from the twelvemonth ended March 31, 2004.
With consequence from March 31, 2004, a NPA shall be counted on loan and progresss where: a
Interest and / or installment of chief remain delinquent for a period of more than 90 yearss in regard of a term loan.
The history remains out of order for a period of 90 yearss, in regard of an Overdraft/ Cash Credit ( OD/CC ) .
The measure remains delinquent for a period of more than 90 yearss in the instance of measures purchased and discounted.
Any sum to be received remains delinquent for a period of more than 90 yearss in regard of any other histories.
Tier 2 bank like all the Urban Co-Operative Banks ( UCBs ) other than the Tier 1 bank i.e. Unit bank shall sort their loan histories every bit NPA as per 90 twenty-four hours norm as hitherto.
FACTORS RESPONSIBLE FOR NPA
Improper choice of borrower ‘s activities
Weak recognition assessment system
Inefficiency in direction of borrower
Slackness in recognition direction & A ; monitoring
Lack of proper follow up by bank
Recession in the market
Due to natural catastrophes and other uncertainnesss
INDIAN ECONOMY AND NPA
Gross NPAs ( non-performing assets ) in Indian banking sector have declined aggressively to shut to 3.0 per cent in 2006 ( 15.7 per cent at end-March 1997 ) . Net New people’s army of the banking sector are now at near to one per cent and the spread between the gross and net NPAs has narrowed over the old ages. Recovery of dues is besides more than the fresh slippages.
The diminution in NPAs is peculiarly important as income acknowledgment, plus categorization and provisioning norms were tightened over the old ages. For case, Bankss now follow 90-day delinquency norm as against 180-day earlier. Banks are besides required to do general provisioning ( 0.40 per cent ) for standard progresss.
Harmonizing to Reserve Bank of India, improved profitableness, underpinned by robust macroeconomic environment and upturn in involvement rate rhythm, has enabled Bankss
to cut down the backlog of NPAs.
The commission on fiscal system, besides known as Narsimhan Committee, under the chairmanship of Shri M. Narsimhan, appointed by the RBI recommended the debut of these prudential accounting norms by Indian Banks in its study submitted in December 1991. The commission was of position of that
If Bankss want to cognize the true and just fiscal wellness of bank so they should observed the prudential accounting norms while doing balance sheet and net income & A ; loss history.
Categorization of assets has to be done on the footing of nonsubjective standards.
Provisioning should be made on the footing of categorization into four different classs.
The income acknowledgment, Assets Classification and purveying norms besides known as Prudential Accounting Norms, provided that a bank should non demo net income which is simply a book net income by fall backing to pattern like debiting involvement to a loan history irrespective of its opportunity of recovery and booking the same as income or by non doing commissariats towards loan losingss.
NARSIMHAN COMMITTEE ‘S RECOMMENATIONS
Committee has suggested that Bankss should run on the footing of fiscal liberty and operational flexibleness.
It has recommended “ Capital Adequacy Norm ” of 8 %
These norms are applicable to all UCB ‘s from 1st April, 1992.
The first commission had made recommendations in 1991, which had resulted in basic alterations in the affair of intervention of income, assets categorization and provisioning norms, etc. It was considered necessary for authorities to go on the betterment with striker regulations in hereafter besides and for that 2nd commission was made to go on alterations with certain alterations.
The 2nd commission includes the undermentioned points: a
If bank is working in foreign states at soon so for them the “ Capital Adequacy Norm ” is 9 % which was 8 % earlier.
Banks ca n’t sort the history as NPA which are guaranteed by the Central / State authorities, effectual from the twelvemonth 2000-2001.
As per the bing norms, no commissariats for standard assets but from March 31st 2000, there is a norm of 0.25 per centum on standard assets.
Banks have to do a proviso of 2.5 % on their investing in Government securities with consequence from the twelvemonth stoping 31st March, 2000. In future, this proviso is likely to be raised to 5 % .
The present norm is of 180 yearss for the history to be treated as NPA but after 31st March, 2000, this period is reduced to 90 yearss merely.
