Prof. b.p.

mishra
XIMB

1
YEAR % OF GNPA TO GROSS ADVANCES
2010- 11 2.24
11-12 2.98
12-13 3.64
13-14 4.32
14-15 5.00
15-16 9.50

SOURCE: Capital line- as on March

2
Bank % of Govt Ownership
IDBI 73.98
IOB 73.58
BOI 70.32
PNB 62.08
BOB 59.24

SOURCE: Capital line- up to june,2016

3
 Year Net Profit in Crore Rs
10-11 43697
11-12 48222
12=13 49721
13-14 36722
14-15 36350
15-16 - 17672

Source; Capital Line

4
Bank Tier- I capital in %
Indian bank 12.1
BOB 10.8
J&K bank 10.6
SBI 9.9
United bank 7.9
Syndicate bank 7.8
UCO bank 7.6
Source : Capital line- as on march,16

5
Year Capital infusion in crores of Rs
2012- 13 12517
13- 14 14000
14- 15 6990
15-16 19950
16-17 25,000

Source: Department of Financial Services

6
 YEAR SOLVELCY RATIO IN %
2010-11 13.7
11-12 18.04
12-13 23.65
13-14 29.81
14-15 33.97
15-16 66.31

Solvency ratio: is defined as ratio of banks net NPA to Net Worth

As banks did not provide for their bad loans, their solvency position
Deteriorated sharply.

SOURCE; Capital line

7
Loan MARCH, MARCH, MARCH, MARCH
Book 13 14 15 16
(%)
GROSS 3.4 4.1 4.45 9.50
NPA
Net NPA - 2.2 2.36 4.63
OVER 9,2 10.0 10.90 13.10
ALL
SRESSED
ADVANC
ES

8
 Performimg assets: Healthy accounts
NPA.. Non Performing AssetsBorrower Wise..to be
idetifiednot facility
Term loan If Interest and/or Principal remain
overdue/unpaid(from the due date) for a period of
more than 90 days (one quarter)
Any amount due to the bank under any credit facility is
overdue if it is not paid on the due date fixed by the bank
Bills purchased & Discounted: Bills remain overdue for
period of 90 days
Investments: If interest\principal is unpaid for 90 days
from due date except Sovereign securities
A non performing asset (NPA) is a loan or an advance where;
i. interest and/ or instalment of principal remain overdue for a
period of more than 90 days in respect of a term loan,
ii. the account remains out of order, in respect of an
Overdraft/Cash Credit (OD/CC),
iii. the bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted,
iv. the instalment of principal or interest thereon remains
overdue for two crop seasons for short duration crops,
v. the instalment of principal or interest thereon remains overdue
for one crop season for long duration crops,

10
 While granting Loans, realistic repayment schedule
to be fixed by banks.
Income recognized on actual basis
Right of appropriation by the banks
Stop further application of interest to the account
from the date of NPA
Interest Moratorium period account is PA
Balance of Rs 5crore and above,
stock audit by external Auditors annually.
11
 For preference shares where the fixed
dividend is not paid. If the dividend on
preference shares (cumulative or non-
cumulative) is not declared/paid in any year it
would be treated as due/unpaid in arrears
and the date of balance sheet of the issuer for
that particular year would be reckoned as
due date for the purpose of asset
classification. 12
 CC/OD If the account is
out of order for more than
During Q1 of 2015-16
90 days.
Case I Case II Case III
the credit is inadequate to
cover the interest charged Sanctioned
Either Outstanding balance Limit 10,00,000 10,00,000 10,00,000
is continuously above the
Outstanding
sanctioned limit or Balance 8,00,000 12,00,000 8,00,000
there is no credit to account
or credits are not enough to Interest
charged 1,10,000 1,10,000 1,10,000
cover the interest debited
Amount
during the same period, Credited to
these accounts should be Bank 80,000 1,20,000 0
treated as 'out of order
 If any credit facility availed by the issuer of a security is
declared as NPA, then investment in any of the securities issued
by the same issuer is also treated as NPI including preference
share.
However, if only the preference shares are classified as NPI, the
investment in any of the other performing securities issued by
the same issuer may not be classified as NPI and any
performing credit facilities granted to that borrower need not
be treated as NPA. &
Vice versa..Why ?
To reduce the default ratio
14
Exception : For any Central Govt. Guaranteed
Securities/Advances.. NPA norms are not applicable..not
to State Govt. Guaranteed Securities until the Central
Government have repudiated the guarantee

