INTRODUCTION TO NON PERFORMINGASSETS
NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a
large number of credit defaults that affect the profitability and net worth of banks and also erodes
the value of the asset. The NPA growth involves the necessity of provisions which reduces the
overall profits and shareholder value. The issue of Non Performing Assets has been discussed at
length for financial system all over the world. The problem of NPAs is not only affecting the
banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a
reflection of the state of health of the industry and trade.
Narasimham Committee has recommended prudential norms on income recognition, asset
classification and provisioning. In a change from the past, Income recognition is now not on an
accrual basis but when it is actually received. Past problems faced by banks were to a great
extent attributable to this. Classification of what a NPA is has changed with tightening of
prudential norms. Currently an asset is non performing if interest or installments of principal due
remain unpaid for more than 180 days.
The banks are commercial organization and the main business of banking is to collect the
deposits from the public and lend it to the individuals, business concerns, institution etc. The
lending business is associated with risk. One of the risks in lending is the possibility of account
becoming non-performing assets. Non-performing assets (NPAs) do not earn interest income and
repayment of loan to bank does not take place according to repayment schedule affecting income
of the bank and their by profitability. The non- performing assets do not generate interest but at
the same time require banks to make provision for such non- performing assets out of their
current profit. The term Non-Performing Assets figured in the Indian banking sector after
introduction of financial sector reforms in 1992. The prudential norms on income recognition,
assets classification and provisioning thereon are implemented from the financial year 1992-93,
as per the recommendation of the committee on the Financial System (Narsimham Commit
tee). These norms have brought in quantification and objectivity into the assessment and
provisioning for NPAs.
MEANING OF NON PERFORMING ASSETS
A non-performing asset (NPA ) is a classification used by financial institutions that refer to loans
that are in jeopardy of default. Once the borrower has failed to make interest or principal
payments for 90 days the loan is considered to be a non-performing asset. One of the most used
terms in the banking and financial sectors over the last few years, leading RBI Governor
Raghuram Rajan to express concern over the health of public sector banks.
All advances given by banks are termed “assets”, as they generate income for the bank by way of
interest or instalments. However, a loan turns bad if the interest or instalment remains unpaid
even after the due date — and turns into a nonperforming asset, or NPA, if it remains unpaid for
a period of more than 90 days.According to a July 2014 RBI circular, all advances where interest
and/or instalment of principal remains due for more than 90 days, would be classified as a
“nonperforming asset”. In case of overdraft or cash credit, if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power for more than 90 days, it would be
classified as an NPA.
DEFINITION OF NON PERFORMING ASSETS
A non performing asset (NPA) is defined as a credit facility in respect of which the interest
and/or installment of principal has remained ‘past due’ for a specified period of time. An asset
including a leased asset becomes non performing when it ceases to generate income for the
bank.With a view to moving towards international best practices and to ensure greater
transparency it has been decided to adopt the ’90 days’ overdue norms for identification of NPAs
from the year ending March 31, 2004. Accordingly with effect from March 31, 2004, a non
performing asset (NPA) shall be 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’ for a specified period of more than 90 days in respect of
an overdraft/cash credit,
The bill remains overdue for a period of more than 90 days in the case of bills purchased an
Interest and/or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
CATEGORIES OF NON PERFORMING ASSETS
Non Performing assets means an asset which becomes non performing when it ceases to yield
income or it is an account of borrower which has been classified by a bank or financial
1 Substandard Assets
2 Doubtful Assets
3 Loss Assets
1) Substandard Assets:
With effect from 31 March 2005, a substandard asset would be one which has remained NPA
for a period less than or equal to 12 months. In such cases, the current net worth of the
borrower/ guarantor or the current market value of the security charged is not enough to
ensure recovery of the dues to the banks in full. In other words such an asset will have well
defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by
the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
2) Doubtful Assets:
With effect from March 31, 2005 an asset would be classified as doubtful if it has remained
in the substandard category for a period of 12 months. A loan classified as doubtful has all
the weaknesses inherent in assets that were classified as sub standard with the added
characteristics that the weaknesses make collection or liquidation in full on the basis of
currently known facts, conditions and values highly questionable and improbable.
