npa and car final

8/7/2019 npa and car final

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A PRESENTATION ON

NON PERFORMING ASSET(NPA)&

CAPITAL ADEQUACY

BY: JAWED AKHTAR & RAMEEZ KHAN

PRESTIGE INSTITUTE OFMANAGEMENT DEWAS


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DEFINATION

A NPA is a loan or an advance where; Interest and/ or installment of principal remain

overdue for a period of more than 90 days in respect

of a term loan, The account remains out of order in respect of an

overdraft/ cash credit

The bill remains overdue for a period of more than90 days in the case of bills purchased anddiscounted

The installment or interest remains overdue for twocrop seasons in case of short duration crops and forone crop season in case of long duration crops


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CATEGORIES OF NPA

Standard Assets Which has remained NPAfor a period of 1 month.

Substandard Assets Which has remained

NPA for a period less than or equal to 2months.

Doubtful Assets Which has remained in thesub-standard category for a period of 12

months Loss Assets where loss has been identified

by the bank or internal or external auditors orthe RBI inspection but the amount has not

been written off wholly.


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FACTORS CONTRIBUTING TO NPAS

Poor Credit discipline

Inadequate Credit & Risk Management

Diversion of funds by promoters

Funding of non-viable projects


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IMPACT OF NPAS ON OPERATIONS

Drain on Profitability

Impact on capital adequacy

Adverse effect on credit growth as thebankers prime focus becomes zeropercent risk and as a result turnlukewarm to fresh credit.

Excessive focus on Credit RiskManagement

High cost of funds due to NPAs


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NPA MANAGEMENT PREVENTIVE

MEASURES Formation of the Credit Information Bureau

(India) Limited (CIBIL) Release of Willful Defaulters List. RBI also

releases a list of borrowers with aggregateoutstanding of Rs.1 cr. and above againstwhom banks have filed suits for recovery oftheir funds

Reporting of Frauds to RBI

Norms of Lenders Liability framing of FairPractices Code with regard to lendersliability to be followed by banks, whichindirectly prevents accounts turning intoNPAs on account of banks own failure


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NPA MANAGEMENT PREVENTIVE

MEASURES Risk assessment and Risk management RBI has advised banks to examine all cases

of wilful default of Rs.1 crore and above andfile suits in such cases. Board of Directorsare required to review NPA accounts of Rs.1crore and above with special reference tofixing of staff accountability.

Reporting quick mortality cases Special mention accounts for early

identification of bad debts. Loans andadvances overdue for less than one and twoquarters would come under this category.However, these accounts do not needprovisioning


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NPA MANAGEMENT - RESOLUTION

Compromise Settlement Schemes Restructuring / Reschedulement Lok Adalat Corporate Debt Restructuring Cell Debt Recovery Tribunal (DRT) Proceedings under the Code of Civil Procedure Board for Industrial & Financial Reconstruction

(BIFR)/ AAIFR National Company Law Tribunal (NCLT)

Sale of NPA to other banks Sale of NPA to ARC/ SC under Securitization andReconstruction of Financial Assets and Enforcementof Security Interest Act 2002 (SRFAESI)

Liquidation


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CAPITAL ADEQUACY

With a view to adopting the Basel Committeeframework on capital adequacy normswhich takes into account the elements ofrisk in various types of assets in the balancesheet as well as off-balance sheet businessand also to strengthen the capital base ofbanks, Reserve Bank of India decided inApril 1992 to introduce a risk asset ratiosystem for banks (including foreign banks)in India as a capital adequacy measure.


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Concept

Essentially, under the above system thebalance sheet assets, non-funded itemsand other off-balance sheet exposures

are assigned weights according to theprescribed risk weights and banks haveto maintain unimpaired minimum capitalfunds equivalent to the prescribed ratioon the aggregate of the risk weightedassets and other exposures on anongoing basis.


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Norm of Capital Adequacy

Minimum requirement of capital funds

Banks are required to maintain a minimum

CRAR of 12% on an ongoing basis. Tier II elements should be limited to a

maximum of 100% of total Tier I elements for

the purpose of compliance with the norms.

The elements of Tier I & Tier II capital do not

include foreign currency loans granted toIndian parties.


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Tier I Capital

1. Elements of Tier I capital

a. Paid-up capital, statutory reserves, and otherdisclosed free reserves, if any.

b. Capital reserves representing surplus arisingout of sale proceeds of assets.

2. Equity investments in subsidiaries, intangible

assets and losses in the current period andthose brought forward from previous periods,should be deducted fromTier I capital.


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Tier II Capital

Elements of Tier II capital Undisclosed reserves and cumulative perpetual

preference shares.

Revaluation reserves.

General provisions and loss reserves.

Hybrid debt capital instruments.

Subordinated debt.

Investment Fluctuation Reserve (IFR).


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Method of Calculation of

Capital Adequacy Capital adequacy ratio (CAR) =

Regulatory capital (Tier I + Tier II) / Total riskweighted assets

(Total risk weighted assets =

Risk weighted assets for credit risk + 12.5(Capital

required for market and operational risks))


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Use

Capital adequacy ratio is the ratio which determines thecapacity ofthe bank in terms of meeting the time liabilitiesand other risks such as credit risk, operational risk, etc. Inthe most simple formulation, a bank's capital is the

"cushion" for potential losses, which protects the bank'sdepositors or other lenders. Banking regulators in mostcountries define and monitor CAR to protect depositors,thereby maintaining confidence in the banking system.

CAR is similar to leverage; in the mostbasic formulation, itis comparable to the inverse of debt-to-equity leverage

formulations (althoughCAR uses equity over assets insteadof debt-to-equity; since assets are by definition equal todebt plus equity, a transformation is required). Unliketraditional leverage, however,CAR recognizes that assetscan have different levels of risk


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THANK YOU

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npa and car final