INTRODUCTION

Action for enforcement of security interest can be initiated only if the secured
asset is classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which has been
classified by bank or financial institution as sub –standard , doubtful or loss asset, in
accordance with the direction or guidelines relating to assets classification issued by
RBI.

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank.

A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of

which the interest and/ or instalment of principal has remained ‘past due’ for a specified
period of time.

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification
of NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31,
2004, a non-performing asset (NPA) shall be a loan or an advance where;

 Interest and/ or instalment of principal remain overdue for a period of

more than 90 days in respect of a term loan,

 The account remains ‘out of order’ for a period of more than 90 days, in
respect of an Overdraft/Cash Credit (OD/CC),

 The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,

 Interest and/or instalment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes, and
  Any amount to be received remains overdue for a period of more than 90
days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002. However,
the date of classification of an advance as NPA should not be changed on account of
charging of interest at monthly rests. Banks should, therefore, continue to classify an
account as NPA only if the interest charged during any quarter is not serviced fully within
180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the
end of the quarter with effect from March 31, 2004.

Out of order

An account should be treated as out of order if the outstanding balance remains

continuously in excess of sanctioned limit /drawing power. in case where the out standing
balance in the principal operating account is less than the sanctioned amount /drawing
power, but there are no credits continuously for six months as on the date of balance
sheet or credit are not enough to cover the interest debited during the same period ,these
account should be treated as ‘out of order’.

Overdue

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
on due date fixed by the bank.

Asset Classification
Categories of NPAs

Standard Assets:

Standard assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here it is also very important
that in this case the arrears of interest and the principal amount of loan does not exceed 90
days at the end of financial year. If asset fails to be in category of standard asset that is
amount due more than 90 days then it is NPA and NPAs are further need to classify in sub
categories.

Banks are required to classify non-performing assets further into the

following three categories based on the period for which the asset has remained non-
performing and the realisability of the dues:

( 1 ) Sub-standard Assets
( 2 ) Doubtful Assets
( 3 ) Loss Assets

( 1 ) Sub-standard Assets:--

With effect from 31 March 2005, a sub standard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following features are
exhibited by sub standard assets: the current net worth of the borrowers / guarantor or the
current market value of the security charged is not enough to ensure recovery of the dues
to the banks in full; and the asset has well-defined credit weaknesses that jeopardise the
liquidation of the debt and are characterised by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.

( 2 ) Doubtful Assets:--
 A loan classified as doubtful has all the weaknesses inherent in assets that were
classified as sub-standard, with the added characteristic that the weaknesses make
collection or liquidation in full, – on the basis of currently known facts, conditions and
values – highly questionable and improbable.

With effect from March 31, 2005, an asset would be classified as doubtful if it remained
in the sub-standard category for 12 months.

( 3 ) Loss Assets:--

A loss asset is one which considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted- although there may be some salvage or
recovery value. Also, these assets would have been identified as ‘loss assets’ by the bank
or internal or external auditors or the RBI inspection but the amount would not have been
written-off wholly.

FACTORS FOR RISE IN NPA’s

 The banking sector has been facing the serious problems of the rising NPAs. But
the problem of NPAs is more in public sector banks when compared to private sector
banks and foreign banks. The NPAs in PSB are growing due to external as well as internal
factors.

EXTERNAL FACTORS

 Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for
recovery of loans and advances. Due to their negligence and ineffectiveness in
their work the bank suffers the consequence of non-recover, their by reducing their
profitability and liquidity.

 Wilful Defaults

There are borrowers who are able to payback loans but are intentionally
withdrawing it. These groups of people should be identified and proper measures
should be taken in order to get back the money extended to them as advances and
loans.

 Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the
PSBs. every now and then India is hit by major natural calamities thus making the
borrowers unable to pay back there loans. Thus the bank has to make large amount
of provisions in order to compensate those loans, hence end up the fiscal with a
reduced profit.

Mainly ours framers depends on rain fall for cropping. Due to

irregularities of rain fall the framers are not to achieve the production level thus
they are not repaying the loans.
 Industrial sickness

Improper project handling , ineffective management , lack of adequate

resources , lack of advance technology , day to day changing govt. Policies give
birth to industrial sickness. Hence the banks that finance those industries
ultimately end up with a low recovery of their loans reducing their profit and
liquidity.

 Lack of demand

Entrepreneurs in India could not foresee their product demand and starts
production which ultimately piles up their product thus making them unable to pay
back the money they borrow to operate these activities. The banks recover the
amount by selling of their assets, which covers a minimum label. Thus the banks
record the nonrecovered part as NPAs and has to make provision for it.

