Non Performing Assets and Recovery Management

Muralidharprasad muralidharprasad@gmail.com

What are Prudential Norms?

Income Recognition, Asset Classification, & Provisioning

What is the basic principle of Income Recognition norms?

Record of Recovery.

IMPACT OF NPAs
The account stops generating income to Bank. The income already booked on that account is reversed. It requires provisioning (10% to 100%) out of profits of the Bank. Affects recycling of funds Affects ALM Erodes Capital Shadows the image of the bank

NPAs TOLERANCE PERIOD

1992 93 1993 94 1994 95 2000 01 2003 04 4Qrs + PAST DUE 3Qrs + PAST DUE 2Qrs + PAST DUE 180 DAYS 90 DAYS

WHEN AN ACCOUNT IS TO BE TREATED AS NPA LOANS CASH CREDITS / OVERDRAFTS BILLS AGRL ADVANCES ADHOC LIMITS

LOANS
A LOAN IS TO BE TREATED AS AN NPA IF THE INTEREST OR INSTALMENTS FALL OVERDUE FOR A PERIOD OF 90 DAYS

How is a CC / OD account classified as NPA? When it becomes out of order on a/c of the following
a. If the O/S continuously exceeds the Limit/D.P. for more than 90 days. b. If the O/S are within the limit & D.P. but there are no credits in the account. c. If the O/S are within the limit & D.P. and the credits are not more than or equal to the Interest debits during 90 days (during preceding 90 days period from the date of balance sheet.) d. If the limits are not renewed within 180 days from the due date e. If the irregular drawings continue for more than 90 days.

What are irregular drawings?

If the drawings are made against stock statement which is more than 3 months old.

BILLS
IF A BILL IS NOT PAID WITH IN 90 DAYS FROM ITS DUE DATE, IT IS TO BE TREATED AS NPA

What is the special treatment given for Agrl Loans? Loans for short duration crops will be NPAs when overdue for 2 crop/Harvest seasons Loans for long duration crops will be NPAs when overdue for 1 crop/Harvest season

ADHOC LIMITS
TO BE TREATED AS NPA IF NOT ADJUSTED WITH IN 180 DAYS FROM DATE OF SANCTION

What is the treatment given for Consortium advances?

The asset status is to be determined by the member Banks, individually, depending on the Record of Recovery in the accounts with them

DATE OF NPA
DATE OF NPA IS TO BE CALCULATED BY TAKING 90 DAYS FROM THE DATE OF DEFAULT. IF THE DEFAULT IS MADE ON 01.12.2005, IT WILL BE NPA BY 02.03.2006 IF THE DEFAULT IS ON 01.01.2006 THE ACCOUNT IS NPA ON 02.04.2006

AFTER IDENTIFICATION WHAT?

STOP CHARGING INTEREST REVERSE THE UN RECOVERED INTEREST DEBITED EARLIER CREATE PROVISION CHANGE ASSET CODE AND CREATE INTEREST SUSPENCE ACCOUNT TO RECORD INTEREST DUE INITIATE RECOVERY MEASURES

OTHER CONSEQUENCES
ONCE AN ACCOUNT OF A PARTY IS IDENTIFIED AS NPA, ALL OTHER ACCOUNTS OF THE PARTY ARE TO BE TREATD AS NPA

CLASSIFICATION OF NPAs
An NPA IS CLASSIFIED AS A SUBSTANDARD ASSET, IF ITS AGE Does Not exceed 12 months.

Doubtful asset
D 1 - Up to 12 MONTHS under Doubtful D 2 - After 12 months up to 36 MONTHS under Doubtful D 3 - After 36 months under Doubtful TILL CLOSED

After how much period will a NPA become a Loss Asset?

NPA will not become loss asset on the basis of age of NPA. An account can be directly identified as loss asset by auditors/inspectors taking into consideration the aspects like availability and realisability of security, threat of recovery, etc.

Provisioning norms
a. Sub Standard Assets --flat 10% on outstanding balance.In case of unsecured exposure 20 % of outstanding Unsecured exposure is realisable value of security is not more than 10 % ab-initio

b.

Doubtful assets

---

20% on sec portion + 100% on un-Sec portion -- doubtful upto 1 year, 30% on sec portion+ 100% on un-Sec portion -- 2nd & 3rd year 100% on sec portion + 100% on un-Sec portion--- more than 3 years. 100 % on secured portion wef 31.3.2005

c. Loss Asset -- flat 100% on outstanding balance d. Standard Assets--0.25% flat on SME and Agril. Advances flat 1% on Residential Housing loans beyond Rs.20 Lakh; Flat 2 % Loans and Advances to NBFCs,Capital Market Exposures,Commercial Real Estates,Personal loans,Credit card receivables. Flat 0.40% on all other advances.

