Description
This is a presentation describes about NPA, income recognition, asset classification, IRAC norms
Commercial Banking : NPAs
1
NON PERFORMING ASSETS INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING NORMS (IRAC NORMS) &
Asset Reconstruction Companies
Banking
3
Banking
4
Banking
5
Why Loan accounts go bad ?
?
?
? ? ? ? ? ? ?
BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within… No contribution … No modernisation … Improper monitoring Industrial Relations.. Natural Calamities ...
?
?
?
? ? ?
?
BANKER – SIDE Defective Sanction No post-sanction supervision, etc Delay in releases Directed lending … Slow decision making process Etc etc etc ….
6
Banking
Non Performing Assets
? ? ? ?
In accounting, originally Bad & Doubtful Debts In 1980s, RBI followed 8 point Health Code Also 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…
Banking 7
Health Code System in Indian Banks during 1980’s
1.
2.
3. 4.
5.
6. 7. 8.
Satisfactory Accounts Irregular Accounts Sick-viable : Under Nursing Sick – Non-viable : Sticky accounts Advances Recalled Suit Filed Accounts Decreed Debts and Debts classified by the Bank as Bad/Doubtful Accounts
8
Banking
Asset Classification – 4 way - 1993
?
Standard Assets
• All regular loan accounts & investments (Performing Assets)
?
Non-Performing Assets
1. Sub-Standard Assets 2. Doubtful Assets 3. Loss Assets
Banking
9
Performing Asset defined …
?
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 !
?
Banking
10
N P As : Definition
?
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 instalment of principal has remained “past due” for a specified time.
11
?
Banking
Recovery of Loans
?
?
? ? ? ?
? ?
Field Visits, Personal persuasion, Stock Statements Notices on due dates – Ordy, Regd, Legal … Civil Procedure, Winding Up Notices, … Seizure and disposal of assets thro’ auctions Criminal Action per Sec 138 of NI Act … Compromises – Interest reduction / waiver, deferment, Simple or Compound calculation Lok Adalat, DRT / BIFR Awards, OTS, CDR Asset Securitisation under SARFAESI Act …
Banking Non Performing Assets 12
Def’n of NPAs Chronologically
?
Mar 31, 1993 Mar 31, 1994 Mar 31, 1995 Mar 31, 2004
4 quarters 3 quarters 2 quarters 1 quarter only ???
?
?
?
Banking
13
Sticky Loans in Banks in India
?
?
Year 1998 1999 2000 2001
Loss 6,242 7,444 7,558 8,001
Doubtful Sub-std 27,146 17,428 31,350 33,688 37,756
Non Performing Assets
?
19,928 19,594 18,206
14
?
?
Banking
Sticky Loans in Banks in India
(Rs. In crores)
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1998
Banking
Loss Doubtful Sub-Std
1999
2000
2001
15
% NPAs to Total Advances (Rs in crores)
?
Year 1998 1999 2000 2001
NPAs 50,816 58,722 60,840 63,962
Total Loans 3,52,696 3,99,436 4,75,757 5,58,679
% 14.4 14.7 12.8 11.4
? ? ? ?
?
(Source : Trends & Progress : RBI, 2001)
16
Banking
NPAs as % to Total Advances
600000 500000 400000 300000 200000 100000 0 1998
Banking
NPAs Total Loans % to Total
199
2000
2001
17
IRAC NORMS
?
Master circular dated 17th July, 2004. Superceded earlier master circular dated 22nd August, 2003.
?
?
Status-quo of classification in respect of earthquake affected accounts available upto 15/07/2004.
Natural Calamities – Floods, Cyclones, Earth quakes, Failure of Monsoon, Fire Accidents, etc...
Banking 18
?
ASSET TYPE
?STANDARD ASSET / PERFORMING ASSET
The account is not non-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. (Para 2 of the Master Circular)
19
Banking
IDENTIFICATION OF NPA
?Cash Credit / Overdrafts ‘out days ? Account remains of order’ for 90 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.
