Current status of NPA in Banks

Introduction

The Reserve Bank of India (RBI) on 30^th Aug 2001 has introduced the norms of Non-Performing Assets (NPA) on the recommendations of Narasimham Committee under the title” Recommendations & prudential norms for Income Recognition and Asset Classification and provisioning for the advance portfolio of the banks” with the intention of proper disclosure of profit & loss and to reflect the financial health of banks.

Accordingly, the provisioning is required to be made on the basis of classification of assets based on the period for which the assets have remained non-performing and the availability of security and the realizable value thereof.

Non-Performing Asset Identification

An asset becomes non-performing when it ceases to generate income for the bank & becomes a non-productive asset. It can be broadly classified as given below.

Type of loan	Identification
Term Loan	The account is treated as NPA if interest and/ or installment remains overdue for a period of more than 90 days.
Cash Credit & Overdraft accounts	An account is treated as NPA, if the account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
Bill Purchased/ Discounted	Bill remains overdue for a Discounted period of more than 90 days.
Agricultural Advances	In case of Short duration crops, the installment of principal or interest thereon remains overdue for two crop seasons  In case of long-duration crops, the installment of principal or interest thereon remains overdue for one crop season.
Liquidity facility	Remains outstanding for more than 90 days in respect of securitization transaction.
Derivative Transactions	Overdue receivables representing positive mark to a market value of a derivative contract remaining unpaid for a period of 90 days from the specified due date.

An account is classified as NPA only if interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

Asset Classification

NPA 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 as under;

1. Standard assets: – These are assets which are regular in paying interest/installment & its operations are normal.
2. Sub-standard assets:  Earlier a sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 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 jeopardise the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.[1]
3. Doubtful assets: – A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, this period of Two year was reduced to 18 months.
4. Loss Assets: – An asset identified by Bank or by internal/external auditor/RBI as loss asset with a little recoverable value. 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. In respect of accounts where there are potential threats to recovery because of erosion in value of Security or fraud by borrower, such accounts should directly be classified as doubtful/ loss asset irrespective of the period for which it remained as NPA.

•   Up gradation of Accounts
• Reschedule of recovery cannot give the advance a better classification than the previous one.
• NPA accounts can be upgraded to Performing Accounts, provided all over dues are adjusted or at least reduced to a period of less than 90 days.
• Up gradation within the NPA category is not permitted i.e. Doubtful account cannot be made substandard even if the over dues are reduced to less than 18 months.[2]

PROVISIONING NORMS

STANDARD ASSETS

 (i) The provisioning norms of all types of standard assets are explained below. Banks should make general provision for standard assets at the following rates for the funded outstanding on a global loan portfolio basis:

 (a) Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at 0.25 percent;

 (b) advances to Commercial Real Estate (CRE) Sector at 1.00 percent;

(c) Advances to Commercial Real Estate – Residential Housing Sector (CRE – RH) at 0.75 percent.

 (d) All other loans and advances not included in (a) (b) and (c) above at 0.40 percent.

SUB STANDARD ASSETS

1. A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.
2. The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent,  i.e., a total of 25 per cent on the outstanding balance. However, in view of certain safeguards such as escrow accounts available in respect of 23 DBOD-MC on IRAC Norms – 2015 infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 per cent. To avail 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.

DOUBTFUL ASSETS

1. 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. ii. In regard to the secured portion, provision may be made on the following basis, at the rates.
2. ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:

LOSS ASSETS

Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.

Conclusion

Presently the major problem for the banking sector in India is Non-performing assets. Where NPA had shown a huge impact on the Indian economy.  As per current data available, the total Banks’ NPA decline was to Rs 8.34 trillion at March-end 2021. [3]

Private sector Bank

In the fiscal year 2020, the value of gross non-performing assets of private banks across India amounted to over 2.1 trillion Indian rupees. It is the first time that the value of gross NPA reached more than two trillion Indian rupees. Non-performing assets have posed a big problem for banks in India and experts point that this crisis had been long in the making. Since more banks are facing a problem of risky or non-performing assets, the profitability and solvency of banks have gone down.[4]

Public sector Bank

The public sector banks collectively owed approximately 6.8 trillion Indian rupees in non-performing assets in the fiscal year 2020. This value was much higher, at around 7.5 trillion rupees in the previous fiscal year, indicating a slow but slight relief for India’s economy in terms of non-paying assets at public Sector banks[5]

So by comparing both the Sectors, we can see that the Public sector banks are highly affected than Private sector banks due to high NPAs. The increasing level of NPAs impacted the profitability of the banks and also the economy of the country. The factors in increasing the NPA are poor credit management policies, intentional loan defaults, loans sanctioned without inquiry for agricultural purposes. One of the reasons for increase in NPA is also the aggressive credit policy of giving high amount of loans.

References

1. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9908&Mode=0
2. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9908&Mode=0#a

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[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/101MC16B68A0EDCA9434CBC239741F5267329.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/23068.pdf

[3] https://tradingqna.com/t/need-list-of-top-the-10-banks-with-lowest-npa/100231/4

[4] https://www.statista.com/statistics/1063340/india-gross-npa-value-private-banks/

[5] https://www.statista.com/statistics/1064657/india-gross-npa-public-sector-banks-india/