Non-Performing Assets


Par 100 posts (V.I.P)
Hey people I am doing a project on NPA i.e. Non-Performing Assets can u guys plzzzzzzz Help me for the same... How do i make my prject different and where do i get the Info?:-/


Vijith Pujari

The Final Shoot Out of Non-Performing Assets (NPAs)

Sr. No. Description



Indian Economy and NPAs

Global Developments and NPAs

Meaning of NPAs

Why such a huge level of NPAs exist in Indian banking system (IBS)?

Why NPAs have become an issue for banks and financial institutions in India?

RBI Guidelines on income recognition (interest income on NPA)

What does Accounting Standard 9 (AS 9) on revenue recognition of

Issued by ICAI say?

Are RBI guidelines on NPAs and ICAI Accounting Standard 9 on revenue recognition, consistent with each other?

RBI guidelines on classification of bank advances

How to classify bank advances, if recovery is highly unlikely?

RBI guidelines on provisioning requirement of bank advances

Credit Risk and NPAs

Public Trust and NPAs

How important is credit rating in assessing the risk of default for lenders?

Usage of financial statements in assessing the risk of default for lenders

Can Universal Banking solve the problem of NPA for DFIs?

Capital Adequacy Ratio (CAR) of RBI and Basle Committee on Banking Supervision (BCBS)

Excess Liquidity? No problem, but no lending please !!!

High cost of funds due to NPAs

Why Bankers say, Finally, what a relief for our business?


What about banks in India?

Finally, what about India?


It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPAs) and the issue is becoming more and more unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed by Parliament, which is an important step towards elimination or reduction of NPAs.

Indian economy and NPAs

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIIs, etc.

Further, international rating agencies like, Standard & Poor have lowered India's credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. One would be surprised to know that the banks and financial institutions in India hold non-performing assets worth Rs. 1,10,000 crores. Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive.

Global Developments and NPAs

The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth.

However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation.

A question that arises is how much risk can a bank afford to take ? Recent happenings in the business world - Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks. In case after case, these giant corporates became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk.

Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default.

Meaning of NPAs

An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status.

Why such a huge level of NPAs exist in the Indian banking system (IBS)?

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing.

Why NPAs have become an issue for banks and financial institutions in India?

To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines.

Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets.

RBI guidelines on income recognition (interest income on NPAs)

Banks recognize income including interest income on advances on accrual basis. That is, income is accounted for as and when it is earned.

The prima-facie condition for accrual of income is that it should not be unreasonable to expect its ultimate collection. However, NPAs involves significant uncertainty with respect to its ultimate collection.

Considering this fact, in accordance with the guidelines for income recognition issued by the Reserve Bank of India (RBI), banks should not recognize interest income on such NPAs until it is actually realized.

What does Accounting Standard 9 (AS 9) on revenue recognition issued by ICAI say?

The Accounting Standard 9 (AS 9) on `Revenue Recognition' issued by the Institute Of Chartered Accountants of India (ICAI) requires that the revenue that arises from the use by others of enterprise resources yielding interest should be recognized only when there is no significant uncertainty as to its measurability or collectability.

Also, interest income should be recognized on a time proportion basis after taking into consideration rate applicable and the total amount outstanding.

Are RBI guidelines on NPAs and ICAI Accounting Standard 9 on revenue recognition consistent with each other?

In view of the guidelines issued by the Reserve Bank of India (RBI), interest income on NPAs should be recognised only when it is actually realised.

As such, a doubt may arise as to whether the aforesaid guidelines with respect to recognition of interest income on NPAs on realization basis is consistent with Accounting Standard 9, `Revenue Recognition'. For this purpose, the guidelines issued by the RBI for treating certain assets as NPAs seem to be based on an assumption that the collection of interest on such assets is uncertain.

Therefore complying with AS 9, interest income is not recognized based on uncertainty involved but is recognized at a subsequent stage when actually realized thereby complying with RBI guidelines as well.