Banks have been asked to cut down the degree of NPA to 5 % of their entire progresss till 31st March, 2000. The per centum has to be brought down to less than 3 % with consequence 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 Old ages
DEFINITION AS PER THE CLASSIFICATION OF ASSETS
Reserve Bank of India ( RBI ) has issued guidelines on purveying demand with regard to bank progresss. In footings of these guidelines, bank progresss are chiefly classified in to following classs: a
Standard ASSETS: a
Standard assets are one which does non transport any jobs and which does non transport more than normal hazard attached to the business.Such assets should non be an NPA.
SUB-STANDARD Assets: a
These assets involved the two types of position as followsaˆ¦
a In regard to the norms of March 31, 2005 an plus would be classified as Sub criterion if it remained NPA for a period less than or equal to 12 months.
aAn assets where the footings of the loan understanding sing involvement & A ; principal have been regenerated or rescheduled after beginning of production, should be classified as sub-standard and should stay in such class for at least 12 months of satisfactory public presentation under the re-negotiated footings.
DOUBTFUL ASSETS: a
In regard to the norms of March 31, 2005 an plus 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 failings built-in as that classified as Sub-standard with the added feature that the failings make aggregation or settlement in full, on the footing of the presently known facts, conditions and values, extremely questionable and unlikely.
Some types of these assets are
Less than 1 twelvemonth
1 to 3 twelvemonth
3 twelvemonth and above
A loss plus is one where loss has been identified by the bank or internal or external hearers or by the Co-operation section or by the RBI review but the sum has non been written of, entirely or partially.
Ready RECKONER FOR ASSET CLASSIFICATION
WHEN DATE OF NPA FALLS?
ASSET CLASSIFICATION AS ON 31-03-2007
Between 1-10-2006 & amp ; 31-03-2007
Between 1-10-2005 & A ; 30-09-2006
Doubtful up to 1 twelvemonth
Between 1-10-2003 & amp ; 30-09-2002
Doubtful plus of 1 twelvemonth to 3 twelvemonth
On or before 30-09-2003
Doubtful plus of more than 3 twelvemonth
No NPA day of the month
No security or salvage value of security is less than 5 %
Opportunity of realisation of dues from all available beginnings is practically negligible or zero.
Account has been identified by the bank or internal/external hearers or RBI inspectors as loss assets, which has non been written off.
GUIDELINES FOR CLASSIFICATION OF ASSETS
1. Basic Consideration: a
a In simple footings the categorization of assets should be done by sing the well defined recognition failings & A ; extent of dependance on indirect security for realisation of dues.
a In histories where there is a possible menace to recovery on history and being of other factor such as fraud committed by borrowers it will non be prudent for bank to sort that history foremost as sub-standard and so as dubious. Such history should be straight off classified as dubious plus or loss plus, as appropriate, irrespective of the period for which it has remained as NPA.
2. ADVANCES GRANTED UNDER REHABILITATION PACKAGES: a
a Banks are non permitted to make categorization of any progresss in regard of which the term have been re-negotiated unless the bundle of re-negotiated footings has worked satisfactory for a period of one twelvemonth.
a A similar relaxation is besides made in regard of SSI units which are identified as sick by Bankss themselves and where rehabilitation bundles plans have been drawn by the Bankss themselves or under pool agreements.
3. INTERNAL SYSTEM FOR CLASSIFICATION OF ASSETS AS NPA: a
a Banks should set up appropriate internal systems to extinguish the inclination to detain or prorogue the designation of NPAs, particularly in regard of high value histories. The Bankss may repair a minimal cut-off point to make up one’s mind what would represent a high value history depending upon their several concern degrees. The cut-off point should be valid for the full accounting twelvemonth.
a Responsibility and proof degree for proper assets categorization may be fixed by bank.
a The system should guarantee that uncertainties in plus categorization due to any ground are settled through specified internal channels with in one month from the day of the month on which the history would hold been classified every bit NPA as per extant guidelines.
