NPA MANAGEMENT – AN OPPORTUNITY FOR CAs Presentation by : S. Ravi, FCA

INTRODUCTION Non-performing assets (NPAs) are one of the major concerns for banks in India as they reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. NPAs affect the liquidity and profitability, in addition to posing threat on quality of asset and survival of banks. To improve the financial health in the banking system it is necessary to trim down NPAs. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

CURRENT STATUS OF NPAs According to latest data released by RBI, Gross non-performing asset (GNPA) ratio has risen to 4.45% as on March 2015 as compared to 4.1% in March 2014 Stressed assets ratio, which is GNPA plus restructured standard advances for the system, stood at 10.9%, as at the end of March, 2015 as compared to 10% in March, 2014 and 10.7% in September 2014. GNPAs for public sector banks as on March 2015 stood at 5.17%, while the stressed assets ratio stood at 13.2% The capital adequacy ratio of the banking system has been steadily declining and at the end of March 2015, it stood at 12.70% as against 13.01% in March 2014. March 2013 March 2014 March 2015 Gross NPAs 3.4% 4.1% 4.45% Net NPAs - 2.2% 2.36% Overall Stressed Advances 9.2% 10 10.9% NPA Management – An Opportunity for CAs By: S. Ravi, FCA

DEFINITION OF NON PERFORMING ASSETS (NPAs) A non performing asset (NPA) is a loan or an advance where; interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC), the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops and for one crop season for long duration crops, the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated Feb 1,2006. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

‘OUT OF ORDER’ AND ‘OVERDUE’ ‘Out of Order’ status An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. Even if the outstanding in the account is within limit/DP, but there are no credits continuously for 90 days or credits are not enough to cover interest debited, the account should be treated as ‘out of order’. ‘Overdue’ Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

TYPES OF LOANS Nature of Facility Parameters Term Loan Interest and/or instalment of principal remain overdue beyond 90 days Overdraft/Cash Credit Remains “out of order” Bill Purchased/discounted Remains overdue beyond 90 days Crop Loans (Short duration crops) Instalment of principal or interest thereon remains overdue for 2 crop seasons (Long duration crops) Instalment of principal or interest thereon remains overdue for 1crop season Securitisation transactions Amount of liquidity facility remains outstanding beyond 90 days Derivative transactions Overdue receivables representing positive mark-to-market value of a derivative contract which remains unpaid beyond 90 days from specified due date for payment NPA Management – An Opportunity for CAs By: S. Ravi, FCA

CLASSIFICATION OF NPAs Substandard Assets Which has remained NPA for a period less than or equal to 12 months. Has credit weaknesses that jeopardise the liquidation of the debt & are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets Which has remained in the substandard category for a period of 12 months. Has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and doubtful. 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. Considered uncollectible and of little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

PROVISIONING NORMS Category Provision Required (%) Standard Assets Direct Advances to Agriculture & SME Sectors - 0.25% Commercial Real Estate Advances - 1% Advances to Commercial Real Estate (Residential Housing Sector) - 0.75% All other Loans & Advances not included in above - 0.40% Substandard Assets Secured Exposure - 15% Unsecured Exposure for Escrow A/cs available in case of Infrastructure lending, infrastructure loan accounts - 20% Other Unsecured Exposure - 25% Doubtful Assets Up to one year :- Secured - 25% & Unsecured - 100% One to three years :- Secured - 40% & Unsecured - 100% More than three years :- 100% Loss Assets 100% of outstanding amount NPA Management – An Opportunity for CAs By: S. Ravi, FCA

CAUSES OF NPAs Causative factors for rising NPAs in the banks are 3 ‘B’s - Business Environment, Borrower and Banker Business Environment Recession in the economy Sudden change in Global & Domestic markets Lack of conductive legal system for loan recovery Lack of cohesive regulatory framework Policy reversal i.e. changes in government policies Social political pressures on commercial credit decisions Natural Calamities Scams Borrower Improper choice of project/activity Adoption of obsolete technology Promoters/Management disputes Inefficient Management Resource crunch Strained labour relation Diversion of funds Willful defaulter Fraudulent intention Banker Lack of credit skill Delay in credit decision & disbursement Credit decisions taken under extraneous influences Lack of proper credit monitoring Lack of effective NPA management NPA Management – An Opportunity for CAs By: S. Ravi, FCA