Investment in State Government guaranteed securities

would attract prudential norms for identification of NPI
and provisioning, if interest and/or principal or any other
amount due to the bank remains overdue for more than
90days.

15
 If the realisable value of the security, as assessed by
the bank/ approved valuers/ RBI is less than 10 per
cent of the outstanding in the borrowal accounts, the
existence of security should be ignored and the asset
should be straightaway classified as loss asset.
Similarly, if the realisable value of the security
is less than 50% of the outstanding, the asset will
straight forward taken as Doubtfull .
16
Classified into Three Categories on the basis of severity
of Credit Weakness
Sub Standard Assets
NPA for less than equal to 12 months

Doubtful Assets ( D1D3)

Remained NPA for more than 12 months in SA
Category
Collection & liquidation of such advances is highly
doubtful on the basis of currently known facts
17
 A loss asset is one 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. In other words, such an asset is
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.

Identified as un-collectibleit is not considered as

bankable assets.if the realized value of the security
falls to less than 10% of the outstanding
such accounts are classified as
uncollectibleThese accounts are written off from
Banks book against full provisioning.
18
G
r
o
s Realizable 90 Days - up to M
s value>50% 12 months
i
Secured 15% n
N
Portion Provisions i
P
A
STA m
u
m Realizable Un Secured 25%
Value<=50% m
i Portion Provisions
n
u
Realizable R
s
value>10% Secured 25% > up to one year..D1 e
40% >1Y - up to 3YD2
Portion q
100% > 3YD3
S u
P DA i
= Un Secured 100%
r
N Portion Provisions e
Realizable
N
Value<10%
100% m
P
A Secured e
Provisions
LA Portion n
t 19
100%
Un Secured
Provisions
Portion
(a)direct advances to agricultural and Small and Micro
Enterprises (SMEs) sectors at 0.25 per cent;
(b) advances to Commercial Real Estate (CRE) Sector at 1.00
per cent;
(c) advances to Commercial Real Estate Residential
Housing Sector (CRE - RH) at 0.75 per cent
(d) housing loans extended at teaser rates and restructured
advances as as indicated in 2.0 and 4.25 respectively;
(e) all other loans and advances not included in (a) (b) and (c)
above at 0.40 per cent.
(ii) The provisions on standard assets should not be reckoned
for arriving at net NPA
20
 Banks should recognise income on accrual basis in
respect of the projects under implementation, which
are classified as standard
Banks which have wrongly recognised income in the
past should reverse the interest if it was recognised as
income during the current year or make a provision for
an equivalent amount if it was recognised as income in
the previous year(s) including GOVT guaranteed
Account.

21
 Income from NPA is recognized upon realizable
basis
Sale of NPA: min(sale price, book value)
If sale price is less than book valueprovision
to be made
Surplus will be ignored