 Change on Govt. policies

With every new govt. banking sector gets new policies for its operation.
Thus it has to cope with the changing principles and policies for the regulation of
the rising of NPAs.

The fallout of handloom sector is continuing as most of the weavers Co-

operative societies have become defunct largely due to withdrawal of state
patronage. The rehabilitation plan worked out by the Central govt to revive the
handloom sector has not yet been implemented. So the over dues due to the
handloom sectors are becoming NPAs.
 INTERNAL FACTORS

 Defective Lending process

There are three cardinal principles of bank lending that have been followed by the
commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

i. Principles of safety

By safety it means that the borrower is in a position to repay the loan both
principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business

Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of

borrower
 The banker should, there fore take utmost care in ensuring that the enterprise or
business for which a loan is sought is a sound one and the borrower is capable of
carrying it out successfully .he should be a person of integrity and good character.

 Inappropriate technology

Due to inappropriate technology and management information system, market

driven decisions on real time basis can not be taken. Proper MIS and financial
accounting system is not implemented in the banks, which leads to poor credit
collection, thus NPA. All the branches of the bank should be computerised.

 Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is another reason
for rise in NPAs. While providing unsecured advances the banks depend more on
the honesty, integrity, and financial soundness and credit worthiness of the
borrower.

• Banks should consider the borrowers own capital investment.

• it should collect credit information of the borrowers from

a. From bankers

b. Enquiry from market/segment of trade, industry, business.

c. From external credit rating agencies.

• Analyse the balance sheet

True picture of business will be revealed on analysis of profit/loss

a/c and balance sheet.

• Purpose of the loan

 When bankers give loan, he should analyse the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive purpose
only. Bank should analyse the profitability, viability, long term
acceptability of the project while financing.

 Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs.

 Managerial deficiencies

The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting securities
banks should consider the 1. Marketability

2. Acceptability

3. Safety

4. Transferability.

The banker should follow the principle of diversification of risk based on

the famous maxim “do not keep all the eggs in one basket”; it means that the
banker should not grant advances to a few big farms only or to concentrate them in
few industries or in a few cities. If a new big customer meets misfortune or certain
traders or industries affected adversely, the overall position of the bank will not be
affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM
(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd
(2439.60lakhs).
 Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly
visit of bank officials to the customer point decreases the collection of interest and
principals on the loan. The NPAs due to wilful defaulters can be collected by
regular visits.

 Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the

same have already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is
increasing day by day.
 Impact of NPA

 Profitability:-
NPA means booking of money in terms of bad asset, which occurred due to
wrong choice of client. Because of the money getting blocked the prodigality of bank
decreases not only by the amount of NPA but NPA lead to opportunity cost also as that
much of profit invested in some return earning project/asset. So NPA doesn’t affect
current profit but also future stream of profit, which may lead to loss of some long-term
beneficial opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.

 Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to borrowing money for shot\rtes period of time which lead to additional cost
to the company. Difficulty in operating the functions of bank is another cause of NPA due
to lack of money. Routine payments and dues.

 Involvement of management:-
Time and efforts of management is another indirect cost which bank has to bear
due to NPA. Time and efforts of management in handling and managing NPA would have
diverted to some fruitful activities, which would have given good returns. Now day’s
banks have special employees to deal and handle NPAs, which is additional cost to the
bank.

 Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in terms
of market credit. It will lose it’s goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks .
 NPA MANAGEMENT – PREVENTIVE MEASURES

• Formation of the Credit Information Bureau (India) Limited (CIBIL)

• Release of Wilful Defaulter’s List. RBI also releases a list of borrowers with
aggregate outstanding of Rs.1 crore and above against whom banks have filed
suits for recovery of their funds

• Reporting of Frauds to RBI

• Norms of Lender’s Liability – framing of Fair Practices Code with regard to

lender’s liability to be followed by banks, which indirectly prevents accounts
turning into NPAs on account of bank’s own failure.

• Risk assessment and Risk management

• RBI has advised banks to examine all cases of wilful default of Rs.1 crore and
above and file suits in such cases. Board of Directors are required to review NPA
accounts of Rs.1 crore and above with special reference to fixing of staff
accountability.

• Reporting quick mortality cases

• Special mention accounts for early identification of bad debts. Loans and advances
overdue for less than one and two quarters would come under this category.
However, these accounts do not need provisioning
 NPA MANAGEMENT - RESOLUTION

Compromise Settlement Schemes

• Banks are free to design and implement their own policies for recovery and write
off incorporation compromise and negotiated settlements with board approval

• Specific guidelines were issued in May 1999 for one time settlement of small
enterprise sector.