IMPACT OF NPAs Profitability of banks is hampered severely as the banks do not earn any income from NPAs, rather they incur cost for their maintenance and have to provide for future losses. Higher provisioning requirement on mounting NPAs adversely affect capital adequacy ratio Credit flow to needy persons/ sectors is held up. Cost of credit i.e. interest rate goes up and consequently the high interest rate affects the viability of many running units. Decrease the value of share sometimes even below their book value in the capital market. NPAs affect the risk facing ability of banks. Waste of valuable Management time. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

PROCESS OF NPA MANAGEMENT Process – NPA Management Stress Identification in the account Creating a sub-asset category viz. ‘Special Mention Accounts’ (SMA) with the three sub - categories as under:- SMA -NF: Principal /interest payment not overdue for more than 30 days but account showing Non-financial (NF) signals of incipient stress SMA -1: Principal /interest payment overdue between 31-60 days SMA -2: Principal /interest payment overdue between 61-90 days Restructuring Prior NPA Post NPA Up-gradation/ Recovery Up-gradation – CDR, JLF etc. Recovery – SARFAESI, DRT , OTS etc. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

NPA MANAGEMENT – PREVENTIVE MEASURES Credit Appraisal & Risk Management Mechanism Documentation of credit policy & credit audit immediately after sanction necessary to upgrade the quality of credit appraisal in banks Banking system equipped with prudential norms to minimize credit risk Organizational Reformation Improvement in the managerial efficiency, skill up gradation for proper assessment of credit worthiness Reduce Dependence on Interest Banker can earn sufficient net margin by investing in safer securities not at a high rate of interest Facilitates for limiting of high level of NPAs gradually Potential & Borderline NPAs under Check Require quick diagnosis & remedial measure so that they do not step into NPAs categories Auditors must monitor all outstanding accounts in respect of accounts enjoying credit limits beyond cut-off points, so that new sub-standard assets can be kept under check. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

NPA MANAGEMENT – CORRECTIVE MEASURES Bankers should adopt the corrective measures proactively in credit management Rectification Recovery Restructuring 3 ‘R’ Measures as advised by RBI NPA Management – An Opportunity for CAs By: S. Ravi, FCA

NPA MANAGEMENT – CORRECTIVE MEASURES For revitalizing distressed assets in the economy, RBI has come up guidelines on Joint Lenders’ Forum (JLF) & Corrective Action Plan (CAP) for taking prompt action for early identification of distressed assets & taking corrective actions for regularising the accounts, revival of viable units and recovery/sale of unviable units on proper diagnosing the problems. These guidelines have been made applicable to only Special Mention Account- 2 (SMA-2 accounts are those accounts where principal or interest payment is overdue between 61-90 days); which are reported to Central Repository of Information on Large Credits (CRILIC) by any of the lenders under Consortium and Multiple Banking Arrangements. NPA Management – An Opportunity for CAs By: S. Ravi, FCA

TOOLS FOR RECOVERING NPAs Compromise Settlement Scheme Lok Adalats Corporate Debt Restructuring (CDR) Debt Recovery Tribunals (DRT) SARFAESI Act 2002 (Securitization & Reconstruction of Financial  Assets & Enforcement of Security Interest Act, 2002) Board for Industrial & Financial Reconstruction (BIFR)/AAIFR National Company Law Tribunal (NCLT) Sale of NPA to other banks Declaration of Non-cooperative borrowers & Wilful defaulters NPA Management – An Opportunity for CAs By: S. Ravi, FCA

OPPORTUNITIES FOR CHARTERED ACCOUNTANTS Assist & Prepare Viability study Conduct Business, Assets & Share Valuation Due Diligence Study for Business Restructuring Verification & Vetting of Documents Preparation of Scheme of Arrangement Consultancy on Taxation aspects Monitoring of Accounts Credit Audit of borrowers Stock Audits Forensic Audits Study & Preparation of Rehabilitation package NPA Management – An Opportunity for CAs By: S. Ravi, FCA

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