In order to ensure proper appreciation of financial statements, banks should disclose the accounting policies adopted in respect of determination of NPAs and basis on which income is recognized with other significant accounting policies.

RBI guidelines on classification of bank advances

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with respect to bank advances. In terms of these guidelines, bank advances are mainly classified into:

Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18 months

Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection.

In terms of RBI guidelines, as and when an asset becomes a NPA, such advances would be first classified as a sub-standard one for a period that should not exceed 18 months and subsequently as doubtful assets.

It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the banks balance sheet.

The Third Schedule to the Banking Regulation Act, 1949, solely governs presentation of advances in the balance sheet.

Banks have started issuing notices under te Securitisation Act, 2002 directing the defaulter to either pay back the dues to the bank or else give the possession of the secured assets mentioned in thenotice. However, there is a potential threat to recovery if there is substantial erosion in the value of security given by the borrower or if borrower has committed fraud. Under such a situation it will be prudent to directly classify the advance as a doubtful or loss asset, as appropriate.

RBI guidelines on provisioning requirement of bank advances

As and when an asset is classified as an NPA, the bank has to further sub-classify it into sub-standard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets.

Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank advances where the recovery is doubtful. Banks are also required to comply with such guidelines in making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares.

In case of loss assets, guidelines specifically require that full provision for the amount outstanding should be made by the concerned bank. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset.

Also in case of doubtful assets, guidelines requires the bank concerned to provide entirely the unsecured portion and in case of secured portion an additional provision of 20%-50% of the secured portion should be made depending upon the period for which the advance has been considered as doubtful.

For instance, for NPAs which are upto 1-year old, provision should be made of 20% of secured portion, in case of 1-3 year old NPAs upto 30% of the secured portion and finally in case of more than 3 year old NPAs upto 50% of secured portion should be made by the concerned bank.

In case of a sub-standard asset, a general provision of 10% of total outstandings should be made.

Reserve Bank Of India (RBI) has merely laid down the minimum provisioning requirement that should be complied with by the concerned bank on a mandatory basis. However, where there is a subtantail uncertainty to recovery, higher provisioning should be made by the bank concerned.

Credit Risk and NPAs

Quite often credit risk management (CRM) is confused with managing non-performing assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e they represent credit risk that has already materialized and default has already taken place.

On the other handmanaging credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk.

Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business.

To create a defense against such uncertainty, bankers are expected to develop an effective internal credit risk models for the purpose of credit risk management.

How important is credit rating in assessing the risk of default for lenders?

Fundamentally Credit Rating implies evaluating the creditworthiness of a borrower by an independent rating agency. Here objective is to evaluate the probability of default. As such, credit rating does not predict loss but it predicts the likelihood of payment problems.

Credit rating has been explained by Moody's a credit rating agency as forming an opinion of the future ability, legal obligation and willingness of a bond issuer or obligor to make full and timely payments on principal and interest due to the investors.

Banks do rely on credit rating agencies to measure credit risk and assign a probability of default.

Credit rating agencies generally slot companies into risk buckets that indicate company's credit risk and is also reviewed periodically. Associated with each risk bucket is the probability of default that is derived from historical observations of default behavior in each risk bucket.

However, credit rating is not fool-proof. In fact, Enron was rated investment grade till as late as a month prior to it's filing for Chapter 11 bankruptcy when it was assigned an in-default status by the rating agencies. It depends on the information available to the credit rating agency. Besides, there may be conflict of interest which a credit rating agency may not be able to resolve in the interest of investors and lenders.

Stock prices are an important ( but not the sole ) indicator of the credit risk involved. Stock prices are much more forward looking in assessing the creditworthiness of a business enterprise. Historical data proves that stock prices of companies such as Enron and WorldCom had started showing a falling trend many months prior to it being downgraded by credit rating agencies.

Usage of financial statements in assessing the risk of default for lenders

For banks and financial institutions, both the balance sheet and income statement have a key role to play by providing valuable information on a borrower’s viability. However, the approach of scrutinizing financial statements is a backward looking approach. This is because, the focus of accounting is on past performance and current positions.