Banking 20
IDENTIFICATION OF NPA …
?Term Loans ?Bills Purchased and Discounted ?Interest and/or instalment remains overdue for 90 days or more. ?Bill remains overdue for 90 days or more.
?Agricultural Advances ?Interest and/or installment remains overdue for two harvest seasons for short duration crop, one harvest season for long duration crop. ?Others ? Any amount to be received remains overdue for 90 days or more .
Banking 21
CLASSIFICATION NORMS
? 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 Assets
These 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.
Banking
22
CLASSIFICATION NORMS
? Doubtful Asset - Three Categories Category Period
Doubtful - I
Doubtful - II Doubtful - III
Banking
up to One Year
Up to Three Years More than Three Years
23
PROVISIONING NORMS
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 ab initio (new guidelines)
Banking 24
PROVISIONING NORMS
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
Banking
25
PROVISIONING NORMS
DOUBTFUL ASSETS
Period Provision (Secured +Unsecured) + 100% + 100% + 100%
Upto 1 year 20% 1to 3 years 30% More than 3 years 100% (effective from 31st March 2005) Outstanding as on 31st March 2004
60%, 75%, 100% on secured portion. 2005 2006 2007
Banking
26
PROVISIONING NORMS
Provision Under Special circumstances ? Normal 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.
Banking 27
IMPORTANT ASPECTS
?Exempted Category Master Circular) (Para 4.2.10 of
? 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 availability of margin. subject to /
? Advance against gold ornaments Government securities not exempt.
Banking
28
IMPORTANT ASPECTS
?Classification of a Borrower (Para 4.2.6 Master Circular) of
? All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. ? Obtain cross-branch classification. confirmation for
Exception: Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement.
Banking 29
IMPORTANT ASPECTS
?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?
Banking 30
IMPORTANT ASPECTS
? Corporate Debt Restructuring (CDR) - (Para 4.2.15 of Circular)
? CDR is an solution. institutional mechanism for evolving
Master
financial
? 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 same as applicable to otherwise restructured accounts. be
? Projects under implementation
?
Treatment to be in line with Para 4.2.16 of Master Circular
Banking
31
GREENING ISSUES
?Sanction/extension of Additional Adhoc facility. ?Enhancement of Limit. facility /
?Conversion of Overdue Limits.
?Frequent Re-schedulement of Term Loans. ?Adjusting Loan of one borrower against other borrower.
Banking 32
INCOME RECOGNITION
? Income Recognition
For 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 - Priority
Unrealised 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.
Banking 33
DISCLOSURE
? 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 Suspense.
disclosed
net
off
NPA
provisions
&
Interest
? Accounting policy for classification, provisioning & recognition need to be disclosed.
income
? 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.
Banking 34
Banking
35
Banking
Non Performing Assets
36
Banking
Non Performing Assets
37
Asset Reconstruction Companies
38
Experience abroad
?
?
? ? ? ?
Spain - Dep Guarantee Fund : 1977-80 Chile - Cash Purchase of Bad Loans1982 USA - Resolution Trust Corp’n, 1989 Japan - Coop Cr’ Purchasing Co 1993 Poland : Rescheduled Bad Loans : 1994 Eastern Europe : Govt Bonds : 1994 (Hungary)
Banking Non Performing Assets 39
Experience abroad...
? ? ? ? ? ? ?
Tanzania - 1988 Ghana - NPA Recovery Trust – 1989 Sweden - SECURUM - January 1993 Uganda - 1995 Philippines - Asset Privatisation Trust Malaysia - Soft loans by Central Bank Colombia, Czech, Slovak, etc too
Banking Non Performing Assets 40
?
?
? ? ? ?
?
Capital from Banks/Financial Inst’ns ARCs in private sector like an SPV Staff from Banks/Financial Inst’ns Issue Bonds in lieu of Assets taken over Guaranteed by Government of India Stamp Duty to be exempted On par with Venture Funds for Inc. Tax
Banking 41
Asset Reconstruction Companies
Developments in India
? ?