• Guidelines were modified in July 2000 for recovery of NPAs of Rs.5 crore and
less as on 31st March 2007.

Restructuring / Reschedulement

• Banks are free to design and implement their own policies for restructuring/
rehabilitation of the NPA accounts
• Reschedulement of payment of interest and principal after considering the Debt
service coverage ratio, contribution of the promoter and availability of security

Lok Adalat

• Small NPAs up to Rs.20 Lacs

• Speedy Recovery

• Veil of Authority

• Soft Defaulters

• Less expensive

• Easier way to resolve

Corporate Debt Restructuring Cell

• The objective of CDR is to ensure a timely and transparent mechanism for

restructuring of the debts of viable corporate entities affected by internal and
external factors, outside the purview of BIFR, DRT or other legal proceedings

• The legal basis for the mechanism is provided by the Inter-Creditor Agreement
(ICA). All participants in the CDR mechanism must enter the ICA with necessary
enforcement and penal clauses.
• The scheme applies to accounts having multiple banking/ syndication/ consortium
accounts with outstanding exposure of Rs.10 crores and above.

• The CDR system is applicable to standard and sub-standard accounts with

potential cases of NPAs getting a priority.

• Packages given to borrowers are modified time & again

• Drawback of CDR – Reaching of consensus amongst the creditors delays the

process

Debt Recovery Tribunal (DRT)

• The banks and FIs can enforce their securities by initiating recovery proceeding
under the Recovery if Debts due to Banks and FI act, 1993 (DRT Act) by filing an
application for recovery of dues before the Debt Recovery Tribunal constituted
under the Act.

• On adjudication, a recovery certificate is issued and the sale is carried out by an

auctioneer or a receiver.

• DRT has powers to grant injunctions against the disposal, transfer or creation of
third party interest by debtors in the properties charged to creditor and to pass
attachment orders in respect of charged properties

• In case of non-realization of the decreed amount by way of sale of the charged

properties, the personal properties if the guarantors can also be attached and sold.

• However, realization is usually time-consuming

• Steps have been taken to create additional benches

Proceedings under the Code of Civil Procedure

• For claims below Rs.10 lacs, the banks and FIs can initiate proceedings under the
Code of Civil Procedure of 1908, as amended, in a Civil court.

• The courts are empowered to pass injunction orders restraining the debtor through
itself or through its directors, representatives, etc from disposing of, parting with
or dealing in any manner with the subject property.

• Courts are also empowered to pass attachment and sales orders for subject
property before judgment, in case necessary.

• The sale of subject property is normally carried out by way of open public auction
subject to confirmation of the court.

• The foreclosure proceedings, where the DRT Act is not applicable, can be initiated
under the Transfer of Property Act of 1882 by filing a mortgage suit where the
procedure is same as laid down under the CPC.

Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR

• BIFR has been given the power to consider revival and rehabilitation of companies
under the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA),
which has been repealed by passing of the Sick Industrial Companies (Special
Provisions) Repeal Bill of 2001.

• The board of Directors shall make a reference to BIFR within sixty days from the
date of finalization of the duly audited accounts for the financial year at the end of
which the company becomes sick
• The company making reference to BIFR to prepare a scheme for its revival and
rehabilitation and submit the same to BIFR the procedure is same as laid down
under the CPC.

• The shelter of BIFR misused by defaulting and dishonest borrowers

• It is a time consuming process

National Company Law Tribunal (NCLT)

• In December 2002, the Indian Parliament passed the Companies Act of 2002
(Second Amendment) to restructure the Companies Act, 1956 leading to a new
regime of tackling corporate rescue and insolvency and setting up of NCLT.

• NCLT will abolish SICA, have the jurisdiction and power relating to winding up
of companies presently vested in the High Court and jurisdiction and power
exercised by Company Law Board

• The second amendments seeks to improve upon the standards to be adopted to

measure the competence, performance and services of a bankruptcy court by
providing specialized qualification for the appointment of members to the NCLT.

• However, the quality and skills of judges, newly appointed or existing, will need
to be reinforced and no provision has been made for appropriate procedures to
evaluate the performance of judges based on the standards

Sale of NPA to other banks

• A NPA is eligible for sale to other banks only if it has remained a NPA for at least
two years in the books of the selling bank

• The NPA must be held by the purchasing bank at least for a period of 15 months
before it is sold to other banks but not to bank, which originally sold the NPA.