22
The regulatory norms for provisioning represent the
minimum requirement. A bank may voluntarily make specific
provisions for advances at rates which are higher than the
rates prescribed under existing regulations, to provide for
estimated actual loss in collectible amount, provided such
higher rates are approved by the Board of Directors and
consistently adopted from year to year. Such additional
provisions are not to be considered as floating provisions.
The additional provisions for NPAs, like the minimum
regulatory provision on NPAs, may be netted off from
gross NPAs to arrive at the net NPAs
23
 Gross Advances = Total Performing Advances +
Gross (Total) NPA
Gross NPA - SP for NPAs= Net NPA (NNPA)
Gross Advances - Specific Provision (SP) for NPAs =
Net Advances
Net Advances = Total Performing Advances+ Gross
NPA - Specific Provision (SP) for NPAs= Total
Performing Advances+ Net NPA
The Balance Sheet figures are ( Advances) are Net
Advances......therefore it includes Total Performing 24
Advances+ NNPAs
 Inputs
Total Loan..Rs. 10 Lakh
Amount Repaid..Rs. 6 lakh
Realisable value of Security Rs. 1.5 lakh
Govt.Guarnted Portion : 50%
Overdue for 2.6 years
Find Total Specific Provision and NNPA
Soln
Outstanding Balance : Rs. 4 lakh
% of RV of security.1.5/4= 37.5%
HenceD2
Unsecured Portion : Rs.2.5 lakh(4-1.5)
Guaranteed Portion : 50%* 2.5 = 1.25
Net Unsecured : 1.25 ( 2.5 1.25)
Provision for secured Part: 40%*1.50 = 0.60
Provision for unsecured Part: 100%*1.25 = 1.25
Total SP = 1.25 + 0.60 = 1.85
GNPA = 4
NNPA = 4 1.85 = 2.15
...........................Case for the Portfolio

25
Example-2

Outstanding Balance Rs. 10 lakhs

CGTMSE/CRGFTLIH Cover:
75% of the amount outstanding or 75% of the
unsecured amount or Rs.37.50 lakh, whichever
is the least Period for which the advance has
remained doubtful: More than 2 years remained doubtful
(say as on March 31, 2016)
Value of security held Rs. 1.50 lakhs
26
Provision required to be made:

Balance outstanding Rs.10.00 lakh

Less: Value of security Rs. 1.50 lakh
Unsecured amount Rs. 8.50 lakh
Less: CGTMSE/CRGFTLIH
cover (75%) Rs. 6.38 lakh
Net unsecured and uncovered portion: Rs. 2.12 lakh
Provision for Secured portion @40%
of Rs.1.50 lakh Rs.0.60 lakh
Provision for Unsecured &
uncovered portion @ 100% of
Rs.2.12 lakh Rs.2.12 lakh
Total provision required Rs.2.72 lakh

27
Banks shall make provisions, with effect from the
year ending March 31, 2003, on the net funded
country exposures on a graded scale ranging
from 0.25 to 100 percent according to the risk
categories mentioned below. To begin with,
banks shall make provisions as per the following
schedule:

28
Risk category ECGC Provisioning
Classification Requirement
(per cent)

Insignificant A1 0.5
Low A2 0.5
Moderate B1 5
High B2 20
Very High C1 25
Restricted C2 100
OFF-Credit D 100
29
Banks are required to make provision
for country risk in respect of a country
where its net funded exposure is one
per cent or more of its total assets.

30
 If arrears of interest and principal are paid by the
borrower in the case of loan accounts classified as NPAs,
the account should no longer be treated as
nonperforming and may be classified as standard
accounts
Amount Recovered against written off loans earlier, will
be recognized as revenueadded to the Profit
Unrealized Interest recognised in the previous year on
advances which have become NPA during the current
year, will be reduced from profit of this year(Interest
Income) 31
The objective of the Corporate Debt Restructuring
(CDR) framework is to ensure timely and transparent
mechanism for restructuring the corporate debts of
viable entities facing problems, outside the purview of
BIFR, DRT and other legal proceedings, for the
benefit of all concerned

32
This mechanism will be available to all borrowers engaged
in any type of activity subject to the following conditions :

a) The borrowers enjoy credit facilities from more than

one bank / FI under multiple banking / syndication /
consortium system of lending.
b) The total outstanding (fund-based and non-fund based)
exposure is Rs.10 crore or above.

CDR system in the country will have a three tier structure :

CDR Standing Forum and its Core Group
CDR Empowered Group
CDR Cell

33
Reference to Corporate Debt Restructuring
System could be triggered by (i) any or more
of the creditor who have minimum 20% share
in either working capital or term finance, or (ii)
by the concerned corporate, if supported by a
bank or financial institution having stake as in
(i) above.