31.03.03 NPA at the beginning of the year Less Reduction during the year NPA after Reduction Add Additions during the year NPA at the end of the year 524.14

31.03.04 580.70

31.03.05 615.37

31.3.06 440.93

180.40 343.74 236.96 580.70

259.89 320.81 294.56 615.37

324.68 290.69 150.24 440.93

157.28 283.65 153.26 436.91

31.03.03
Upgradation 12.13

31.03.04
20.35

31.3.05
77.30

31.3.06
26.94

Recovery Compromise Write Off

47.19 27.43 93.65 180.40

55.58 45.64 138.32 259.89

77.33 51.01 116.04 324.68

47.96 34.38 48.00 157.28

Total Reduction

PERFORMANCE OF XXX BANK Parameter Mar 04 Marc05 Mar 06 Dec 06

Rs.in Crores
Gross Advances Gross NPA % to Gross Advances Provision held Net Advances Net NPAs % to Net NPAs to Net Advances Provision Coverage Ratio

13379 615 4.60 493 12883 120 0.93 80.16

17906 441 2.46 389 17514 49 0.28 88.22

22481 437 1.94 381 22097 52 0.24 87.20

25578 439.64 1.72 329 25227 111 0.44 74.83

PERFORMANCE OF XXX BANK Vs SCBS, PSBS, NATIONALISED BANKS, SBI &SBI GROUP Gross NPAs Net NPAs
Banks SCBs PSBs Mar 03 Mar 04 Mar 05 Mar 06 Jun 06 Mar 03 Mar 04 Mar 05 Mar 06 Jun 06 4.00 3.30 2.50 3.05 3.04 1.90 1.20 0.90 1.30 1.30 4.21 3.50 3.86 3.11 2.91 2.28 2.74 2.98 2.71 2.49 1.35 3.90 -------1.91 3.80 -------1.93 2.16 1.64 1.58 0.84 1.28 1.40 1.33 1.09 0.44 0.99 0.96 1.16 1.01 0.15 0.24 1.40 ---0.07 1.40 ----

Nationalised 4.66 SBI SBI Group 3.59 3.48

XXX Bank 2.35

1.94

REASONS AND REMEDIES

EXTERNAL REASONS NATURAL CALAMITIES RECESSION LPG DIRECTED LENDING/TARGET ORIENTED INFRASTRUCTURAL INADEQUACIES

REASONS - EXTERNAL
WILFUL DEFAULT LACK OF MOTIVATION FOR REPAYMENT COMPLICATED AND TARDY LEGAL SYSTEM

REASONS - INTERNAL
IMPROPER SELECTION INADEQUATE PRESANCTION SURVEY DEFECTIVE APPRAISAL NON COMPLIANCE TO SANCTION TERMS UN REALISTIC REPAYMENT SCHEDULES LACK OF MONITORING

REMEDIES- PREVENTION

SELECTION & APPRAISAL TIMELY DISBURSEMENT MONITORING AND FOLLOWUP RESTRUCTURING MONITORING STANDARD ASSETS

REMEDIES - REDUCTION
ISSUE NOTICES TO ALL NPA ACCOUNTS Recovery camps Min. Two per month. NODAL OFFICER AT Z.O Dist. Level Nodal Officer - NPA ASSET RECOVERY TEAM AT H.O. ASSET RECOVERY CELLs in selected zones for monitoring High Value NPAs. Specialised Asset Recovery Branch in Hyd. Zone. MRO ATTACHED TO LEAD BANK.

REMEDIES - REDUCTION
USE SECURITISATION ACT VERIFY DOCUMENTS AND SUBMIT SUITFILING PROPOSALS WHERE EVER NECESSARY DRTs LOK ADALAT COMPROMISE WRITE OFF

What is PNPA?
Loans Interest/Principal overdue for 30 days or more but below 90 days OD/CC Liability exceeds limit /Drawing Power continuously for 30 days or more but below 90 days, Credit in A/C during past 30 days less than interest for same period, drawing allowed for more than 30 days on Drawing Power of stock statement > than 3 months, Not renewed within 90 days from due date Bills Unpaid for more than 30days but less than 90 days (Contd)

PNPA (Contd)
Direct Agrl Loans Loan granted for short duration crops will be PNPA if installment or principal is overdue for one crop season Loan granted for long duration crops when overdue for 6 months

Periodicity of identification of PNPAs

Once in a month on 10th of each month Report to be sent quantum wise Rs.25 lakh & above Rs.5 lakh & above but below 25 lakh Rs.25000 & above but below 5 lakh Below Rs.25000

What are the types of reduction in NPAs?

Actual Recovery, Compromise, Write-off & Up gradation.

Periodicity of valuation of securities:

Collateral securities shall be got revalued once in 2 years.

What are the exempted category of advances?

Advances against Bank's own deposits, NSCs, Kisan Vikas Patras, & Life Insurance Policies eligible for surrender.

When the a/c becomes NPA on a/c of interest becoming overdue?

An account becomes NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter

Ever greening is:

Re-schedulement of a loan for the purpose of avoiding an account becoming NPA, Recovery of Interest / instalments by sanctioning additional facilities to avoid showing an account as NPA.

How is a surplus recovery treated?

Surplus recovery can be advance recovery towards principal but not towards future interest debits.