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NPA

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DefiningNPA

As from 01.04.2004, NPA shall be an advance where Term Loans: Interest and or instalment of principal remain

over due for a period of more than 90 days

Overdraft and Cash Credit accounts: The account remains

out of order for a period of90 days Bill: The bill remains overdue for more than 90 days

Other Accounts: Any amount to be recovered remainsoverdue for90 days in respect of other accounts

Agricultural Accounts:

Short Duration Crops will be treated as NPA if installmentremains unpaid for 2 crop-seasons beyond the due date

Long Duration Crops 1 crop season

Exhibiting potential credit risk through early warning signals

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Early Warning Signals

Transaction Related

Persistent irregularity in the account

Defaults in repayment obligations

Frequent demands for adhoc limits from the partyActivity Related

Rejection of products in the market

Idle machineries

Decline in number of shifts/workers

Inventory pile up

Delays in receivables collection

Increased dependence on job works

Technological obsolescence

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Asset Classification

Standard Asset

Sub standard asset

Classified as NPA for a period not exceeding 18 months*

If renegotiated or rescheduled, to be continued as substandard for at least 1 year

Doubtful Asset NPA for more than 18 months *

Loss Asset Loss identified by internal orexternal auditors, but amount not written off fully

*changed to 12 months wef 31st March, 2005

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SUMMARYOF %AGES

Standard Accounts: General Provision

Standard Accounts: Direct Agriculture &SME

0.40%

0.25%

Substandard SecuredSubstandard Un-Secured

10%20%

Doubtful upto 12 months

Doubtful 1 3 years

Doubtful more than 3 years

20%

30%

100%

Loss Account 100%

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NPA Defined

Non Performing Assets or a problem loan can be defined as a loan where the

lender has some doubts or is experiencing difficulties in obtaining repayments

and, irrespective of the time frame , the outcome could be a loss of capital.

Impact ofNPAs

NPAs do not generate income

They require provisions

Borrowing cost of resources locked in NPAs

Enhances administrative, legal and recovery costs

Reduces profitability substantially

Affects the morale of the employees and decision making for fresh loans

suffer

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Consequences ofNPAs

Direct

It affects profitability of the unit substantially

Affects banks credibility and render raising of fresh capital from the market

difficult

Recycling of funds get blocked

Indirect

Reduction in lending rate is made difficult

Affect risk taking ability which ultimately affect competitiveness of the branch

unit

Lack of market competitiveness results in slump in credit expansion. The

cost of poor quality loans is shifted to bank customers through higher

spreads

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Poor Credit Management

Faulty lending policy/Absence of written policies/lower entry point

norms/bench mark ratios

Absence of portfolio concentration limits-industry/region specific

Excessive centralization or decentralization of lending authority

Poor industry analysis

A perfunctory financial analysis of borrowers

Poor Loan Review System

Inadequate monitoring and follow up

Misuse of authority

He is an alright guy syndrome

Complacency and casual attitude on the part of operating staff

Inadequate expertise in the sector financed

REASONS FORNPA (Bankspecific)

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Internal Borrower specific

Management Inefficiency

Diversion of funds and misutilisation of funds

Faculty project planning resulting in time/cost over run or wrong technology

Product failing to capture market

Strained labour relations

Willful default

Product obsolescence

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Prognosis Strategies

Preventive

Detective

Corrective

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PREVENTIVE

NPA Management Policy

Basic Tenets of Policy

Seeks to lay down banks policy on management and recovery of NPAs

Stresses on proactive initiatives to prevent fresh NPAs by prescribing time

norms for detection of early warning signals for taking corrective action

Effective market intelligence

Periodic dialogue with the borrower

Scrutiny of financial statements

Control over excess drawings/overdrafts

Periodical evaluation of securities

Continuous watch over management of borrowing company

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DETECTIVE-WARNING SIGNALS

Look for pressure on the accounts

Unauthorized excesses

Turnover increasing/decreasing

Hard-core borrowing appearing on current accounts

Unpaid cheques in or out

Frequent requests by the borrower for increase in facilities

Idle assets (effect on capital employed)

Hard core increase in average debit balance

Delays in realization of bills receivables

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CORRECTIVE

Discuss with the customer about the problems

Collect as much information as possible about the unit discreetly

Carry out a SWOT analysis of the account

Visit business premises and check the security and examine as to whether

additional security shall be available

Set objectives for the way forward, investigate as to what went wrong with

the original proposal of the borrower and as to where his calculations and

actions have gone wrong

Obtain borrowers understanding of, and commitment to, any plans for

repayment , particularly timing and amounts and get agreements in writing,

if possible then and there

Take firm control of the position . If commitments are not met, take speedy

and firm action