npa & income recognition ppt

Commercial Banking : NPAs

BankingNon Performing Assets 1

NON PERFORMING ASSETS

INCOME RECOGNITION, ASSET CLASSIFICATION

ANDPROVISIONING NORMS

(IRAC NORMS)&

Asset Reconstruction Companies

BankingNon Performing Assets 3

Bank Credit (% to GDP)

BankingNon Performing Assets 4

BankingNon Performing Assets 5

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Why Loan accounts go bad ?

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BORROWER-SIDELack of PlanningDiversion of FundsDisputes within…No contribution …No modernisation

…Improper

monitoringIndustrial

Relations..Natural

Calamities ...

BANKER – SIDE Defective SanctionNo post-sanction

supervision, etcDelay in releasesDirected lending …Slow decision

making processEtc etc etc ….

Health Code System in Indian Banks during 1980’s

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1. Satisfactory Accounts2. Irregular Accounts3. Sick-viable : Under Nursing4. Sick – Non-viable : Sticky accounts5. Advances Recalled6. Suit Filed Accounts7. Decreed Debts and8. Debts classified by the Bank as

Bad/Doubtful Accounts

Asset Classification – 4 way - 1993

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Standard Assets All regular loan accounts &

investments (Performing Assets)

Non-Performing Assets1. Sub-Standard Assets2. Doubtful Assets3. Loss Assets

Performing Asset defined …

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An account (loan or investment) is classified as Performing Asset if it does not disclose any problems and carry more than normal risk attached to the business

All loan facilities which are regular !

N P As : Definition

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An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

A credit facility in respect of which the interest and/or installment of principal has remained “past due” for a specified time.

Non Performing Assets

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In accounting, originally Bad & Doubtful DebtsIn 1980s, RBI followed 8 point Health CodeAlso called Non Performing Loans (NPLs)or Stressed Assets

An advance where interest and / or instalment of principal remain ‘overdue’ for a period of more than 90 days in respect of Term Loan / OD / CC /BP / BD / other accounts – investments, export finance, SSI/SME/ agricultural, housing loan, educational loan, lease and hire purchase …. Etc.

Sub-standard, Doubtful and Loss Assets…

Recovery of Loans

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Field Visits, Personal persuasion, Stock StatementsNotices on due dates – Ordy, Regd, Legal …Civil Procedure, Winding Up Notices, …Seizure and disposal of assets thro’ auctionsCriminal Action per Sec 138 of NI Act …Compromises – Interest reduction / waiver, deferment,

Simple or Compound calculationLok Adalat, DRT / BIFR Awards, OTS, CDRAsset Securitisation under SARFAESI Act …

Def’n of NPAs Chronologically

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Mar 31, 1993 4 quarters

Mar 31, 1994 3 quarters

Mar 31, 1995 2 quarters

Mar 31, 2004 1 quarter only ???

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% NPAs to Total Advances (Rs in crores)

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YearNPAs Total Loans %

1998 50,816 3,52,696 14.41999 58,722 3,99,436 14.72000 60,840 4,75,757 12.82001 63,962 5,58,679 11.4

(Source : Trends & Progress : RBI, 2001)

IRAC NORMS

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Master circular dated 17th July, 2004.

Superceded earlier master circular dated 22nd August, 2003.

Status-quo of classification in respect of earth-quake affected accounts available upto 15/07/2004.

Natural Calamities – Floods, Cyclones, Earth quakes, Failure of Monsoon, Fire Accidents, etc...

ASSET TYPE

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STANDARD ASSET / PERFORMING ASSETThe account is standard / performing and does not carry more than the normal risk attached to the business.

NON-PERFORMING ASSET (NPA)The asset ceases to generate income for the bank.

IDENTIFICATION OF NPA

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Cash Credit / Overdrafts Account remains ‘out of order’ for 90 days or

more.

The account is treated as ‘out of order’ if :

* Outstanding Balance remains continuously in excess of sanction limit/drawing power for 90 days or more.

* No credit continuously for 90 days or more as on the date of Balance Sheet.

* Credits in the account are not sufficient to cover interest debited during the same period.

IDENTIFICATION OF NPA …

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Term Loans Interest and/or instalment remains overdue for 90

days or more.

Bills Purchased and Bill remains overdue for 90 days or more.

Discounted

Agricultural Advances Interest and/or installment remains overdue for two harvest seasons for short duration crop, one harvest season for long duration crop. loan

Others Any amount to be received

remains overdue for 90 days or more .

CLASSIFICATION NORMS

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Standard Asset The account is not non-performing.

Sub-Standard Asset A sub standard Asset is one which has

remained NPA for a period less than or equal 12 months. (w.e.f. 31st March 2005)

Loss AssetsThese are accounts, identified by the bank or

internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off.