3) Loss Assets:
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.
PROVISIONSING NORMS FOR STANDARD,
SUBSTANDARD AND DOUBTFUL
1) Provisions againstStandard Assets:
From the year ending 31 March, 2000, the banks have been making a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis. The provisions of
standard assets should not be reckoned for arriving at net NPAs. The provisions toward
Standard Assets need not to be netted from gross advances but shown separately as
‘Contingent Provisions against Standard Assets’ under ‘Other Liabilities and Provisions –
Others ‘ in Schedule 5 of the balance sheet.
2) Provisioning againstSubstandard Assets:
A general provision of 15 percent on total outstanding should be made without making any
allowance for ECGC guarantee cover and securities available. However the provisions for
unsecured advances which are identified as ‘substandard’ would attract additional provision
of 10 per cent, i.e., a total of 25 percent on the outstanding balance.
However, in view of certain safeguards such as escrow accounts available in respect of
infrastructure lending, infrastructure loan accounts which are classified as substandard will
attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 per cent. To
avail of this benefit of lower provisioning, the banks should have in place an appropriate
mechanism to escrow the cash flows and also have a clear and legal first claim on these cash
flows. The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent.
3) Provisions againstDoubtful Assets:
100 percent of the extent to which the advance is not covered by the realizable value of the
security to which the bank has a valid recourse and the realizable value is estimated on a
realistic basis. In regard to the secured portion, provision may be made on the following
basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending
upon the period for which the asset has remained doubtful.
TYPES OF NON PERFORMING ASSETS
1) Gross NPA
2) Net NPA
1) Gross NPA
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the non standard assets like as substandard, doubtful and loss assets.
2) Net NPA
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross and
net NPA is quite high.
REASONS FOR AN ACCOUNT BECOMING NON
1. Internal Factors
2. External Factors
1) Internal Factors
Funds borrowed for a particular purpose but not use for the said purpose.
Project not completed in time.
Poor recovery of receivables.
Excess capacities created on non economic costs.
In ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
Willful defaults, siphoning of funds, fraud, disputes, management disputes,
Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delaying settlement of payments / subsidiaries by government bodies etc.
2) External Factors
Sluggish legal system:
Long legal tangles.
Changes that had taken place in labour laws.
Lack of sincere effort.
Scarcity of raw material, power and other resources.
Shortage of raw material, power shortage, industrial recession, excess capacity,
natural calamities like floods, accidents.
Failures, nonpayment / over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
IMPACT OF NON PERFORMING ASSESTS
1. Profitability :
NPA means booking of money in terms of bad asset, which occurred due to wrong
choice of client. Because of the money getting blocked the prodigality of bank decreases not only
by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in
some return earning project / asset. So NPA doesn’t affect current profit but also future stream of
profit which may lead to loss of some long term beneficial opportunity. Another impact of
reduction in profitability is low ROI (return on investment), which adversely affect current
earning of bank.
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest period of time which lead to additional cost to the company.
Difficulty in operating the functions of bank is another cause of NPA due to lack of money that
is due to routine payments and dues.
3. Involvement of management:
Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to some
fruitful activities, which would have given good returns. Nowadays banks have special
employees to deal and handle NPAs which is additional cost to the bank.
4. Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting their money in the banks.
STRATEGIES FOR REDUCING NON PERFORMING ASSETS
This is hard reality that NPAs cannot be eliminated at all. These can be reduced, minimized or
mitigated. Following measures have proved effective / successful in reducing the quantum of
Improving quality of appraisal by making effective use of latest technology and by
replacing subjectivity with objectivity.
Banks have developed robust risk management system and appraisal techniques to ensure
better quality of their loan portfolio.
Effective follow up, supervision and persuasion of each and every account and more
particularly, the accounts showing early alert signals and special mention accounts on day
to day basis meeting the borrowers personally, exerting pressure through guarantors /
Establishment of Special loan Recovery Cells at various centers / locations to keep track
of recovery in each and every loan account.
