2. Non Performing Asset means a loan or an
account of borrower, which has been
classified by a bank or financial institution
as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines
relating to asset classification issued by RBI.
3. Standard Assets : Arrears of interest and the principal amount of
loan does not exceed 90 days at the end of financial year ( 0.25 % of
all type standard assets )
Substandard Assets : Which has remained NPA for a period less
than or equal to 12 months. ( 10 % of all types standard assets )
Doubtful Assets : Which has remained in the sub-standard category
for a period of more than 12 months
D1 i.e. up to 1 year : 20% provision is made by the bank
D2 i.e. up to 2 year : 30% provision is made by the bank
D3 i.e. up to 3 year : 100% provision is made by the bank
Loss Assets : 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. ( 100% of secured and unsecured advances )
4.
5. The strong credit growth is the synonymous with
improvement in asset quality and at the same time
the declining credit growth in the system is an
indication for asset deterioration and likely to add
impaired assets further. Asset Quality concerns
persist as the growth in NPAs accelerated and
continued to outpace credit growth .
The Gross NPA ratio of the banks has witnessed
sharp increase from 5.1 % as on september 2015 to
7.6 % as at end of March 2016. Similarly, the Net
NPA ratio has gone up from 11.3% to 11.5% during
the same period.
Among the selected seven sectors, Agriculture,
Construction, Iron & Steel and Engineering sectors
registered highest NPA compared to other sectors.
6.
7. The combined net loss of 20 public sector banks
(PSB) stood at Rs 16,272.34 crore for the fourth
quarter ended March 2016 as bad loans
situation worsened.
8.
9. Restriction on flow of cash done by bank
due to the provisions of fund made against
NPA.
Drain of profit.
Bad effect on goodwill.
Bad effect on equity value.
10. The problem of NPAs in the Indian banking
system is one of the foremost and the most
formidable problems that had impact the entire
banking system. Higher NPA ratio trembles the
confidence of investors, depositors, lenders etc.
It also causes poor recycling of funds, which in
turn will have deleterious effect on the
deployment of credit. The non-recovery of
loans effects not only further availability of
credit but also financial soundness of the
banks.
11. NPAs put detrimental impact on the
profitability as banks stop to earn income on
one hand and attract higher provisioning
compared to standard assets on the other hand.
On an average, banks are providing around
25% to 30% additional provision on
incremental NPAs which has direct bearing on
the profitability of the banks.
12. The increased NPAs put pressure on recycling
of funds and reduces the ability of banks for
lending more and thus results in lesser interest
income. It contracts the money stock which
may lead to economic slowdown.
13. In the light of high NPAs, Banks tend to lower
the interest rates on deposits on one hand and
likely to levy higher interest rates on advances
to sustain Net Interest Margin . This may
become hurdle in smooth financial
intermediation process and hampers banks’
business as well as economic growth.
14. As per Basel norms, banks are required to
maintain adequate capital on risk-weighted
assets on an ongoing basis. Every increase in
NPA level adds to risk weighted assets which
warrant the banks to shore up their capital base
further. Capital has a price tag ranging from
12% to 18% since it is a scarce resource.
15. Normally, shareholders are interested to enhance
value of their investments through higher
dividends and market capitalization which is
possible only when the bank posts significant
profits through improved business. The increased
NPA level is likely to have adverse impact on the
bank business as well as profitability thereby the
shareholders do not receive a market return on
their capital and sometimes it may erode their
value of investments. As per extant guidelines,
banks whose Net NPA level is 5% & above are
required to take prior permission from RBI to
declare dividend and also stipulate cap on
dividend payout.
16. Credibility of banking system is also affected
greatly due to higher level NPAs because it
shakes the confidence of general public in the
soundness of the banking system. The
increased NPAs may pose liquidity issues
which is likely to lead run on bank by
depositors. Thus, the increased incidence of
NPAs not only affects the performance of the
banks but also affect the economy as a whole
17.
In a nutshell, the high incidence of NPA has
cascading impact on all important financial
ratios of the banks viz., Net Interest Margin,
Return on Assets, Profitability, Dividend
Payout, Provision coverage ratio, Credit
contraction etc., which may likely to erode the
value of all stakeholders including
Shareholders, Depositors, Borrowers,
Employees and public at large
18. Prevention is better than cure
Proper evaluation of credit proposals
Centralized model for sanction and recovery corporate
loans
Timely follow up is the key to keep the quality of assets
intact
Selection of right borrowers, viable economic activity,
adequate finance and timely disbursement, end use of
funds and timely recovery of loans should be the focus
areas for preventing or minimizing the incidence of
fresh NPAs.ko
19. . Curative Management
Re-phasement of loans
Pursuing Corporate Debt Restructuring (CDR
Encouraging rehabilitation of potentially viable
units
Encouraging acquisition of sick units by healthy
units
Entering compromise schemes with borrowers /
Entering one time settlement
20. 27 public sector banks (PSBs), which constitute 70
percent of India’s banking sector, have written off Rs
59,547 crore in fiscal year ended March 2016.
In the last three years (FY13, 14 and 15) banks had
together written off Rs 1.14 lakh crore.
Around 70,000 cases involving more than Rs 5 lakh
crore are pending in Debt Recovery Tribunals (DRT).
The government is coming up with the ammendments
in the debt recovery law in lok sabha.
To strengthen the debt recovery laws with an objective
to improve the ease of doing business in the country .
21. The government had last year announced it
will infuse Rs 70,000 crore
In line with the blueprint, PSU banks are to get
Rs 25,000 crore each in 2015-16 and 2016-17
fiscal. Besides, Rs 10,000 crore each would be
infused in 2017-18 and 2018-19.
Banks have to raise a further Rs 1.1 lakh crore
from the markets to meet their capital
requirement.
22. Resolution to the problem – as currently
happening – recognize all such bad loans to get the
extent of the problem. Get Bankruptcy Act,
amendments to Sarfaesi & DRT Acts in place
(which will happen soon), then since de-
nationalization of PSU Banks is not possible (lack
of BJP majority in Rajya Sabha), first merge Banks
to reduce their number from 27 to a decent 6. Then
offload stakes in these 6 big Banks by keeping
Government stake at 51%. Simultaneously, force
Promoters to offload their assets and pay back the
Banks.