• The NPA may be classified as standard in the books of the purchasing bank for a
period of 90 days from date of purchase and thereafter it would depend on the
record of recovery with reference to cash flows estimated while purchasing

• The bank may purchase/ sell NPA only on without recourse basis

• If the sale is conducted below the net book value, the short fall should be debited
to P&L account and if it is higher, the excess provision will be utilized to meet the
loss on account of sale of other NPA.

Sale of NPA to ARC/ SC under Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest Act 2002 (SRFAESI)

• SARFESI provides for enforcement of security interests in movable (tangible or

intangible assets including accounts receivable) and immovable property without
the intervention of the court

• The bank and FI may call upon the borrower by way of a written legal notice to
discharge in full his liabilities within 60 days from the date of notice, failing which
the bank would be entitled to exercise all or any of the rights set out under the Act.

• Another option available under the Act is to takeover the management of the
secured assets

• Any person aggrieved by the measures taken by the bank can proffer an appeal to
DRT within 45 days after depositing 75% of the amount claimed in the notice.
• Chapter II of SARFESI provides for setting up of reconstruction and securitization
companies for acquisition of financial assets from its owner, whether by raising
funds by such company from qualified institutional buyers by issue of security
receipts representing undivided interest in such assets or otherwise.

• The ARC can takeover the management of the business of the borrower, sale or
lease of a part or whole of the business of the borrower and rescheduling of
payments, enforcement of security interest, settlement of dues payable by the
borrower or take possession of secured assets

• Additionally, ARCs can act as agents for recovering dues, as manager and
receiver.

• Drawback – differentiation between first charge holders and the second charge
holders.
 Non Performing Assets ( NPAs ) of Banks in India 2008
(Amount in Rs. Crore)