34
CDR is a non-statutory mechanism which is a
voluntary system based on Debtor- Creditor
Agreement (DCA) and Inter-Creditor Agreement
(ICA). The Debtor-Creditor Agreement (DCA) and
the Inter-Creditor Agreement (ICA) shall provide
the legal basis to the CDR mechanism.

35
The CDR Empowered Group shall decide on the acceptable
viability benchmark levels on the following illustrative
parameters, which may be applied on a case-by-case basis,
based on the merits of each case :
* Return on Capital Employed (ROCE),
* Debt Service Coverage Ratio (DSCR),
* Gap between the Internal Rate of Return (IRR) and the
Cost of Fund (CoF),
* Extent of sacrifice.

36
Broad benchmarks for the viability parameters :

i. Return on capital employed should be at least

equivalent to 5 year Government security yield plus 2
per cent.
ii. The debt service coverage ratio should be greater
than 1.25 within the 5 years period in which the unit
should become viable and on year to year basis the
ratio should be above 1. The normal debt service
coverage ratio for 10 years repayment period should be
around 1.33.
iii. The benchmark gap between internal rate of return
and cost of capital should be at least 1per cent.

37
iv. Operating and cash break even points should be worked out
and they should be comparable with the industry norms.
v. Trends of the company based on historical data and future
projections should be comparable with the industry. Thus
behaviour of past and future EBIDTA should be studied and
compared with industry average.
vi. Loan life ratio (LLR), as defined below should be 1.4, which
would give a cushion of 40% to the amount of loan to be
serviced.

Present value of total available cash flow (ACF) during the

loan life period (including interest and principal)
LLR= ----------------------------------------------------------------------------
Maximum amount of loan

38
 Joint lender forum
Before a loan account turns into a NPA, banks are
required to identify incipient stress in the account by
creating three subcategories under the Special Mention
Account (SMA) category as given in the table below:

SMA Subcategories Basis for classification

SMA-0 Principal or interest payment not overdue for more than
30 days but account showing signs of incipient stress
SMA-1 Principal or interest payment overdue between 31-60 days
SMA-2 Principal or interest payment overdue between 61-90 days

39
The Reserve Bank of India (RBI) has set up
a Central Repository of Information on Large Credits
(CRILC) to collect, store, and disseminate credit data to
lenders. Reporting that banks will be required to report
credit information, including classification of an account as
SMA to CRILC on all their borrowers having aggregate
fund-based and non fund based exposure of Rs.50
million and above with them.

40
Banks are advised that as soon as an account
is reported by any of the lenders to CRILC as
SMA-2, they should mandatorily form a
committee to be called Joint LendersForum
(JLF) if the aggregate exposure (AE) [fund
based and non-fund based taken together]of
lenders in that account is Rs 1000 million and
above. Lenders also have the option of forming
a JLF even when the AE in an account is less
than Rs.1000 million and/or when the
account is reported as SMA-0 or SMA-1.

41
Total provisions Held / Gross NPA > 70%

42
Ratio of Incremental NPAs to Opening Gross Advances

New accretion to NPAs during the year

Gross standard advances at the beginning of the year

Asset Quality
These ratios on Incremental NPAs to Gross Standard
Advances would basically reveal the asset quality of
standard advances of banks. These ratios basically
reveal the deterioration of the advances portfolio
during the year. Higher ratio indicates the
aggressive loan philosophy or poor asset quality
of banksDefault Ratio

43
Gross/ Net NPAs (including NPAs in Investments) to
total Assets
Gross NPAs
Gross Advance
Net NPAs / Net Advances
These ratios reveal the degree of impairment of assets
in the balance sheet

44
Ratio of Net NPAs to Total Equity
Net NPAs
Total Equity

Ratio of Net NPAs to Total Equity indicates the

equity cover for NPAs. If the ratio is greater than
unity, that particular bank is financing NPAs out of
interest paying liabilities. For example the total
Equity of the bank is say Rs 100 and the Net NPAs
are at Rs 110. Therefore we may construe that the
bank is funding NPAs worth Rs 10 from its interest
bearing liabilities Rs 10. Therefore the cost fund on
this Rs 10 and the income, which could have been
earned on this Rs 10, is a loss for the bank. This
sort of funding pattern would adversely affect
the profitability of banks 45
In case of restructured accounts where
the banks are converting at the time of restructuring,
Part of their liabilities to EQUITY of the corporate entity
and offering the management to a new promoter
/ group,SDR is applicable.