INCOME RECOGNITION POLICY
Harmonizing to the act of 1st April, 1992 the income acknowledgment policy is as followsaˆ¦
a The policy of income acknowledgment has to be nonsubjective and based on the record of recovery. Income from non-performing assets is non recognized on accrual footing but is booked as income merely when it is really received. Therefore, Bankss should non take to income history involvement on non-performing assets on accrual footing.
a However, involvement on progresss against term sedimentations, NSCs, IVPs, KVPs, and Life policies may be taken to income history on the due day of the month, provided equal border is available in the histories.
a Fees and committees earned by the Bankss as a consequence of re-negotiations or rescheduling of outstanding debt should be recognized on an accrual footing over the period of clip covered by the re-negotiated or rescheduled extension of recognition.
a If Government guaranteed progresss becomes ‘overdue ‘ and there by NPA, the involvement on such progresss should non be taken to income history unless the involvement has been realized.
a Harmonizing to the norms the commissariats should be made on the nonperforming assets on the footing of categorization of assets as we have already discussed.
a Taking in to account this provisioning norms the Bankss have to do proviso on different assets like Loss Assets, Doubtful Assets and Standard Assets as below: –
( | ) . LOSS ASSETS
a The full assets should be written off after obtaining necessary blessing from the competent authorization and as per the commissariats act of C0-operative society Act. If the assets are permitted to stay in the books for any ground, 100 % of the outstanding should be provided for.
a If expected salvage value of the loss plus is negligible so 100 % proviso should be made on it.
( || ) . SUB-STANDARD Assets
a A general proviso of 10 % on the entire outstanding should be made on the progresss given.
( ||| ) . DOUBTFUL ASSETS
a On dubious assets proviso is made from 20 % to 100 % as per the period of plus. The tabular array below shows the proviso on dubious assets.
Time period for which the progress has remained in ‘doubtful ‘ class
Up to one twelvemonth
One to Three twelvemonth
More than Three twelvemonth
( | ) 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 old ages ‘ on or after April1, 2007
( |V ) . STANDARD ASSETS
a From the twelvemonth ended March 31, 2000, the Bankss should do a general proviso of a lower limit of 0.25 % on the standard assets.
a However, Tier 2 Bankss are required to make higher purveying on standard assets as under: –
General purveying demand is 0.40 % from the present degree of 0.25 % . But in instance of agribusiness or in SME investors the purveying rate is required to be 0.25 % .
( V| ) . HIGHER Commissariat
a There is no expostulation if the Bankss create bad and dubious debts reserve beyond the specified bounds on their ain or if provided in the several State Co-operative Societies Acts.
MANAGEMENT OF NPA
It is really necessary for bank to maintain the degree of NPA every bit low as possible. Because NPA is one sort of obstruction in the success of bank so, for that the direction of NPA in bank is necessary. And this direction can be done by following manner: a
Framing moderately good documented loan policy and regulations.
Sound recognition assessment on well-settled banking norms.
Stressing decrease in Gross NPAs instead so Net NPAs
Gluing of sale notice/ wall postings on the house pledged as security.
Recovery attempt starts from the month of default itself. Prompt legal action should be taken.
Position of delinquent histories is reviewed on a hebdomadal footing to collar slippage of fresh history to NPA.
Half annual balance verification certifications are obtained from the borrowers on a regular basis.
A commission is constituted at Head Office, to reexamine irregular histories.
Due to take down recognition hazard and consequent higher profitableness, greater encouragement is given to little borrowers.
Recovery competition system is extended among the staff members. The retrieving highest sum is felicitated.
Adopting the system of market intelligence for make up one’s minding the credibleness of the borrowers
Creation of a separate ‘Recovery Department ‘ with Particular Recovery Officer appointed by the RCS.
Recovery OF NPA
IMPORTANCE OF RECOVERY: a
1. Addition in the income of bank.
2. Addition in the trust of portion holder in bank.
3. Degree of NPA reduces as the recovery done.
4. Decrease in provisioning demands.
STEPS TAKEN BY GOVERNMENT TO RECOVERING NPA: a
1. SECURITIZATION ACT
Now this act is besides applicable to all Urban Co-Operative Banks.
Harmonizing to this act Bank can take direct ownership of the movable and immoveable belongings mortgages against loans and sell out the same for such recovery, without depending on legal procedure in the tribunal.
Gujarat province has besides by amending under co-op soc, move empower co-op bank to name their staff as recovery officer on acquiring order from the board of campaigners.
Above both act are benefited to bank for the recovery of NPA.