?
?
?
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
Banking 42
Setting up of AR Companies in India
1.
2.
3.
4.
5.
Asset Reconstruction Company India Ltd (ARCIL) – (SBI+ HDFC+ IDBI+ ICICI Bk) Asset Care Enterprise (ACE) – (IFCI + PNB) ARC to be floated by Kotak Mahindra Bank? ASREC – Andhra Bank, Stanchart, Deutsche and UTI Bk? Corp Bank, ING Vysya and Actis to start?
Banking Non Performing Assets 43
Definition of ARCs (RBI _ April 2003)
?
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
Non Performing Assets 44
Banking
Objectives of ARCs in India
?
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.
Non Performing Assets 45
?
Banking
ARCIL
?
?
www.arcil.co.in Sponsored 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
?
?
?
Mission
• Maximise value through innovative resolution • Establish fair and transparent business practices • Facilitate development of market for distress debt
Banking
Non Performing Assets
46
ARCIL : Shareholding Pattern
Banking
Non Performing Assets
47
Banking
Non Performing Assets
48
Developments in 2004
? ? ?
Revised Definition of NPA to 90 Days Banks managed to bring down NPAs < 3% SARFAESI Act, 2002 amended in Dec 2004
• To set up Asset Reconstruction Companies • Take 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
Banking Non Performing Assets 49
NPAs in Banks : March 2005 (Rs in Cr)
Banks Public (27) Private (29) Foreign (31) IDBI Bank
Banking
Total Assets 16,76,847 4,25,802
Gross Net NPAs NPAs 46,380 16,135 8,715 4,038
81,360
1,216
848
50
CDR mechanism
? ? ? ?
?
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 ...
Banking 51
CIBIL – www.cibil.com
? ? ?
?
?
Credit Information Bureau of India Ltd Exchange of Credit Info among Banks/FIs Unscrupulous borrowers cannot play one bank against another for credit facilities Set 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 ...
Banking 52
Banking – Asset Quality
Banking
Non Performing Assets
53
Gross NPAs as % of Total ASSETs
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 4.60 4.89 5.20 3.90 2.41
2002- 2003- 20043 4 5 4.00 4.21 4.34 3.76 2.44 3.30 3.50 3.64 2.42 2.13 2.52 2.73 3.15 1.56 1.43
20056 1.86 2.09 2.50 0.96 0.96
54
Non Performing Assets
Net NPAs as % of Total ASSETs
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 2.30 2.42 3.23 2.10 0.81
2002- 2003- 20043 4 5 1.90 1.93 2.51 2.116 0.79 1.20 1.28 1.17 1.10 0.66 0.92 0.95 1.39 0.80 0.42
20056 0.66 0.72 0.91 0.43 0.40
55
Non Performing Assets
Net NPAs as % of Total Assets
3.5 3
Percentages
2.5 2 1.5 1 0.5 0 2001-2 2002-3 2003-4 Years 2004-5 2005-6
87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
Non Performing Assets
56
Gross NPAs as % of Total Advancess
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 10.40 11.09 11.01 8.86 5.38
2002- 2003- 20043 4 5 8.80 9.36 8.86 7.64 5.25 7.20 7.79 7.59 4.99 4.62 5.20 5.53 5.97 3.59 2.85
20056 3.30 3.70 4.30 1.70 1.90
57
Non Performing Assets
Net NPAs as % of Total Advances
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 5.50 5.82 7.13 4.94 1.89
2002- 2003- 20043 4 5 4.40 4.53 5.54 4.63 1.76 2.90 2.99 3.85 2.36 1.48 2.00 2.06 2.74 1.85 0.86
20056 1.20 1.30 1.60 0.80 0.80
58
Non Performing Assets
Net NPAs as % of Total Advances
8 7 6 5 4 3 2 1 0 2001-2 2002-3 2003-4 Years
Banking Non Performing Assets 59
Percentages
87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
2004-5
2005-6
doc_573051158.ppt
This is a presentation describes about NPA, income recognition, asset classification, IRAC norms
Commercial Banking : NPAs
1
NON PERFORMING ASSETS INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING NORMS (IRAC NORMS) &
Asset Reconstruction Companies
Banking
3
Banking
4
Banking
5
Why Loan accounts go bad ?