As on March 31,2008

Bank Name Gross Gross Gross NPA

NPAs Advance Ratio %
PSU Banks

State Bank of India & its Associates

State Bank of Bikaner & Jaipur 437 25304 1.7

State Bank of Hyderabad 312 35901 0.9

State Bank of India 12837 422181 3.0

State Bank of Indore 265 18356 1.4

State Bank of Mysore 359 21305 1.7

State Bank of Patiala 521 36724 1.4

State Bank of Saurashtra 179 12309 1.5

State Bank of Travancore 571 28440 2.0

Nationalised Banks

Allahabad Bank 1011 50312 2.0

Andhra Bank 372 34556 1.1

Bank of Baroda 1981 107672 1.8

Bank of India 1931 114793 1.7

Bank of Maharashtra 766 29798 2.6

Canara Bank 1416 107655 1.3

Central Bank of India 2350 74287 3.2

Corporation Bank 584 39664 1.5

Dena Bank 573 23381 2.4

IDBI Bank Ltd 1565 83608 1.9

Indian Bank 487 40228 1.2

Indian Overseas Bank 997 61058 1.6

Oriental Bank of Commerce 1280 55327 2.3

Punjab & Sind Bank 136 18409 0.7

Punjab National Bank 3319 120932 2.7

Syndicate Bank 1769 65197 2.7

UCO Bank 1652 55627 3.0

Union Bank of India 1657 75879 2.2

United Bank of India 761 28152 2.7

Vijaya Bank 512 32019 1.6

Private Banks / Other Scheduled Commercial Banks

Axis Bank 486 59899 0.8

Bank of Rajasthan 126 7529 1.7

Catholic Syrian Bank 131 3387 3.9

Centurion Bank of Punjab 540 16455 3.3

City Union Bank 83 4575 1.8

Development Credit Bank 63 4105 1.5

Dhanalakshmi Bank 63 2146 2.9

Federal Bank 469 19327 2.4

HDFC Bank 904 64032 1.4

ICICI Bank 7580 229892 3.3

IndusInd Bank 392 12897 3.0

ING Vysya Bank 116 14663 0.8

Jammu & Kashmir Bank 485 19164 2.5

Karnataka Bank 380 11102 3.4

Karur Vysya Bank 194 9569 2.0

Kotak Mahindra Bank 453 15729 2.9

Lakshmi Vilas Bank 138 3931 3.5

Nainital Bank 19 1002 1.8

Ratnakar Bank 37 617 6.0

SBI Commercial & International Bank 5 364 1.4

South Indian Bank 188 10597 1.8

Tamilnad Mercantile Bank 122 5431 2.2

Yes Bank 11 9432 0.1

Foreign Banks

AB Bank 3 26 10.2

ABN AMRO Bank 294 20502 1.4

Abu Dhabi Commercial Bank 19 182 10.7

Antwerp Diamond Bank - 476 0.0

BNP Paribas 34 3805 0.9

Bank of America 1 3453 0.0

Bank of Bahrain & Kuwait 25 301 8.4

Bank of Ceylon 17 56 29.6

Bank of Nova Scotia 2 4776 0.0

Barclays Bank 61 7664 0.8

Calyon Bank 2 1815 0.1

China Trust Commercial Bank 1 129 1.0

Citibank 1011 38915 2.6

Deutsche Bank 60 9000 0.7

Development Bank of Singapore 5 2368 0.2

HSBC 697 30467 2.3

JP Morgan Chase Bank 121 1158 10.5

Krung Thai Bank - 9 0.0

Mashreq Bank - 41 0.0

Mizuho Corporate Bank 7 863 0.8

Oman International Bank - 1 0.0

Shinhan Bank - 314 0.0

Societe Generale - 385 0.0

Sonali Bank Ltd 1 9 10.0

Standard Chartered Bank 723 33729 2.1

State Bank of Mauritius - 214 0.0

The Bank of Tokyo - Mitsubishi UFJ - 2307 0.0

RBI Report and Annual accounts/balance sheet of banks

Reserve Bank Guidelines on purchase/ sale of Non Performing
Financial Assets

Scope

1. These guidelines would be applicable to banks, FIs and NBFCs purchasing/

selling non performing financial assets, from/ to other banks/FIs/NBFCs
(excluding securitisation companies/ reconstruction companies).

2. A financial asset, including assets under multiple/consortium banking

arrangements, would be eligible for purchase/sale in terms of these guidelines if it
is a non-performing asset/non performing investment in the books of the selling
bank.

3. The reference to 'bank' in the guidelines would include financial institutions and
NBFCs.

Structure
4. The guidelines to be followed by banks purchasing/ selling non-performing
financial assets from / to other banks are given below. The guidelines have been
grouped under the following headings:

i. Procedure for purchase/ sale of non performing financial assets by banks,

including valuation and pricing aspects.

ii. Prudential norms, in the following areas, for banks for purchase/ sale of non
performing financial assets:

a. Asset classification norms

b. Provisioning norms

c. Accounting of recoveries

d. Capital adequacy norms

e. Exposure norms

iii. Disclosure requirements

5. Procedure for purchase/ sale of non performing financial assets, including

valuation and pricing aspects

i). A bank which is purchasing/ selling non-performing financial assets should

ensure that the purchase/ sale is conducted in accordance with a policy approved
by the Board. The Board shall lay down policies and guidelines covering, inter
alia,

a. Non performing financial assets that may be purchased/ sold;

b. Norms and procedure for purchase/ sale of such financial assets;

c. Valuation procedure to be followed to ensure that the economic value of

financial assets is reasonably estimated based on the estimated cash flows arising
out of repayments and recovery prospects;

d. Delegation of powers of various functionaries for taking decision on the

purchase/ sale of the financial assets; etc.

e. Accounting policy

ii). While laying down the policy, the Board shall satisfy itself that the bank has
adequate skills to purchase non performing financial assets and deal with them in
an efficient manner which will result in value addition to the bank. The Board
should also ensure that appropriate systems and procedures are in place to
effectively address the risks that a purchasing bank would assume while engaging
in this activity.

iii) The estimated cash flows are normally expected to be realised within a period
of three years and not less than 5% of the estimated cash flows should be realized
in each half year.

iv) A bank may purchase/sell non-performing financial assets from/to other banks
only on 'without recourse' basis, i.e., the entire credit risk associated with the non-
performing financial assets should be transferred to the purchasing bank. Selling
bank shall ensure that the effect of the sale of the financial assets should be such
that the asset is taken off the books of the bank and after the sale there should not
be any known liability devolving on the selling bank.
v) Banks should ensure that subsequent to sale of the non performing financial
assets to other banks, they do not have any involvement with reference to assets
sold and do not assume operational, legal or any other type of risks relating to the
financial assets sold. Consequently, the specific financial asset should not enjoy
the support of credit enhancements / liquidity facilities in any form or manner.

vi) Each bank will make its own assessment of the value offered by the purchasing
bank for the financial asset and decide whether to accept or reject the offer.

vii) Under no circumstances can a sale to other banks be made at a contingent

price whereby in the event of shortfall in the realization by the purchasing banks,
the selling banks would have to bear a part of the shortfall.

viii) A non-performing asset in the books of a bank shall be eligible for sale to
other banks only if it has remained a non-performing asset for at least two years in
the books of the selling bank.

ix) Banks shall sell non-performing financial assets to other banks only on cash
basis. The entire sale consideration should be received upfront and the asset can be
taken out of the books of the selling bank only on receipt of the entire sale
consideration.

x) A non-performing financial asset should be held by the purchasing bank in its

books at least for a period of 15 months before it is sold to other banks. Banks
should not sell such assets back to the bank, which had sold the NPFA.