The key accounting ratios generally used for the purpose of ascertaining the creditworthiness of a business entity are that of debt-equity ratio and interest coverage ratio. Highly rated companies generally have low leverage. This is because; high leverage is followed by high fixed interest charges, non-payment of which results into a default.

Capital Adequacy Ratio (CAR) of RBI and Basle committee on banking supervision (BCBS)

Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian banks. The minimum CAR which the Indian Banks are required to meet at all times is set at 9%. It should be taken into consideration that the bank's capital refers to the ability of bank to withstand losses due to risk exposures.

To be more precise, capital charge is a sort of regulatory cost of keeping loans (perceived as risky) on the balance sheet of banks. The quality of assets of the bank and its capital are often closely related. Quality of assets is reflected in the quantum of NPAs. By this, it implies that if the asset quality was poor, then higher would be the quantum of non-performing assets and vice-versa.

Market risk is the risk arising due to the fluctuations in value of a portfolio due to the volatility of market prices.

Operational risk refers to losses arising due to complex system and processes.

It is important for a bank to have a good capital base to withstand unforeseen losses. It indicates the capability of a bank to sustain losses arising out of risky assets.

The Basel Committee On Banking Supervision (BCBS) has also laid down certain minimum risk based capital standards that apply to all internationally active commercial banks. That is, bank's capital should atleast be 8% of their risk-weighted assets. This infact helps bank to provide protection to the depositors and the creditors.

The main objective here is to build a sort of support system to take care of unexpected financial losses thereby ensuring healthy financial markets and protecting depositors.

Excess liquidity? No problem, but no lending please !!!

One should also not forget that the banks are faced with the problem of increasing liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default.

In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).

Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks.

On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBI's vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. as a result of which, banks are little reluctant in granting loans to corporates.

As such, though in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers.

High cost of funds due to NPAs

Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lender’s losses caused due to high level of NPAs.

Therefore, quite often corporates prefer to raise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher.

With the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60 days. Once the borrower receives a notice from the concerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders.

The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, banks can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the assets of the defaulting companies or change their management.

But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty increases with the passage of time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch good price. If faced with such a situation than the very purpose of getting protection under the Securitisation Act, 2002 would be defeated and the hope of seeing a must have growing banking sector can easily vanish.


To conclude with, till recent past, corporate borrowers even after defaulting continuously never had any real fear of bank taking any action to recover their dues despite the fact that their entire assets were hypothecated to the banks. This is because there was no legal Act framed to safeguard the real interest of banks.

However with the introduction of Securitisation Act, 2002 banks can now issue notices to their defaulters to repay their dues or else make defaulters face hard and tough actions under the aforementioned Act. This enables banks to get rid of sticky loans thereby improving their bottomlines. Also a hallmark of a good business is approaching it with a fresh, new perspective and requires management that is fully awake, fully alive and of course fully focused on making things better.

Also, the passing of the Securitisation Act, 2002 came as a bonanza for investors in banking sector stocks that in turn resulted into an improvement in their share prices.


New member

Thank you very much... this information which is posted is really helpful to me... once again thanks a lot.....


New member
hey gyzzz....
i hv gt 2 do a projct on NPA(non performing assets)
n i nd sm references desperatly............
plzzz gyzz plzzz upload any kinda helping prjct if u cn....
wl b highly highlyy obliged...!!!!!:SugarwareZ-026::SugarwareZ-026:


New member
hey gyzzz....
i hv gt 2 do a projct on NPA(non performing assets)
n i nd sm references desperatly............
plzzz gyzz plzzz upload any kinda helping prjct if u cn....
wl b highly highlyy obliged...!!!!!:SugarwareZ-026::SugarwareZ-026:
hey friend, try to search materials related to NPA in the search option in the site.....
well you can check out this link as i hope it can help you alot...