introduction of the topic.docx

8/9/2019 Introduction of the topic.docx

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NON-PERFORMING OF THE ASSETS

INTRODUCTION

A Non-performing asset(NPA) is defined as a credit facility in respect of which the interest and/or

installment of principalhas remained past due for a specified period of time.

NPA is a classification used byfinancial institutionsthat refer to loans that are in jeopardy of default.

Once the borrower has failed to mae interest or principle payments for !" days the loan is

considered to be a non#performin$ asset. Non#performin$ assets are problematic for financial

institutions since they depend on interest payments for income. %roublesome pressure from the

economy can lead to a sharp increase innon#performin$ loansand often results in massi&e write#

downs.

'lassification of NPA

ans are reuired to classify non#performin$ assets further into the followin$ three cate$ories

based on the period for which the asset has remained non#performin$ and the realisability of the

dues*

+. ,ub#standard assets* a sub standard asset is one which has been classified as NPA for a

period not e-ceedin$ + months.

. oubtful Assets* a doubtful asset is one which has remained NPA for a period e-ceedin$ +

months.

0. 1oss assets* where loss has been identified by the ban2 internal or e-ternal auditor or

central ban inspectors. ut the amount has not been written off2 wholly or partly.

,ub#standard asset is the asset in which ban ha&e to maintain +34 of its reser&es. All those assets

which are considered as non#performin$ for period of more than + months are called as oubtful

Assets. All those assets which cannot be reco&ered are called as 1oss Assets.
http://en.wikipedia.org/wiki/Bond_(finance)#Principalhttp://en.wikipedia.org/wiki/Financial_institutionshttp://en.wikipedia.org/wiki/Financial_institutionshttp://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Non-performing_loanhttp://en.wikipedia.org/wiki/Non-performing_loanhttp://en.wikipedia.org/wiki/Financial_institutionshttp://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Non-performing_loanhttp://en.wikipedia.org/wiki/Bond_(finance)#Principal


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Reasons for Occurrence of NPA

NPAs result from what are termed 5ad 1oans6 or defaults. efault2 in the financial parlance2 is thefailure to meet financial obli$ations2 say non#payment of a loan installment. %hese loans can occur

due to the followin$ reasons*

7sual banin$ operations /ad lendin$ practices

A banin$ crisis (as happened in ,outh Asia and 8apan)

O&erhan$ component (due to en&ironmental reasons2 business cycle2 etc.)

9ncremental component (due to internal ban mana$ement2 lie credit policy2 terms of credit2

etc...)

The Problems caused by NPAs

NPAs do not just reflect badly in a bans account boos2 they ad&ersely impact the national

economy. :ollowin$ are some of the repercussions of NPAs*

epositors do not $et ri$htful returns and many times may lose uninsured deposits. ansmay be$in char$in$ hi$her interest rates on some products to compensate Non#performin$

loanlosses

an shareholders are ad&ersely affected

ad loans imply redirectin$ of funds from $ood projects to bad ones. ;ence2 the economy

suffers due to loss of $ood projects and failure of bad in&estments


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0. %hey increase loan loss reser&es.

=. %hey brin$ unwanted attention from $o&ernment re$ulators.

ASSET CLASSIICATION


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9>N%9:9'A%9ON O: PO%>N%9A1 NPA / ,%?>,,> A,,>%,

1. Reckoning of NPA :

A NPA account to be identified based on its status / position of the accounts

erosion in security as on the date of balance sheet of the ban. Ne&ertheless2 the date of a NPA

account would be the actual date on which the slippa$e occurred. 9f an account is re$ulari@ed

before the balance sheet date by repayment of o&erdue amount throu$h $enuine sources (not

by sanctionin$ of additional facilities or transfer of funds between accounts)2 the account need

not be treated as NPA.

9t has2 howe&er2 to be ensured that in the account remains in order subseuently

and a solitary or few credits made in the account on or before the balance sheet date which

e-tin$uishes the o&erdue amount of interest or installment of principal is not reconed as the

sole criterion for treatin$ the asset as standards one.

2. Identification and monitoring of potential NPA / stressed assets:

9ndention of potential NPA account as its incipient sta$e of sicness and initiatin$

immediate correcti&e measures is the most important step for pre&entin$ an

asset from becomin$ NPA. %he $uidelines issued by 'redit onitorin$ 'ell

('') 'A2 ;O should be followed in this re$ard.

3. Constitution pf NPA Preention Cell at t!e R"s.

9t has been decided to constitute a NPA Pre&ention cell at the ?Os to

monitor the ,tandard# accounts and to ensure the pre&ention of their slippa$e

to NPA. %he cell headed by ?e$ional ana$er would comprise ?e$ional


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ana$er2 y. ?e$ional ana$er and 'redit Officer. 9t will conduct its meetin$

e&ery fortni$ht.