?
?
? ? ? ? ? ? ?
BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within… No contribution … No modernisation … Improper monitoring Industrial Relations.. Natural Calamities ...
?
?
?
? ? ?
?
BANKER – SIDE Defective Sanction No post-sanction supervision, etc Delay in releases Directed lending … Slow decision making process Etc etc etc ….
6
Banking
Non Performing Assets
? ? ? ?
In accounting, originally Bad & Doubtful Debts In 1980s, RBI followed 8 point Health Code Also 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…
Banking 7
Health Code System in Indian Banks during 1980’s
1.
2.
3. 4.
5.
6. 7. 8.
Satisfactory Accounts Irregular Accounts Sick-viable : Under Nursing Sick – Non-viable : Sticky accounts Advances Recalled Suit Filed Accounts Decreed Debts and Debts classified by the Bank as Bad/Doubtful Accounts
8
Banking
Asset Classification – 4 way - 1993
?
Standard Assets
• All regular loan accounts & investments (Performing Assets)
?
Non-Performing Assets
1. Sub-Standard Assets 2. Doubtful Assets 3. Loss Assets
Banking
9
Performing Asset defined …
?
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 !
?
Banking
10
N P As : Definition
?
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 instalment of principal has remained “past due” for a specified time.
11
?
Banking
Recovery of Loans
?
?
? ? ? ?
? ?
Field Visits, Personal persuasion, Stock Statements Notices on due dates – Ordy, Regd, Legal … Civil Procedure, Winding Up Notices, … Seizure and disposal of assets thro’ auctions Criminal Action per Sec 138 of NI Act … Compromises – Interest reduction / waiver, deferment, Simple or Compound calculation Lok Adalat, DRT / BIFR Awards, OTS, CDR Asset Securitisation under SARFAESI Act …
Banking Non Performing Assets 12
Def’n of NPAs Chronologically
?
Mar 31, 1993 Mar 31, 1994 Mar 31, 1995 Mar 31, 2004
4 quarters 3 quarters 2 quarters 1 quarter only ???
?
?
?
Banking
13
Sticky Loans in Banks in India
?
?
Year 1998 1999 2000 2001
Loss 6,242 7,444 7,558 8,001
Doubtful Sub-std 27,146 17,428 31,350 33,688 37,756
Non Performing Assets
?
19,928 19,594 18,206
14
?
?
Banking
Sticky Loans in Banks in India
(Rs. In crores)
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1998
Banking
Loss Doubtful Sub-Std
1999
2000
2001
15
% NPAs to Total Advances (Rs in crores)
?
Year 1998 1999 2000 2001
NPAs 50,816 58,722 60,840 63,962
Total Loans 3,52,696 3,99,436 4,75,757 5,58,679
% 14.4 14.7 12.8 11.4
? ? ? ?
?
(Source : Trends & Progress : RBI, 2001)
16
Banking
NPAs as % to Total Advances
600000 500000 400000 300000 200000 100000 0 1998
Banking
NPAs Total Loans % to Total
199
2000
2001
17
IRAC NORMS
?
Master circular dated 17th July, 2004. Superceded earlier master circular dated 22nd August, 2003.
?
?
Status-quo of classification in respect of earthquake affected accounts available upto 15/07/2004.
Natural Calamities – Floods, Cyclones, Earth quakes, Failure of Monsoon, Fire Accidents, etc...
Banking 18
?
ASSET TYPE
?STANDARD ASSET / PERFORMING ASSET
The account is not non-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. (Para 2 of the Master Circular)
19
Banking
IDENTIFICATION OF NPA
?Cash Credit / Overdrafts ‘out days ? Account remains of order’ for 90 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.