46
A restructured account is one where the bank, for
economic or legal reasons relating to the
borrower's financial difficulty, grants to the borrower
concessions that the bank would not otherwise
consider.

47
1. Flexible Structuring of Long Term project Loans
to Infrastructure & Core Industries.- 5/25 SCEME
(DBOD No.BP.BC.24/21.04.132/2014-15 dated July,15,2014).

2.Strategic Debt Restructuring scheme.- SDR

(DBR.BP.BC.No.101//21.04.132/2014-15 dated june,8,2015)

3.Scheme for Sustainable structuring of Streessed asset S4S.

(DBR.No.BP.BC.103/21.04.132/2015-16 dated June,13,2016)

48
Banks are unable to provide long tenor financing owing to
asset-liability mismatch issues.. After factoring in the initial
construction period and repayment moratorium, the
repayment of the bank loan is compressed to a shorter
period of 10-12 years (with resultant higher loan
instalments), which strains the viability of the project,

49
constrains the ability of promoters to generate
fresh equity out of internal generation for further
investments.
It might also lead to levying higher user
charges in the case of infrastructure projects in
order to ensure that greater cash flows are
generated to service the loans.
As a result of these factors, some of the long
term projects have been experiencing stress in
servicing the project loan.

50
The long tenor loans to infrastructure/core industries projects,
say 25 years, could be structured as under:

The fundamental viability of the project would be established

on the basis of all requisite financial and non-financial
parameters.
Indicating capacity to service the loan and ability to repay
over the tenor of the loan;especially the acceptable level of
interest coverage ratio (EBIDTA / Interest payout).

Allowing longer tenor amortisation of the loan (Amortisation

Schedule), say 25 years (within the useful life / concession
period of the project) with periodic refinancing (Refinancing
Debt Facility) of balance debt, the tenor of which could be
fixed at the time of each refinancing, within the overall
amortisation period;
51
 25 years (Amortisation Schedule), but provide
funding (Initial Debt Facility) for only, say, 5
years with refinancing of balance debt being
allowed by existing or new banks (Refinancing
Debt Facility) or even through bonds;

The refinancing (Refinancing Debt Facility) after

each of these 5 years would be of the reduced
amounts determined as per the Original
Amortisation Schedule.

52
Only term loans to infrastructure projects, as defined under
the Harmonised Master List of Infrastructure of RBI, and
projects in core industries sector, included in the Index of
Eight Core Industries (base: 2004-05) published by the
Ministry of Commerce and Industry, Government of India,
(viz., coal, crude oil, natural gas, petroleum refinery products,
fertilisers, steel (Alloy + Non Alloy), cement and electricity -
some of these sectors such as fertilisers, electricity
generation, distribution and transmission, etc. are also
included in the Harmonised Master List of Infrastructure sub-
sectors) - will qualify for such refinancing;

53
 The tenor of the Amortisation Schedule should
not be more than 80% (leaving a tail of 20%)

The bank offering the Initial Debt Facility may

sanction the loan for a medium term, say 5 to 7
years. This is to take care of initial construction
period and also cover the period at least up to the
date of commencement of commercial operations
(DCCO) and revenue ramp up.

54
 Banks may determine the pricing of the loans at
each stage of sanction of the Initial Debt Facility
or Refinancing Debt Facility, commensurate with
the risk at each phase of the loan, and such
pricing should not be below the Base Rate of the
bank;

Banks should have a Board approved policy for

such financing.