CLASSIFICATION NORMS

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Doubtful Asset - Three Categories Category Period

Doubtful - I up to One Year Doubtful - II Up to Three Years

Doubtful - III More than Three Years

PROVISIONING NORMS

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STANDARD ASSET 0.25% on Standard Assets on Global loan

portfolio basis

SUB-STANDARD ASSET 10% of total outstanding 20% of total outstanding if loan is unsecured

abinitio (new guidelines).

PROVISIONING NORMS

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SUB-STANDARD (Cont’d)

Banks are permitted to phase the additional provisioning upon reduction in transition period from 18 to 12 months Over a period of four years with minimum 20% each year (new guidelines)

LOSS ASSET:100% should be provided for out standing amount.

PROVISIONING NORMS

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DOUBTFUL ASSETS

Period Provision (Secured +Unsecured)

Upto 1 year 20% + 100%1to 3 years 30% + 100%More than 3 years 100% + 100%(effective from 31st March 2005)

Outstanding as on secured portion. 31st March 2011(60%) , 2012(75%), 2013(100%)

PROVISIONING NORMS

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Provision Under Special circumstancesNormal provision on Government guaranteed advances.

In case of advances guaranteed by DICGC/ECGC, Provision should be made only for balance in excess of the amount guaranteed by these corporations.

IMPORTANT ASPECTS

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Exempted Category (Para 4.2.10 of Master Circular)Advances against term deposits, NSCs, IVPs,

KVPs and Life Insurance Policies need not be treated as NPAs, till security cover is sufficient to cover outstanding balance.

Income to be recognised subject to availability of margin.

Advance against gold ornaments / Government securities not exempt.

IMPORTANT ASPECTS

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Classification of a Borrower (Para 4.2.6 of Master Circular)

All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular.

Obtain cross-branch confirmation for classification.

Exception: Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement.

IMPORTANT ASPECTS

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Consortium Advances (Para 4.2.7 of Master Circular)

Member banks shall classify the accounts according to their own record of recovery.

Bank needs to arrange to get their share of recovery or obtain an express consent from the Lead Bank.

Bank may obtain Lead Bank confirmation & cognizance of the same may be taken?

Corporate Debt Restructuring.

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Corporate Debt Restructuring (CDR) - (Para 4.2.15 of Master Circular)

CDR is an institutional mechanism for evolving financial solution.

CDR will be available only in respect of multiple banking/syndication/consortium accounts with outstanding exposure of Rs.20 Crores & above. (Not available for sole banking accounts)

Accounting treatment for restructuring under CDR will be same as applicable to otherwise restructured

accounts.

Projects under implementation Treatment to be in line with Para 4.2.16 of Master

Circular

GREENING ISSUES

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Sanction/extension of Additional facility / Adhoc facility.

Enhancement of Limit.

Conversion of Overdue Limits.

Frequent Re-schedulement of Term Loans.

Adjusting Loan of one borrower against other borrower.

INCOME RECOGNITION

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Income RecognitionFor NPA accounts income should be recognised on realisation basis.

When an account becomes non-performing, unrealised interest of the previous year to be derecognised/ reversed.

Adjustment of Recoveries - PriorityUnrealised Expenses , Unrealised Interest

Amount of Principal Outstanding

Clarification vide Master Circular - in the absence of clear agreement between the Bank and the Borrower, an appropriate policy to be followed in uniform and consistent manner.

DISCLOSURE

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At Branch Level Auditor needs to report the compliance with IRAC

norms of RBI with respect to classification & provisioning for NPA and income recognition in Long Form Audit Report (LFAR) of the branch.

At Head Office Level Advances are disclosed net off NPA provisions &

Interest Suspense.

Accounting policy for classification, provisioning & income recognition need to be disclosed.

Disclosure needs to be made as required in terms of the guidelines issued by the Reserve Bank of India in connection with Percentage of Net NPAs to Net Advances, Provision for Standard Assets & NPAs, Movements in NPAs, Movement in Provision for NPAs.

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Asset Reconstruction Companies

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Experience abroad

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Spain - Dep Guarantee Fund : 1977-80 Chile - Cash Purchase of Bad Loans1982USA - Resolution Trust Corp’n, 1989Japan - Coop Cr’ Purchasing Co 1993Poland : Rescheduled Bad Loans : 1994Eastern Europe : Govt Bonds : 1994 (Hungary)

Experience abroad...

