NPA

ASSESTS – ANYTHING THAT GENERATES INCOME IN FUTURE. Eg- machine, cash

LIABILITY - Liabilities are items that are obligations for a business

Banks’ asset-liability profiles

 A balance sheet is an accounting tool that lists assets and liabilities.

 Every scheduled bank is required to furnish in the prescribed form to the Reserve Bank of
India on a fortnightly basis on reporting Fridays and Last Fridays of the month statement
showing its liabilities and assets in India in terms of Section 42(2) of the Reserve Bank of
India Act, 1934.

 This return provides up-to-date information on deposits, advances and investments etc of
banks.

ASSETS LIABILITIES

. Those things that a bank owns. . Those things that a bank owns to its
It can be physical property(like land, customers or investors
equipment) or financial property. It includes financial property and debts.

. banks generally have 4 types of assets- . banks generally have several type of deposits
1. Physical assets (not an exhaustive list) eg- customer deposits
2. Loans/advances
3. Reserves-Deposit with RBI & other Borrowings by banks, RBI , external commercial
banks, CRR, SLR borrowings etc.
4. Investments- govt securities, shares etc

NON-PERFORMING ASSETS

NPA- An asset becomes non-performing when it ceases to generate income for the bank.
Earlier an asset was considered as non-performing asset (NPA) based on the concept
of 'Past Due'. An amount is considered as past due, when it remains outstanding for 30 days
beyond the due date.
However, with effect from March 31, 2001 the ‘past due’ concept has been dispensed with
and the period is reckoned from the due date of payment. With a view to moving towards
international best practices and to ensure greater transparency, '90 days' overdue* norms
for identification of NPAs have been made applicable from the year ended March 31, 2004.
An example of NPA:
Suppose the State Bank of India (SBI) gives a loan of Rs. 10 crores to a company (Eg:
Kingfisher Airlines). Consider that they agreed upon for an interest rate of say 10% per
annum. Now suppose that initially everything was good and the market forces were working
in support to the airline industry, therefore, Kingfisher was able to service the interest
amount. Later, due to administrative, technical or corporate reasons suppose the company is
not able to pay the interest rates for 90 days. In that case, a loan given to the Kingfisher
Airlines is a good case for the consideration as NPA.

The definition of NPAs was tightened in phases and the RBI Master Circular (2005) defines A
Non-performing asset (NPA) is a loan or an advance where;

Concepts/clarifications/Illustration examples on due dates and specifications of

SMA/NPA clarification dates
If the loan instalment/ Interest is not repaid on or before the due date the loan will become

overdue and will be classified as Special Mention Account as follows.

Example: If we assume the instalment/ Interest due date of a loan is 31-03-2021 and the
instalment/ Interest is not repaid before the Day end process of 31-03-2021 it will be become
overdue and will be classified as Special Mention Account -0 (SMA-0) on the same day. If it
continues to remain overdue beyond 30 days, it will be tagged as SMA-1 on Day end process of 30-
04-2021. And if it continues to be overdue more than 60 days it will be tagged as SMA2 on the Day
end Process of 30-05-2021. If the overdue amount is not repaid, within 90 days from the due date
then it will become NPA on 29/06/2021.

Agriculture:

KCC –the Instalment of principal or interest thereon remains overdue for two crop seasons for short
duration crops Example: If KCC granted on 12/08/2018 the expiry date (One Year is taken as season)
will be 11/08/2019 and it will be classified as NPA on 11/08/2021(2 crop seasons).

 the instalment of principal or interest thereon remains overdue for one crop season for long
duration crops Example: If we assume a crop loan granted on 12/08/2018(Two years taken as season)
and expiry date is 11/08/2020 and it will become NPA on 11/08/2022.

CLASSIFICATION OF NPAs
After identification NPA assets are classified into four categories in view of their status as NPA,
availability of security and factors affecting the recovery of their dues. On the basis of said
classification provisions are to be made.

i) Standard assets: - These are assets which are regular in paying interest/instalment & its
operations are normal.
ii) Sub-standard assets: - If the loan is NPA up to 12 months the same is called Sub
Standard Assets.
iii) Doubtful assets: - If an asset is a sub-standard asset for a period exceeding 12 months, it
should be classified as doubtful asset.

iv) Loss Assets :- An asset identified by Bank or by internal/external auditor/RBI as loss

assets with a little salvage value.