(xi) Banks are also permitted to sell/buy homogeneous pool within retail non-
performing financial assets, on a portfolio basis provided each of the non-
performing financial assets of the pool has remained as non-performing financial
asset for at least 2 years in the books of the selling bank. The pool of assets would
be treated as a single asset in the books of the purchasing bank.

xii) The selling bank shall pursue the staff accountability aspects as per the
existing instructions in respect of the non-performing assets sold to other banks.

6. Prudential norms for banks for the purchase/ sale transactions

(A) Asset classification norms

(i). The non-performing financial asset purchased, may be classified as 'standard'

in the books of the purchasing bank for a period of 90 days from the date of
purchase. Thereafter, the asset classification status of the financial asset purchased,
shall be determined by the record of recovery in the books of the purchasing bank
with reference to cash flows estimated while purchasing the asset which should be
in compliance with requirements in Para 5 (iii).

(ii). The asset classification status of an existing exposure (other than purchased
financial asset) to the same obligor in the books of the purchasing bank will
continue to be governed by the record of recovery of that exposure and hence may
be different.

(iii) Where the purchase/sale does not satisfy any of the prudential requirements
prescribed in these guidelines the asset classification status of the financial asset in
the books of the purchasing bank at the time of purchase shall be the same as in
the books of the selling bank. Thereafter, the asset classification status will
continue to be determined with reference to the date of NPA in the selling bank.

(iv)Any restructure/reschedule/rephrase of the repayment schedule or the

estimated cash flow of the non-performing financial asset by the purchasing bank
shall render the account as a non-performing asset.

(B) Provisioning norms

Books of selling bank

i. When a bank sells its non-performing financial assets to other banks, the same
will be removed from its books on transfer.

ii. If the sale is at a price below the net book value (NBV) (i.e., book value less
provisions held), the shortfall should be debited to the profit and loss account of
that year.

iii. If the sale is for a value higher than the NBV, the excess provision shall not be
reversed but will be utilised to meet the shortfall/ loss on account of sale of other
non performing financial assets.

Books of purchasing bank

The asset shall attract provisioning requirement appropriate to its asset

classification status in the books of the purchasing bank.

(C) Accounting of recoveries

Any recovery in respect of a non-performing asset purchased from other

banks should first be adjusted against its acquisition cost. Recoveries in excess of
the acquisition cost can be recognised as profit.

(D) Capital Adequacy

For the purpose of capital adequacy, banks should assign 100% risk
weights to the non-performing financial assets purchased from other banks. In case
the non-performing asset purchased is an investment, then it would attract capital
charge for market risks also. For NBFCs the relevant instructions on capital
adequacy would be applicable.

(E) Exposure Norms

The purchasing bank will reckon exposure on the obligor of the specific
financial asset. Hence these banks should ensure compliance with the prudential
credit exposure ceilings (both single and group) after reckoning the exposures to
the obligors arising on account of the purchase. For NBFCs the relevant
instructions on exposure norms would be applicable.

7. Disclosure Requirements

Banks which purchase non-performing financial assets from other banks

shall be required to make the following disclosures in the Notes on Accounts to
their Balance sheets:

A. Details of non-performing financial assets purchased: (Amounts in Rupees

crore)
1. (a) No. of accounts purchased during the year

(b) Aggregate outstanding

2. (a) Of these, number of accounts restructured during the year

(b) Aggregate outstanding

B. Details of non-performing financial assets sold: (Amounts in Rupees crore)

1. No. of accounts sold

2. Aggregate outstanding

3. Aggregate consideration received

C. The purchasing bank shall furnish all relevant reports to RBI, CIBIL etc. in
respect of the non-performing financial assets purchased by it.
 Gross NPA/ Gross Advance (in %)
Category
2001 2002 2003 2004

Public sector 12.37 11.09 9.36 7.79

bank

Private sector 8.37 9.64 8.07 5.84

bank

6.84 5.38 5.25 4.62

Foreign bank