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Tanzania - 1988 Ghana - NPA Recovery Trust – 1989Sweden - SECURUM - January 1993Uganda - 1995Philippines - Asset Privatisation Trust Malaysia - Soft loans by Central BankColombia, Czech, Slovak, etc too

Asset Reconstruction Companies

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Capital from Banks/Financial Inst’nsARCs in private sector like an SPVStaff from Banks/Financial Inst’nsIssue Bonds in lieu of Assets taken overGuaranteed by Government of IndiaStamp Duty to be exemptedOn par with Venture Funds for Inc. Tax

Developments in India

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Ordinance in June 2002 on Securitisation Law

Enacted by Parliament in December 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) 2002

Powers to Lenders – To Seizure of Assets, Change of Management, Securitisation of Financial Assets, etc

Challenged in Supreme Court by M/s. Mardia Chemicals Ltd., against right of ICICI Bank

Setting up of AR Companies in India

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1. Asset Reconstruction Company India Ltd (ARCIL) – (SBI+ HDFC+ IDBI+ ICICI Bk)

2. Asset Care Enterprise (ACE) – (IFCI + PNB)

3. ARC to be floated by Kotak Mahindra Bank?

4. ASREC – Andhra Bank, Stanchart, Deutsche and UTI Bk?

5. Corp Bank, ING Vysya and Actis to start?

Definition of ARCs (RBI _ April 2003)

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A company which is set up with the objective of taking over distressed assets (Non Performing Assets) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable.

Objectives of ARCs in India

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To buy out troubled loans from banks and make special efforts at recovering value from the assets, if necessary by special legislation, with special powers for recovery.

Restructuring of weak banks to divest the bad loan portfolio — essential for a comprehensive restructuring strategy of weak banks.

ARCIL

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www.arcil.co.inSponsored by SBI, ICICI Bank Ltd., IDBI Ltd.

and Punjab National Bank

Vision - Mission Statement Vision

Be a major contributor to the Indian economy by capturing value from the impaired assets

 MissionMaximise value through innovative resolution Establish fair and transparent business practices Facilitate development of market for distress

debt

ARCIL : Shareholding Pattern

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Developments in 2004

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Revised Definition of NPA to 90 DaysBanks managed to bring down NPAs < 3% SARFAESI Act, 2002 amended in Dec 2004

To set up Asset Reconstruction CompaniesTake possession of secured assets of borrowers

Right to lease out, sell and realize such assets

Right to take over the management of borrowers

60 days notice by lenders is adequate No appeal permissible unless borrowers deposit 50% amount due and approach DRT / DRAT

NPAs in Banks : March 2005 (Rs in Cr)

Banks Total Assets

Gross NPAs

Net NPAs

Public (27) 16,76,847 46,380 16,135

Private (29)

4,25,802 8,715 4,038

Foreign (31)IDBI Bank 81,360 1,216 848

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CDR mechanism

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Corporate Debt Restructuring mechanism

Similar to UK, Thailand, Korea & Malaysia

RBI guidelines to Banks and FIs in Aug’01

To ensure timely and transparent mechanism to restructure debts, outside purview of BIFR, DRTs and other legal proceedings

To consider all viable entities with dues above Rs. 20 crores facing problems of repayment ...

C I B I L.

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Credit Information Bureau of India Ltd Exchange of Credit Info among Banks/FIsUnscrupulous borrowers cannot play one

bank against another for credit facilitiesSet up in January 2001 by SBI + HDFC + Dun

and Bradstreet Info Pvt Ltd + Trans Union International Inc – Rs 25 cr Capital

Formal set up 2005 onwards ...

Economic Times dt Jan 05, 2006

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Bad Loans cross 16% of India’s GDPARCIL puts figure at Rs. 2,36,000 croresSays unlocking value from NPAs will help

banks meet additional capital requirementsGr NPAs in financial sector – Rs 1,11,000

crores; Restructured Standard Assets – Rs. 27,000 crores; Corporate Debt Restructring – Rs. 65,000 crores; Bad Loans Written off by Banks Rs. 77,000 crs.

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Banking – Asset Quality

Gross NPAs as % of Total ASSETs

BANKS 2001-2 2002-3

2003-4

2004-5 2005-6

87 SCBs 4.60 4.00 3.30 2.52 1.86

28 PSBs 4.89 4.21 3.50 2.73 2.09

20 OPBs 5.20 4.34 3.64 3.15 2.50

9 NPBs 3.90 3.76 2.42 1.56 0.96

30 FBs 2.41 2.44 2.13 1.43 0.96

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Net NPAs as % of Total ASSETsBANKS 2001-2 2002-

32003-

42004-5 2005-6

87 SCBs 2.30 1.90 1.20 0.92 0.66

28 PSBs 2.42 1.93 1.28 0.95 0.72

20 OPBs 3.23 2.51 1.17 1.39 0.91

9 NPBs 2.10 2.116 1.10 0.80 0.43

30 FBs 0.81 0.79 0.66 0.42 0.40

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2001-2 2002-3 2003-4 2004-5 2005-60

0.5

1

1.5

2

2.5

3

3.5

Net NPAs as % of Total Assets

87 SCBs

28 PSBs

20 OPBs

9 NPBs

30 FBs

Years

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