Rehabilitation of Potentially Viable Units by extending them various reliefs and
Acquisitions of Sick units by healthy units also takeover and mergers etc.
Compromise and Settlements with the borrowers to save time and cost etc.
Filing settlement claims with ECGC and also DICGC wherever applicable.
Appointment of recovery agents or in – house enforcement staff.
Settlement of loan cases by way of Arbitration and Conciliation.
Recovery through legal action- DRT, SARFAESI, Lok Adalats , State Recovery Acts,
Filing of Suits in Civil Courts, Criminal Action against willful defaulters.
Securitization of Assets.
EARLY SYMPTOMS OF NON PERFORMING ASSETS
Some of the early symptoms of NPA are as follows:
1.Non- payment of the very first installment in case of term loan.
2.Bouncing of cheque due to insufficient balance in the accounts.
3.Irregularity in installment.
4.Irregularity of operations in the accounts.
5.Unpaid overdue bills
6.Declining Current Ratio.
2) Operationaland Physical:
1. If information is received that the borrower has either initiated the process of
winding up or are not doing the business.
2. Overdue receivables.
3. sStock statement not submitted on time.
4.External non – controllable factor like natural calamities in the city where
borrower conduct his business
5.Frequent changes in plan.
6.Non – payment of wages.
3) Attitudinal Changes:
1.Use for personal comfort, stocks and shares by borrower.
2.Avoidance of contact with bank.
3.Problem between partners.
4.Changes in Government policies.
GOVERNMENT INITIATIVES TO NON PERFORMING
1. SICK INDUSTRIAL COMPANIES ( SPECIAL PROVISIONS ) ACT, 1985 OR
2. RECOVERIES OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS (
RDDBFI) ACT, 1993 ( POPULARLY KNOWN AS DEBT RECOVERY ACT )
3. DEBT RECONSTRUCTING & CORPORATE DEBT RECONSTRUCTING (
CDR ) SYSTEM
1. Sick industrial companies ( specialprovisions ) act , 1985 or SICA:
To examine and recommend remedy for high industrial sickness in the eighties, the Tiwari
committee was set up by the government. It was to suggest a comprehensive legislation to deal
with the problem of industrial sickness. The committee suggested the need for special legislation
for speedy revival of sick units or winding up of unviable ones and setting up of quasi – judicial
body namely; Board for Industrial and Financial Reconstruction (BIFR) and The Appellate
Authority for Industrial and Financial Reconstruction (AAIRFR) and their benches. Thus in
1985, the SICA came into existence and BIFR started functioning from 1987.
The objective of SICA was to proactively determine or identify the sick / potentially sick
companies and enforcement of preventive, remedial or other measures with respect to these
companies. Measures adopted included legal, financial reconstructing as well as management
overhaul. However, the BIFR SARFAESI ACT 2002: An Assessment process was cumbersome
and unmanageable to some extent. The system was not favourable for the banking sector as it
provided a sort of shield to the defaulting companies.
In Act to make, in the public interest, special provision with a view to securing the timely
detection of sick and potentially sick companies owning industrial undertakings, the speedy
determination by a Board of experts of the preventive, ameliorative, remedial and other measures
which need to be taken with respect to such companies and the expeditious enforcement of the
measures so determined and for matters connected therewith or incidental thereto.
Short title, extent, commencement and application.—
(1) This Act may be called the Sick Industrial Companies (Special Provisions) Act, 1985.
(2) It extends to the whole of India.
(3) It shall come into force on such date 1 as the Central Government may, by notification in the
Official Gazette, appoint and different dates may be appointed for different provisions of this Act
and any reference in any provision of this Act to the commencement of this Act shall be
construed as a reference to the commencement of that provision.
(4) It shall apply, in the first instance, to all the scheduled industries other than the scheduled
industry relating to ships and other vessels drawn by power.
(5) The Central Government may, in consultation with the Reserve Bank of India, by
notification, apply the provisions of this Act, on and from such date as may be specified in the
notification, to the scheduled industry relating to ships and other vessels drawn by power.
