Friday, 3 February 2012

NON PERFORMING ASSETS (NPA)

NON PERFORMING ASSETS (NPA):
 
WHAT IS A NPA (NON PERFORMING ASSET):
Action for enforcement of security interest can be initiated only if the secured asset is classified as Nonperforming asset.Non performing asset means an asset or account of borrower,which has been classified by bank or financial institution as sub –standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI .

An amount due under any credit facility is treated as “past due “when it is not been paid within 30 days from the due date.Due to the improvement in the payment and settlement system, recovery climate, up gradation of technology in the banking system etc, it was decided to dispense with “past due“concept, with effect from March 31, 2001. 

Accordingly as from that date, a Non performing asset shell be an advance where:

>>Interest and/or installment of principal remain overdue fora period of more than 180 days in respect of a term loan,

>>The account remains ‘out of order ‘ for a period of more than 180 days ,in respect of an overdraft/cash credit(OD/CC.).

>>The bill remains overdue for a period of more than 180days in case of bill purchased or discounted.

>>Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and

>>Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt ’90 days overdue ‘norms for identification of NPAs,from the year ending March 31,2004,a non performing asset shall be a loan or an advance where;

>>Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,


>>The account remains ‘out of order ‘ for a period of more than 90 days ,in respect of an overdraft/cash credit (OD/CC)

>>The bill remains overdue for a period of more than 90days in case of bill purchased or discounted.iv.Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and

>>Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Out of order :
An account should be treated as out of order if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. in case where the out standing balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period ,these 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 due date fixed by the bank.

FACTORS FOR RISE IN NPA's:

The banking sector has been facing the serious problems of the rising NPA's. But the problem of NPA's is more in public sector banks when compared to private sector banks and foreign banks. The NPA's in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS:

Ineffective recovery tribunal :
The Govt. has set of numbers of recovery tribunals,which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.


Wilful Defaults :

There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to themas advances and loans

Natural calamities :
This is the measure factor, which is creating alarming rise in NPA's of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit.Mainly ours framers depends on rain fall for cropping. Due to irregularities of rain fall the framers are not to achieve the production level thus they are not repaying the loans.

Industrial sickness:

Improper project handling , ineffective management, lack of adequate resources , lack of advance technology ,day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.

Lack of demand:

Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles uptheir product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the nonrecoverable as NPAs and has to make provision for it.

Change on Govt. policies:
With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPA's. The fallout of hand loom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central govt to revive the hand loom sector has not yet been implemented. So the over dues due to the hand loom sectors are becoming NPA's.


INTERNAL FACTORS:


Defective Lending process:


There are three cardinal principles of bank lending that have beenfollowed by the commercial banks since long :

>>Principles of safety.
>>Principle of liquidity.
>>Principles of profitability.

Principles of safety:

By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers:


1.Capacity to pay
2.Willingness to pay

Capacity to pay depends upon:

>>Tangible assets
>>Success in business

Willingness to pay depends on:
>>Character
>>Honest 
>>Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.


Inappropriate technology:

Due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized.

Improper swot analysis:

The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and creditworthiness of the borrower.
• Banks should consider the borrowers own capital investment.
• It should collect credit information of the borrowers from:
>>From bankers
>>Inquiry from market/segment of trade, industry,business
>>From external credit rating agencies.
• Analyze the balance sheet True picture of business will be revealed onanalysis of profit/loss a/c and balance sheet.
• Purpose of the loan
>>When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity,banks should grant loan for productive purpose only.Bank should analyze the profitability, viability, long term acceptability of the project while financing. 

Managerial deficiencies:
The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the:
>>Marketability
>>Acceptability
>>Safety
>>Transferability.

The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If anew big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected.Like


Ex: OSCB suffered loss due to the OTM Cuttack,and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs) ,and the hand loom sector Orissa

hand loom WCS ltd(2439.60lakhs).

Absence of regular industrial visit:
The irregularities in spot visit also increases the NPA's.Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits
Re loaning process:
Non remittance of recoveries to higher financing agencies and re loaning of the same
have already affected the smooth operation of the credit cycle
.
Due to re loaning to the defaulters and CCB's and PAC's,the NPA's of OSCB is increasing day by day
 
PROBLEMS DUE TO NPA :
1.Owners do not receive a market return on there capital .in the worst case, if the banks fails, owners loose their assets. In modern times this may affect a broad pool of shareholders.
2.Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors loose their assets or uninsured balance.
3.Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth.
4.Non performing loans epitomize bad investment. Thermostatically credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in mis allocation of capital, and by extension, labor and natural resources.
5. Non performing asset may spill over the banking system and contract the money stock, which may lead to economic contraction. This spill over effect can channelize through liquidity or bank insolvency:
>>when many borrowers fail to pay interest, banks may experience liquidity shortage. This can jam payment across the country,
>>illiquidity constraints bank in paying depositors.c) overcapitalized banks exceeds the banks capital base.




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