I#$ %&NC#I"N 'I(( )* A$ &N+*R:

%o e-amine the information recei&ed from branches relatin$ to ,tandard

(based on B" days norms)2 NPA accounts and identify the accounts forrestructurin$. %he entire process should be completed within a time frame of 0"days.

%o re&iew the performance of the e-istin$ restructured accounts includin$ 9:?

and '? cases.

%he cell will send information on fortni$htly basis to ''2 'A ;ead Office.

?e$ional ana$er to cell for the e-planation from the ranch ana$ers whose

performance in reco&ery is far from satisfactory.

,. Reie and reporting of potential NPA / $tressed assets

:ollowin$ steps be taen for re&iew and reportin$ of potential NPA /

,tressed Assets*

$tep-1: Analysis of reason of deterioration of health2 si$ns of sicness2 problem

character of the ACc.

$tep-2: 'lose interaction with the borrower2 &isit to the unit2 close and freuent

monitorin$ of the account2 drawin$ the attention of the borrower to the irre$ularity /

deterioration in he asset uality / si$ns of weaness in the account.


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$tep-3* Ad&ice the borrower to correct the irre$ularity immediately in a time bound

manner and obtain his cate$orical assurance.

$tep-,* 'orrecti&e measures for pre&ention of slippa$es*

?e&iew the account and consider sanction of need based worin$ capital limits

on merits2 if the present limits are inadeuate.

9dentify ,tressed Assets accounts and consider restructurin$ / reali$nment / re#

schedulement on merits.

>arly warnin$ si$nal2 if any2 to be watched and addressed to.

Derification of (i) the documents for its correctness2 enforceability2 (ii) correctness

of ?O (iii) insurance co&ers (i&) &alue/maretability of prime/collateral securityeye.

Derification of e-istence of primary / collateral security of the borrower.

$tep-* ?eport to the ne-t hi$her authority2 the details on the abo&e aspects and

su$$estin$ specific correcti&e measures in time.

$tep-: 9mplement the correcti&e action and report to hi$her authority.

. 0aintaining t!e Assets ualit :

Post sanction monitorin$2 super&ision2 and follow up

:ollowin$ measures should be put in place.

i4 #erms and condition of t!e sanction:

%erms and condition of sanction ha&e to be strictly complied with


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ii4 5erification:

Derification of end use of the funds2 stocs and assets by an officials or

throu$h duly appointed concurrent auditors as per norms for effecti&e monitorin$of the accounts.

iii4 (egal %ormalities:

:ormalities lie obtainin$ / e-ecution of documents / search certificates2

re$istration of char$es2 timely re&i&al of the documents2 completion of euitable

mort$a$e formalities etc. as per norms are the most important steps.

i4 $tock $tatements:

ranches should obtain stoc statements at monthly inter&als re$ularly.

As per ?9 $uidelines2 the outstandin$ in the A/' based on the drawin$

powers calculated from stoc statements older than 0 months would be

deemed as irre$ular and if such irre$ular drawin$s are permitted for !"

days continuously2 the A/' will be NPA.

4 $tock audit:

,toc audit is to be conducted e&ery year in e&ery NPA account with

outstandin$ limit of ?s + crore and abo&e. ;owe&er2 where&er current

assets are depleted or unit is closed2 the stipulation may be e-empted.

. 0anagement of NPA:

%he ?s personally &erify and ensure that all accounts2 especially hi$h

&alue ad&ances are properly classified into standard2 ,ub#std. oubtful or loss

cate$ories strictly as per prudential norms. 9t will be their responsibility to finali@e

and eliminate delay or postponed of identification of NPA.


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9n case of doubts due to any reason2 ?s may see $uidance from ;O

and settle the matter within one month from the date on which the account would

ha&e been classified as NPA as per norms.

9t may be noted that if ?9 obser&es any di&er$ences in asset

classification2 especially in hi$h &alue accounts due to willful non#compliance of

?9 $uidelines by any official responsible for classification then ?9 may initiate

deterrent action includin$ imposition of monetary penalty.

6. Appropriation of recoer in NPAs:

a) Non decreed accounts*

9n case of NPA accounts in all cate$ories i.e. ,ub standard2 oubtful and 1oss

appropriated first a$ainst outstandin$ in the account and the surplus a&ailable2 if

any2 is to be taen to interest / income. %he same norm will be applicable to the

compromised accounts also.

b) ecreed accounts*

9n case of decreed accounts where there is no compromise settlement amount

reco&ered should be appropriated as per the decretal terms. ;owe&er2 if there is

no specific term as re$ards appropriation of reco&ery in the decrial terms2 the

reco&ery should be appropriated first towards Principal and the balance towards

interest.

c) Appropriation of >'E' claim amount in NPA Accounts*

As per the e-istin$ procedure2 an is e-pected to eep the claim amount

recei&ed from the >'E' in a separate memorandum account and pursue

reco&ery efforts a$ainst the concerned >-porter borrower for the full amount of

dues inclusi&e of the claim amount settled.

introduction of the topic.docx

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