2. Declaration.—It is hereby declared that this Act is for giving effect to the policy of the State
towards securing the principles specified in clauses (b) and (c) of article 39 of the Constitution.
2. Recoveries Of Debts Due To Banks And Financial Institutions
(RDDBFI)Act, 1993 (Popularly Known As Debt Recovery Act )
The procedures for recovery of debts to the banks and financial institutions resulted in significant
portions of funds getting locked. The need for a speedy recovery mechanism through which dues
to the banks and financial institutions could be realized was felt. Different committees set up to
look into this, suggested formation of Special Tribunals for recovery of overdue debts of the
banks and financial institutions by following a summary procedure. For the speedy recovery of
bad loans, the RDDBFI Act was passed suggesting a special Debt Recovery Tribunal to be set up
for the recovery of NPA. However, this act also could not speed up the recovery of bad loan, and
the stringent requirements rendered the attachment and foreclosure of the assets given as security
for the loan as ineffective. Banks and financial institutions at present experience considerable
difficulties in recovering loans and enforcement of securities charged with them. The existing
procedure for recovery of debts due to the banks and financial institutions has blocked a
significant portion of their funds in unproductive assets, the value of which deteriorates with the
passage of time. The Committee on the Financial System headed by Shri M. Narasimham has
considered the setting up of the Special Tribunals with special powers for adjudication of such
matters and speedy recovery as critical to the successful implementation of the financial sector
reforms. An urgent need was, therefore, felt to work out a suitable mechanism.
3. Debt reconstructing & corporate debt reconstructing (CDR)system:
Debt reconstructing is a process by which a business entity facing cash flow problems and
financial distress is enabled to reduce and renegotiate its delinquent debts in order to improve or
restore liquidity and rehabilitate so that it can continue its operations. Business entities at times
are found to be in financial troubles for factors beyond their control and also due to certain
internal reasons. At this juncture, they need immediate help of the Lending Institution. Any delay
in extending such help may seriously affect the health of an account. For the revival of such
businesses as well as for the security of the funds lent by the banks and FIs . Corporate Debt
Restructuring (“CDR”) mechanism is a voluntary non statutory mechanism under which
financial institutions and banks come together to restructure the debt of companies facing
financial difficulties due to internal or external factors, in order to provide timely support to such
companies. “To ensure timely and transparent mechanism for restructuring of corporate debts of
viable entities facing problems, for the benefit of all concerned.”“To aim at preserving viable
corporates that are affected by certain internal and external factors”.“To minimize the losses to
creditors and other stakeholders through an orderly and co-ordinated restructuring programme”.
There are occasions when corporates find themselves in financial difficulties because of factors
beyond their control and also due to certain internal reasons. For the revival of such corporates as
well as for the safety of the money lent by the banks and financial institutions, timely support
through restructuring of genuine cases is called for. However, delay in agreement amongst
different lending institutions often comes in the way of such endeavors. Based on the experience
in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional
mechanism for restructuring of corporate debt and need for a similar mechanism in India, a
Corporate Debt Restructuring System was evolved and detailed guidelines were issued by
Reserve bank of India on August 23, 2001 for implementation by financial institutions and
The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based
on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of
approvals by super-majority of 75% creditors (by value) which makes it binding on the
remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only
multiple banking accounts, syndication/consortium accounts, where all banks and institutions
together have an outstanding aggregate exposure of Rs.100 million and above. It covers all
categories of assets in the books of member-creditors classified in terms of RBI's prudential asset
classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and
Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The
cases of restructuring of standard and sub-standard class of assets are covered in Category-I,
while cases of doubtful assets are covered under Category-II.
It may be emphasized here that, in no case, the requests of any corporate indulging in
fraud or misfeasance, even in a single bank, can be considered for restructuring under
CDR System. However, Core Group, after reviewing the reasons for classification of the
borrower as wilful defaulter, may consider admission of exceptional cases for
restructuring after satisfying itself that the borrower would be in a position to rectify the
wilful default provided he is granted an opportunity under CDR mechanism.