GROSS NPA AND NET NPA

 Gross NPA(GNPA) and Net NPA:

 o GNPA: This is the total amount of NPAs without deducting the provisional
amount.
o Net NPA: This is the gross NPA minus the provision.
 Provision refers to funds left aside by banks to cover potential losses
arising from bad loans or NPAs.

 NPA Provisioning: Provision for a loan refers to a certain

percentage of loan amount set aside by the banks.
o The standard rate of provisioning for loans in Indian
banks varies from 5-20% depending on the business
sector and the repayment capacity of the borrower.
o In the cases of NPA, 100% provisioning is required in
accordance with the Basel-III norms.

SIDBI- As of March 31, 2024, the Small Industries Development Bank of India (SIDBI) had
a net non-performing asset (NPA) ratio of 0% and a gross NPA ratio of 0.02%.

Aspect Gross NPA Net NPA

Definition Total non-performing assets Non-performing assets after deducting

without any deductions provisions for bad debts

Purpose Indicates the overall level of Reflects actual risk exposure, giving a clearer
NPAs in a bank picture of a bank’s credit quality

Calculation Includes all loans classified as Gross NPA minus provisions for bad and
NPAs doubtful debts

Risk Reflection Shows the total extent of Shows the bank’s net risk exposure, providing
problematic assets a more accurate measure of credit risk

Bank Health A higher Gross NPA indicates Lower Net NPA suggests effective
Indicator poor loan quality management of problem loans through
provisions

Reasons for Increasing Non Performing Assets

 Over-optimism of Banking Sector: Bank did not show much accountability and diligence
when the economy was growing and infrastructure improved during 2006-08.

 Slow Growth: The financial crisis of 2008 led to slower economic growth which in turn
affected the profits of the companies and reduced their ability to pay back the loans on time.

 External Factors: To counter the aftermath of the financial crisis and declining growth, major
central banks globally adopted the easy money policy which also resulted in easy liquidity in
emerging markets such as India.
 o This phenomenon pushed up asset prices and led to inflation and also posed threat
of stagflation.

 Regulatory and Policy Risks: A volatile regulatory framework in the country in the past few
years has led to stress in certain industries.

o For example, Mining ban in certain southern Indian states caused significant financial
and operating stress in companies engaged therein, which had a cascading effect on
overall investments in the Indian economy.

 Industry Specific Risks: There are industry-specific reasons that cause a rise in the level of
Non Performing Assets in India.

o For example, higher Non Performing Assets in aviation sector could be attributed to
high cost of aviation turbine fuel. For Indian airlines, turbine fuels constitute 45% of
total operating costs, as compared to the global average of 30%.

 Poor Credit Appraisal System: The credit appraisal by the banks before giving loans remains
of low quality.

 Diversion of Loans: The poor end-use monitoring system of the Banks has led to diversion of
funds by the companies for other wasteful purposes.

 Wilful Defaulters: A lack of proper mechanisms to deal with them means that there has
been an increase in the number of wilful defaulters.

o Wilful Defaulters refer to those loanees who fail to repay back the loans despite of
being capable of doing so.

 Red-Tapism: Delays in government approvals led to increase in the number of stalled

projects.

 Lack of Policy Foresight: Legal provisions to deal with Non Performing Assets such as
Insolvency and Bankruptcy Code (IBC) and SARFAESI Act have been formulated only recently.

 Frauds: The system has failed to bring any high-profile fraudsters to justice. It was only after
the NPA crisis that the RBI established a fraud monitoring cell to facilitate the early reporting
of fraud cases to investigative agencies.

 Ineffective Recovery Tribunal: There has been undue delay in the resolution of cases before
the debt recovery tribunals leading to higher Non Performing Assets.

 Political Interference in working of PSBs: The Non Performing Assets are mainly
concentrated in the Public Sector Banks which could be linked to their poor governance,
political interference and lack of independent decision making body.

 Priority Sector Lending: The lending by the Banks to priority sectors such as Agriculture and
MSMEs has also contributed to Non Performing Assets.

 Credit Culture: The frequent announcement of farm loan waivers by the Central has affected
the credit culture in India.

 Absence of Integrated Database on Credit Information: Presently, the credit related

information is captured by multiple agencies without proper coordination.
 o The RBI’s proposal of creating Public Credit Registry faces legal challenges.

Impact of Rising Non Performing Assets

Rising Non Performing Assets has negative impact the overall growth of the economy as can be
seen below.
 Profitability: On an average, banks are providing around 25% to 30% additional provision on
incremental Non Performing Assets which has direct bearing on the banks’ profitability.