55
 This would ensure long term viability of infrastructure/core
industries sector projects by smoothening the cash flow
stress in initial years;

Banks would be able to extend finance to such projects

without getting adversely impacted by asset-liability
management (ALM) issues;

Banks could shed or take up exposures at different stages of

the life cycle of such projects depending on banks single /
group borrower or sectoral exposure limits;

With reduction of project risk and option of refinancing, ratings

of such projects would undergo upward revision.

Allowing lower capital requirement for banks as also access

to corporate bond markets to project promoters at any stage
56
based on such refinancing; etc.
If the Initial Debt Facility or Refinancing Debt
Facility becomes NPA at any stage, further
refinancing should stop and the bank which holds
the loan when it becomes NPA, would be required
to recognise the loan as such and make necessary
provisions as required under the extant regulations.
Once the account comes out of NPA status, it will
be eligible for refinancing in terms of these
instructions;

57
 JLF/Corporate Debt Restructuring Cell (CDR) may
consider the following options when a loan is
restructured:
Possibility of transferring equity of the company by
promoters to the lenders to compensate for their
sacrifices;
Promoters infusing more equity into their
companies;
Transfer of the promoters holdings to a security
trustee or an escrow arrangement till turnaround of
company. This will enable a change in management
control, should lenders favour it. 58
 In many cases of restructuring of accounts, borrower
companies are not able to come out of stress due to
operational/ managerial inefficiencies despite substantial
sacrifices made by the lending banks.

The restructuring package should also stipulate the timeline

during which certain viability milestones (e.g. improvement in
certain financial ratios after a period of time, say, 6 months or
1 year and so on) would be achieved.
FAILURE

59
With a view to ensuring more stake of promoters in
reviving stressed accounts and provide banks with
enhanced capabilities to initiate change of
ownership in accounts which fail to achieve the
projected viability milestones, banks may, at their
discretion, undertake a Strategic Debt
Restructuring (SDR) by converting loan dues to
equity shares

60
The decision on invoking the SDR by converting
the whole or part of the loan into equity shares
should be taken by the JLF as early as possible
but within 30 days from the above review of the
account. Such decision should be well
documented and approved by the majority of the
JLF members (minimum of 75% of creditors by
value and 60% of creditors by number);

61
Post the conversion, all lenders under the JLF must
collectively hold 51% or more of the equity shares
issued by the company;
The share price for such conversion of debt into
equity will be determined as
1.Conversion of outstanding debt (principal as well as
unpaid interest) into equity instruments should be at a Fair
Value which will not exceed the lowest of the following,
subject to the floor of Face Value
Market value(reference date prior 10 days trading value)
Book value.
The JLF must approve the SDR conversion
package within 90 days from the date of deciding to
undertake SDR; 62
The new promoter should not be a
person/entity/subsidiary/associate etc. (domestic as
well as overseas), from the existing
promoter/promoter group. Banks should clearly
establish that the acquirer does not belong to the
existing promoter group; and
b. The new promoters should have acquired at least
51 per cent of the paid up equity capital of the
borrower company.

63
Eligible Accounts

For being eligible under the scheme, the account1 should

meet all the following conditions:
(i) The project has commenced commercial operations;
(ii) The aggregate exposure (including accrued interest)
of all institutional lenders in the account is more than
Rs.500 crore (including Rupee loans, Foreign Currency
loans/External Commercial Borrowings,);
(iii) The debt meets the test of sustainability- appointed by
a technical committee by IBA

64
With the present cash-flow scenario , Banks to decide
The component of sustainable debt, and convert
Unsustainable debt either to equity or
equity equivalents securities.

65
 Unlike CDR, S4S does not allow the banks to offer
any moratorium on debt repayment;

they are also not allowed to extend the repayment

schedule or reduce the interest rate.

The conversion of part of debt into equity or qausi-

equity instruments will be governed by valuation
norms, prescribed by the regulator.

66
 Finally, the banks will have to set aside money
for 20% of the total outstanding debt or 40% of
the debt that is seen as unsustainable.

This is more than what banks typically need to

provide for bad loans15% in the first year.

67
thanks

68