Structure of CDR System: The edifice of the CDR Mechanism in India stands on the
strength of a three-tier structure:
CDR Standing Forum
CDR Empowered Group
THE KINGFISHER STORY
Vijay Mallya owned India’s biggest liquor company, a private jet, an Airbus and many other
riches. Then in 2005, Vijay Mallya launched Kingfisher, an airline to match his style and
flamboyance. Khushboo Narayan, Johnson T A and Shaji Vikraman tell the story of how
kingfisher went from bang to bust.
Sometime in 2006, the Mumbai based IDBI Bank got a proposal from Kingfisher Airlines,
seeking funds to acquire aircraft. Vijay Mallya had launched the airline the previous year, in
May 2005, on his son’s birthday and he had been cruising. He had bought Shaw Wallace, one of
the oldest liquor manufacturers in India, for Rs 1300 crore from the Chhabria family after the
death his arch rival, Manu Chhabria, in 2002. He had topped that by striking a deal with the
British beer maker Scottish and Newcastle, which had
bought a 37.5 per cent stake in Mallya United Breweries Ltd for Rs 940 crore.
That was also the time most Indian business houses, riding on easy liquidity and buoyant growth,
were getting into infrastructure projects- building airports, ports, power plants, roads and
acquiring mines. However, when the Kingfisher proposal came up at a meeting of the credit
committee of the IDBI in those go- go days, not many were convinced about financing the
aircraft acquisition plan. They had their reasons:
The highly competitive airline industry was known to be a capital guzzler and this after all was a
fledging airline. There was another reason too. Much earlier as a development financial
institution, IDBI had encountered lending problems while dealing with Mallya after his
acquisition of Mangalore Chemicals and Fertilisers. So the committee choose not to approve the
But a few years later, in 2009, the bank provided a loan of Rs 900 crore to Kingfisher, a decision
that has come to hurt top officials of the bank, who are now being put on the wringer by the CBI
and other agencies with Mallya being declared a ‘wilful defaulter’.
So how did it all go so horribly wrong for Mallya? Even before Kingfisher could be launched the
aviation industry had started bleeding. Crude oil prices were high, with fuel costs often making
up half the operating cost of airlines. But Mallya announced his would be a premium, world class
airline. He personally hired his airhostesses and Yana Gupta, a Bollywood actor, performed in a
video that showed safety instructions before take off.
NPA in the banking sector is the common problem in all the public, private and the foreign
sector bank but the bank also had taken certain strict measures to control the NPA. Increase in
NPA causes increase in debt due to reduce NPA Reserve Bank Of India had also taken some
strict measures to control NPA. NPA should be controlled by the bank immediately if it is not
controlled immediately the bank have to face many problem and due to which it affects the
profitability of the bank and it also creates the problem of insolvency too many banks.
However, the problem NPA also occurs due to lack of efficiency in the banking sector and also
due to lack of management in the banking sector if this two things are largely controlled in
banking sector the problem of NPA will get vanished and there should also be innovation of new
technique to solve the problem of NPA in the banking sector. Bank should only give the loan to
those account holders who have the ability to pay the loan at a maturity date if the bank give loan
without seeing the investor ability to pay in the future the bank will commonly face the problem
of NPA. Bank should also follow RBI rule and regulation to control NPA due to this it avoids the
problem of NPA in future.
Hence the problem is there everywhere but it requires lot of will and mental caliber to solve it
and the problem of NPA will get solved early and easily in every banking sector. Although
elaborate guidelines on management of non-performing assets have been prescribed, it is
necessary to keep in mind that application of these guidelines may or may not bring the desired
results. This naturally requires dedicated and trained staff at branch totally involved in the
process and used exclusively for management of NPAs. Carrying cost is one of the tools for
analysis of non-performing assets at the branch, which helps deciding priorities for recovery, and
future plans for credit expansion. Although, at controlling offices the significance of the concept
157is well understood it is not percolated down to field level staff. It is therefore necessary to
create awareness among the ground level staff about the concept and application of it for
appropriate and focused strategy at branch level to improve branch profitability.