 Asset (Credit) Contraction: The increased Non Performing Assets has reduced the banks’
ability to lend more and thus lesser interest income.

o It contracts the money stock which may lead to economic slowdown.

 Liability Management: High Non Performing Assets may make Banks lower the interest rates
on deposits on one hand and levy higher interest rates on advances.

o This may become hurdle in smooth financial intermediation process and hampers
banks’ business as well as economic growth.

 Capital Adequacy: According to Basel norms, banks must maintain sufficient capital for their
risk-weighted assets.

o An increase in the level of Non Performing Assets adds to risk weighted assets which
requires the banks to shore up their capital base further.

o In case of PSBs, it may put additional burden on the Government for recapitalisation
of PSBs.

 Shareholders’ Confidence: The rise in Non Performing Assets is likely to negatively affect the
bank’s business and profitability. As a result, shareholders may not receive a market return
on their capital, and their investment value could erode.
  Public Confidence: The credibility of the banking system is significantly impacted by high
levels of NPAs, as it undermines the general public’s confidence in the system’s stability and
reliability.

Steps Taken to Curb NPAs

 Debt Recovery Tribunal (DRT): It was set up in 2013 to reduce the time required for settling
cases. (but limited to loans upto 5 lakhs rupees)

o It is governed by Recovery of Debt due to Banks and Financial Institutions Act, 1993.

 Credit Information Bureau: It was set up in 2000 to prevent NPAs by sharing of information
on wilful defaulters.

 SARFAESI Act – 2002 :The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002 – Reconstruction of Financial Assets
and Enforcement of Security Interests (SARFAESI) Act, 2002: This act provides the legal
framework for securitization activities in India.

o It grants banks and financial institutions the authority to seize immovable property
that has been pledged to recover debts, without needing to go through the Debt
Recovery Tribunal (DRT).

The Act permits Banks / Financial Institutions to recover their NPAs without the involvement
of the Court, through acquiring and disposing of the secured assets in NPA accounts with an
outstanding amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on
the borrower’s failure to repay, they can:

Take ownership of security and/or

Control over the management of the borrowing concern.

Appoint a person to manage the concern.

 Asset Reconstruction Companies (ARCs): ARCs have been set up to fasten the recovery of
value from stressed loans, bypassing courts. The RBI gave license to 14 new ARCs recently
after the amendment of the SARFAESI Act of 2002. These companies are created to unlock
value from stressed loans. Before this law came, lenders could enforce their security
interests only through courts, which was a time-consuming process.

 Corporate Debt Restructuring: It was implemented in 2005 to alleviate the debt burden on
companies by extending the repayment period as well as reducing interest rates.

 5:25 Rule: Introduced in 2014, it is also known as Flexible Restructuring of Long-Term Project
Loans for Infrastructure and Core Industries. Also known as, Flexible Structuring of Long
Term Project Loans to Infrastructure and Core Industries. It was proposed to maintain the
cash flow of such companies since the project timeline is long and they do not get the money
back into their books for a long time, therefore, the requirement of loans at every 5-7 years
and thus refinancing for long term projects.

 Joint Lenders Forum (JLF): Established in 2014, it was designed to prevent scenarios where a
loan from one bank is used to repay loans from other banks. It was created by the inclusion
 of all PSBs whose loans have become stressed. It is present so as to avoid loan to the same
individual or company from different banks. It is formulated to prevent the instances where
one person takes a loan from one bank to give a loan of the other bank.

 Mission Indradhanush: It was launched in 2015 as a comprehensive 7-pronged reforms to

improve the functioning of the Public Sector Banks.

o The reforms under Mission Indradhanush include: Appointments, Bank Board

Bureau, Capitalisation, De-stressing, Empowerment, Framework for Accountability,
and Governance reforms i.e. ABCDEFG

A-Appointments: Based upon global best practices and as per the guidelines in the
companies act, separate post of Chairman and Managing Director and the CEO will
get the designation of MD & CEO and there would be another person who would be
appointed as non-Executive Chairman of PSBs.

B-Bank Board Bureau: The BBB will be a body of eminent professionals and officials,
which will replace the Appointments Board for the appointment of Whole-time
Directors as well as non-Executive Chairman of PSBs

C-Capitalization: As per finance ministry, the capital requirement of extra capital for
the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore out of which
70000 crores will be provided by the GOI and the rest PSBs will have to raise from
the market.