Banking 20
IDENTIFICATION OF NPA …
?Term Loans ?Bills Purchased and Discounted ?Interest and/or instalment remains overdue for 90 days or more. ?Bill remains overdue for 90 days or more.
?Agricultural Advances ?Interest and/or installment remains overdue for two harvest seasons for short duration crop, one harvest season for long duration crop. ?Others ? Any amount to be received remains overdue for 90 days or more .
Banking 21
CLASSIFICATION NORMS
? 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 Assets
These 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.
Banking
22
CLASSIFICATION NORMS
? Doubtful Asset - Three Categories Category Period
Doubtful - I
Doubtful - II Doubtful - III
Banking
up to One Year
Up to Three Years More than Three Years
23
PROVISIONING NORMS
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 ab initio (new guidelines)
Banking 24
PROVISIONING NORMS
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
Banking
25
PROVISIONING NORMS
DOUBTFUL ASSETS
Period Provision (Secured +Unsecured) + 100% + 100% + 100%
Upto 1 year 20% 1to 3 years 30% More than 3 years 100% (effective from 31st March 2005) Outstanding as on 31st March 2004
60%, 75%, 100% on secured portion. 2005 2006 2007
Banking
26
PROVISIONING NORMS
Provision Under Special circumstances ? Normal 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.
Banking 27
IMPORTANT ASPECTS
?Exempted Category Master Circular) (Para 4.2.10 of
? 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 availability of margin. subject to /
? Advance against gold ornaments Government securities not exempt.
Banking
28
IMPORTANT ASPECTS
?Classification of a Borrower (Para 4.2.6 Master Circular) of
? All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. ? Obtain cross-branch classification. confirmation for
Exception: Credit facility to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on lending arrangement.
Banking 29
IMPORTANT ASPECTS
?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?
Banking 30
IMPORTANT ASPECTS
? Corporate Debt Restructuring (CDR) - (Para 4.2.15 of Circular)
? CDR is an solution. institutional mechanism for evolving
Master
financial
? 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 same as applicable to otherwise restructured accounts. be
? Projects under implementation
?
Treatment to be in line with Para 4.2.16 of Master Circular
Banking
31
GREENING ISSUES
?Sanction/extension of Additional Adhoc facility. ?Enhancement of Limit. facility /
?Conversion of Overdue Limits.
?Frequent Re-schedulement of Term Loans. ?Adjusting Loan of one borrower against other borrower.
Banking 32
INCOME RECOGNITION
? Income Recognition
For 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 - Priority
Unrealised 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.
Banking 33
DISCLOSURE
? 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 Suspense.
disclosed
net
off
NPA
provisions
&
Interest
? Accounting policy for classification, provisioning & recognition need to be disclosed.
income
? 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.
Banking 34
Banking
35
Banking
Non Performing Assets
36
Banking
Non Performing Assets
37
Asset Reconstruction Companies
38
Experience abroad
?
?
? ? ? ?
Spain - Dep Guarantee Fund : 1977-80 Chile - Cash Purchase of Bad Loans1982 USA - Resolution Trust Corp’n, 1989 Japan - Coop Cr’ Purchasing Co 1993 Poland : Rescheduled Bad Loans : 1994 Eastern Europe : Govt Bonds : 1994 (Hungary)
Banking Non Performing Assets 39
Experience abroad...
? ? ? ? ? ? ?
Tanzania - 1988 Ghana - NPA Recovery Trust – 1989 Sweden - SECURUM - January 1993 Uganda - 1995 Philippines - Asset Privatisation Trust Malaysia - Soft loans by Central Bank Colombia, Czech, Slovak, etc too
Banking Non Performing Assets 40
?
?
? ? ? ?
?
Capital from Banks/Financial Inst’ns ARCs in private sector like an SPV Staff from Banks/Financial Inst’ns Issue Bonds in lieu of Assets taken over Guaranteed by Government of India Stamp Duty to be exempted On par with Venture Funds for Inc. Tax
Banking 41
Asset Reconstruction Companies
Developments in India
? ?
