Non Performing Assets (NPA)

Prudential Norms on Asset Classification

Aditya Lathe

What is an NPA?

A simplified definition:

An asset becomes non performing when it ceases to generate income for the Bank.

NPAs across Banking Sector (FY 10)

2.27 2.31

3.22

4.26

0.00

1.00

2.00

3.00

4.00

5.00

Public SectorBanks

Old PrivateSector Banks

New PrivateSector Banks

Foreign Banks

Gross NPAs to Gross Advances Ratio (%)

Source: RBI Data

Gross NPAs

Gross Advances

Gross NPAs to Gross Advances Ratio

Public Sector Banks 57300 2519330 2.27%

Old Pvt. Sector Banks 3612 156407 2.31%

New Pvt. Sector Banks 13772 428184 3.22%

Foreign Banks 7127 167438 4.26%

81813 3271361 2.50%

Kotak Bank NPAs

2.9

1.8

4.3

2.4

3.6

1.72.0

0.7

0.0

1.0

2.0

3.0

4.0

5.0

2008 2009 2010 2011

KMBL Historical NPAs

Gross NPAs to Gross Advances (%) Net NPAs to Net Advances (%)

Year Gross NPAs

Gross Advances

Gross NPAs to Gross

AdvancesNet NPAs Net

AdvancesNet NPAs to Net

Advances

2011 603 29722 2.03% 211 29328 0.72%

2010 767 21178 3.62% 360 20824 1.73%

2009 731 16959 4.31% 397 16604 2.39%

2008 453 15729 2.90% 276 15515 1.78%

Criteria for NPA recognition Term Loan: If interest and/ or installment of principal remains overdue for

a period of more than 90 days

Bills purchased/ discounted: If the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted

Derivatives: If the overdue receivables representing mark-to-market value of a derivative contract remain unpaid for a period of 90 days from the specified due date for payment.

Agriculture/ Crop Loans: Case I: If the installment of principal or interest thereon remains

overdue for two crop seasons for short duration crops, Case II: If the installment of principal or interest thereon remains

overdue for one crop season for long duration crops,

Criteria for NPA recognition: Cash Credit

In case of cash credit / overdraft accounts, a NPA is an loan or advance where the account remains ‘out of order’.

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power.

In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.

Criteria for NPA recognition: General Guidelines

The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, as income recognition is based on record of recovery.

The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc.

Criteria for NPA recognition: General Guidelines

Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular.

A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory.

Criteria for NPA recognition: General Guidelines

Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.

All the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular.

Criteria for NPA recognition: General Guidelines

Government guaranteed advances

The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. However, With effect from the year ending 31 March 2006 State Government guaranteed advances and investments in State Government guaranteed securities would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days.

Advances against Term Deposits, NSCs, KVP/IVP, etc Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

Criteria for NPA recognition: Project Loans

Two things to remember:

What is a Project Loan: Any term loan which has been sanctioned for the purpose of setting up of an economic venture.

For all projects financed by the FIs/ banks after 28th May, 2002, the date of completion of the project should be clearly spelt out at the time of financial closure of the project. Therefore, a Commercial Operation Date (COD) must be fixed at the time of loan sanction / financial closure for Project Loans.

Criteria for NPA recognition: Project Loans

Project Loan- Non Infrastructure project:

Before COD If interest remains overdue for a period of more than 90 days If it fails to commence commercial operations within 6 months from the

original COD, even if it is regular as per record of recovery.

After COD If interest and/ or installment of principal remains overdue for a period of

more than 90 days,

Criteria for NPA recognition: Project Loans

Project Loan- Infrastructure project:

Before COD If interest remains overdue for a period of more than 90 days If it fails to commence commercial operations within 2 years from the

original COD, even if it is regular as per record of recovery.

After COD If interest and/ or installment of principal remains overdue for a period of

more than 90 days,

NPA Sub categories

Non Performing Assets

Substandard Assets Doubtful Assets Loss Assets

Criteria for classification Sub-Standard Assets: An asset which has remained NPA for a period less

than or equal to 12 months.

Doubtful Assets: An asset that has remained in the substandard category for a period of 12 months.

Loss Assets: An asset where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

NPA Provisioning norms

Standard Assets

• Direct advances to agriculture and SME at 0.25%,•CRE at 1%•Other loans and advances at 0.40%

Substandard Asset

• A general provision of 15% on total outstanding The ‘unsecured exposures’ which are ‘substandard’ to attract additional provision of 10%, i.e., a total of 25% on the outstanding balance.

NPA Provisioning normsDoubtful Assets

•100% of the extent to which the advance is not covered by the realisable value of the security •For the secured portion, provision to be made as follows, depending upon the period for which the asset has remained doubtful:

Time spent in ‘doubtful’ category

Provision requirement

< 1 year 25 %

1 to 3 years 40 %

> 3 years 100 %

Loss Assets Write Off or provision of 100% of outstanding

Light at the end of the tunnel- Upgradation of NPAs In case of NPA accounts, if arrears of interest and principal paid by the

borrower, the account to be no longer treated as non-performing and may be classified as ‘standard’.

Caution: In case of accounts with inherent weakness, even if there are a few credits before the balance sheet date, the account should still be deemed as a NPA.

In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularization of the account to eliminate doubts on their performing status.

Thank You