D-DEstressing: PSBs and strengthening risk control measures and NPAs disclosure.
 E-Employment: GOI has said there will be no interference from Government and
Banks are encouraged to take independent decisions keeping in mind the
commercial the organizational interests.

F-Framework of Accountability: New KPI(key performance indicators) which would

be linked with performance and also the consideration of ESOPs for top
management PSBs.

G-Governance Reforms: For Example, Gyan Sangam, a conclave of PSBs and financial
institutions. Bank board Bureau for transparent and meritorious appointments in
PSBs.

 Strategic Debt Restructuring (SDR): This scheme was launched in 2015 under which if the
corporates, who have taken loans from banks, are unable to repay, the banks can convert
part or complete loans into equity shares.

 Asset Quality Review (AQR): Initiated in 2015 as a preventive measure, it involves the early
identification of assets that might become stressed in the future.

 Insolvency and Bankruptcy Code (IBC): It was enacted in 2016 and lays down clear-cut and
faster insolvency proceedings to help creditors, including banks, recover dues and prevent
bad loans. It has been formulated to tackle the Chakravyuaha Challenge (Economic Survey)
of the exit problem in India. The aim of this law is to promote entrepreneurship, availability
of credit, and balance the interests of all stakeholders by consolidating and amending the
laws relating to reorganization and insolvency resolution of corporate persons, partnership
firms and individuals in a time-bound manner and for maximization of value of assets of such
persons and matters connected therewith or incidental thereto.

Below table gives the list of measures taken to control Non-Performing Assets (NPA)

Measures Details

Debt Recovery Tribunal 1. It was set up to reduce the time required for settling cases
(DRT) – 2013
2. Governed by Recovery of Debt due to Banks and Financial Institutions
Act, 1993

3. Insufficient numbers, hence cases are pending for longer durations.

Credit Information Bureau 1. This step is to prevent NPA’s by sharing of information on wilful
(2000) defaulters

ARC (Asset Reconstruction 1. Recovering value from stressed loans bypassing courts which was a
Companies) time-consuming process.

Corporate Debt 1. Reduce the burden of debts on the company by giving more time to the
Restructuring (2005) company to payback as well as decreasing the rates along with it

5:25 Rule (2014) 1. This is also called Flexible Restructuring of Long Term Project Loans to
Infrastructure and Core Industries

2. This involves refinancing of long term projects

Joint Lenders Forum (2014) 1. It is done to avoid a situation where a loan is taken from one bank to
repay the loans in other banks

Mission Indradhanush 1. It is the most comprehensive reforms undertaken to improve the

(2015) functioning of the Public Sector Banks, by using the ABCDEFG formula.

Strategic Debt 1. Corporates who have taken loans from banks if they are unable to
Restructuring (SDR) – 2015 repay, then the banks can convert part or complete loans into equity
shares

Asset Quality Review 1. This is a kind of preventive measure, involving early identification of
(2015) assets which could turn out to be stressed at a later stage.

Insolvency and Bankruptcy 1. One-stop process for solving insolvencies.

Code (2016)
2. Aims to protect small investors.

Bad banks, formally called Asset Reconstruction Companies (ARC), are specialized
financial institutions that buy the stressed and non-performing assets (NPA) of the bank to
help clean up their balance sheet.

Establishment and Regulations of ARC

 Incorporated under the Companies Act and registered with RBI under the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act,
2002.

 Regulated by RBI as a Non-Banking Financial Company (NBFC) under RBI Act, 1934.

Announced in Budget 2021-22 – It proposes the following dual structure of the New Bad
Bank:

1. National Asset Reconstruction Company Ltd (NARCL) – Set up as an Asset Reconstruction

Company (ARC) to acquire stressed assets worth Rs 2 lakh crore from various commercial
banks.

 Incorporated under the Companies Act & has been set up by the banks. Public Sector
Banks (PSBs) to maintain 51% ownership in it.

 It will acquire bad debts from the lead bank and pay 15% upfront in cash, and issue the
balance 85% as government-guaranteed tradable security receipts (SR).

2. India Debt Resolution Company Ltd (IDRCL) – Set up as an Asset Management

Company (AMC) to then sell stressed assets in the market.

 IDRCL is a service company to manage the asset and engage market professionals and
turnaround experts. PSBs & Public Financial Institutions - 49% stake; Private sector lenders -
51% stake.

 Role of Government Guarantee - Government guarantee will be invoked if the bad bank is
unable to sell bad loan, or sells it at a loss. Government will not hold any equity in the Bad
Bank.