?
?
?
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
Banking 42
Setting up of AR Companies in India
1.
2.
3.
4.
5.
Asset Reconstruction Company India Ltd (ARCIL) – (SBI+ HDFC+ IDBI+ ICICI Bk) Asset Care Enterprise (ACE) – (IFCI + PNB) ARC to be floated by Kotak Mahindra Bank? ASREC – Andhra Bank, Stanchart, Deutsche and UTI Bk? Corp Bank, ING Vysya and Actis to start?
Banking Non Performing Assets 43
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
Non Performing Assets 44
Banking
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.
Non Performing Assets 45
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Banking
ARCIL
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www.arcil.co.in Sponsored 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
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Mission
• Maximise value through innovative resolution • Establish fair and transparent business practices • Facilitate development of market for distress debt
Banking
Non Performing Assets
46
ARCIL : Shareholding Pattern
Banking
Non Performing Assets
47
Banking
Non Performing Assets
48
Developments in 2004
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Revised Definition of NPA to 90 Days Banks managed to bring down NPAs < 3% SARFAESI Act, 2002 amended in Dec 2004
• To set up Asset Reconstruction Companies • Take 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
Banking Non Performing Assets 49
NPAs in Banks : March 2005 (Rs in Cr)
Banks Public (27) Private (29) Foreign (31) IDBI Bank
Banking
Total Assets 16,76,847 4,25,802
Gross Net NPAs NPAs 46,380 16,135 8,715 4,038
81,360
1,216
848
50
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 ...
Banking 51
CIBIL – www.cibil.com
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Credit Information Bureau of India Ltd Exchange of Credit Info among Banks/FIs Unscrupulous borrowers cannot play one bank against another for credit facilities Set 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 ...
Banking 52
Banking – Asset Quality
Banking
Non Performing Assets
53
Gross NPAs as % of Total ASSETs
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 4.60 4.89 5.20 3.90 2.41
2002- 2003- 20043 4 5 4.00 4.21 4.34 3.76 2.44 3.30 3.50 3.64 2.42 2.13 2.52 2.73 3.15 1.56 1.43
20056 1.86 2.09 2.50 0.96 0.96
54
Non Performing Assets
Net NPAs as % of Total ASSETs
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 2.30 2.42 3.23 2.10 0.81
2002- 2003- 20043 4 5 1.90 1.93 2.51 2.116 0.79 1.20 1.28 1.17 1.10 0.66 0.92 0.95 1.39 0.80 0.42
20056 0.66 0.72 0.91 0.43 0.40
55
Non Performing Assets
Net NPAs as % of Total Assets
3.5 3
Percentages
2.5 2 1.5 1 0.5 0 2001-2 2002-3 2003-4 Years 2004-5 2005-6
87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
Non Performing Assets
56
Gross NPAs as % of Total Advancess
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 10.40 11.09 11.01 8.86 5.38
2002- 2003- 20043 4 5 8.80 9.36 8.86 7.64 5.25 7.20 7.79 7.59 4.99 4.62 5.20 5.53 5.97 3.59 2.85
20056 3.30 3.70 4.30 1.70 1.90
57
Non Performing Assets
Net NPAs as % of Total Advances
BANKS 87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
Banking
20012 5.50 5.82 7.13 4.94 1.89
2002- 2003- 20043 4 5 4.40 4.53 5.54 4.63 1.76 2.90 2.99 3.85 2.36 1.48 2.00 2.06 2.74 1.85 0.86
20056 1.20 1.30 1.60 0.80 0.80
58
Non Performing Assets
Net NPAs as % of Total Advances
8 7 6 5 4 3 2 1 0 2001-2 2002-3 2003-4 Years
Banking Non Performing Assets 59
Percentages
87 SCBs 28 PSBs 20 OPBs 9 NPBs 30 FBs
2004-5
2005-6
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