Non Performing Assets & its' Role in Indian Perspective
b) Net NPA: are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. In India, bank's balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following:
Reasons for an account becoming NPA:
1) Internal Factors:
* Funds borrowed for a particular purpose but not use for the said purpose.
* Project not completed in time.
* Poor recovery of receivables.
* Excess capacities created on non-economic costs.
* In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets.
* Business failures.
* Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns.
* Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc.
* Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delaying settlement of payments\ subsidiaries by government bodies etc.,
2) External Factors:
* Sluggish Legal System i.e. long legal tangles, changes that had taken place in labour laws & lack of sincere effort.
* Scarcity of raw material, power and other resources.
* Industrial Recession.
* Shortage of raw material, raw material / input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents.
* Failures, nonpayment over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc.
* Government policies like excise duty changes, Import duty changes etc.
Impact of NPA:
1) Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn't affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (Return On Investment), which adversely affect current earnings of bank.
2) Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money, routine payments and dues.
3) Involvement of Management: Time and efforts of management is another indirect cost which bank has to, bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now day s banks have special employees to deal and handle NPAs, which is additional cost to the bank.
4) Credit Loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks.
Symptoms of NPA:
There are four symptoms by which one can recognize a Performing Asset turning in to Non Performing Asset.
* Non-payment of the very first installment in case of term loan.
* Bouncing of cheques due to insufficient balance in the accounts.
* Irregularity in installment.
* Irregularity of operations in the accounts.
* Unpaid overdue bills
* Declining Current Ratio.
* Payment which does not cover the interest and principal amount of that installment.
* While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.
2) Operational and Physical:
* If information is received that the borrower has either initiated the process of winding up or are not doing the business.
* Overdue receivables.
* Stock statement not submitted on time.
* External non-controllable factor like natural calamities in the city where borrower conduct his business.
* Nonpayment of wages.
3) Attitudinal Changes:
* Use for personal comfort, stocks and shares by borrower.
* Avoidance of contact with bank.
* Problem between partners.
* Changes in Government policies.
* Death of borrower.
* Competition in the market.
Preventive Measurement for NPA:
1) Early Recognition of the Problem: Invariably, by the time banks start their efforts to get involved in a revival process, it too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank s dues.
2) Identifying Borrowers with genuine intent : Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who have intelligent inputs with regard to promoters sincerity, and capability to achieve turnaround. Based on this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. "Special Investigation" In this regard banks may consider having of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.
3) Timeliness & Adequacy of response: Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoter s commitment, has to be adequate in terms of extend of additional funding and relaxations etc. Under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.
4) Focus on Cash flows : While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.
5) Management Effectiveness: The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit s fortunes. A bank may commit additional finance to angling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered.
6) Multiple Financing: During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks / FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.
Procedures for NPA identification:
1) Internal Checks and Control: Since high level of NPAs dampens the performance of the banks identification of potential problem accounts and their close monitoring assumes importance. Though most banks have Early Warning Systems (EWS) for identification of potential NPAs, the actual processes followed, however, differ from bank to bank. The EWS enable a bank to identify the borrower accounts which show signs of credit deterioration and initiate remedial action. Many banks have evolved and adopted an elaborate EWS, which allows them to identify potential distress signals and plan their options beforehand, accordingly. The early warning signals, indicative of potential problems in the accounts, viz. persistent irregularity in accounts, delays in servicing of interest, frequent devolvement of L/Cs, units' financial problems, market related problems, etc. Are captured by the system. In addition, some of these banks are reviewing their exposure to borrower accounts every quarter based on published data which also serves as an important additional warning system. These early warning signals used by banks are generally independent of risk rating systems and asset classification norms prescribed by RBI. The major components/processes of a EWS followed by banks in India as brought out by a study conducted by Reserve Bank of India at the instance of the Board of Financial Supervision are as follows:
i. Relationship Manager/Credit Officer: The Relationship Manager/Credit Officer is an official who is expected to have complete knowledge of borrower, his business, his future plans, etc. The Relationship Manager has to keep in constant touch with the borrower and report all developments impacting the borrow able account. As a part of this contact he is also expected to conduct scrutiny and activity inspections. In the credit monitoring process, the responsibility of monitoring a corporate account is vested with Relationship Manager/Credit Officer.
ii. Know your client ' profile (KYC): Most banks in India have a system of preparing `knowyour client' (KYC) profile/credit report. As a part of `KYC' system, visits are made on clients and their places of business/units. The frequency of such visits depends on the nature and needs of relationship.
iii. Credit Rating System: The credit rating system is essentially one point indicator of an individual credit exposure and is used to identify measure and monitor the credit risk of individual proposal. At them whole bank level, credit rating system enables tracking the health of banks entire credit portfolio. Most banks in India have put in place the system of internal credit rating. While most of the banks have developed their own models, a few banks have adopted credit rating models designed by rating agencies. Credit rating models take into account various types of risks viz. financial, industry and management, etc. associated with a borrow able unit. The exercise is generally done at the time of sanction of new borrow able account and at the time of review renewal of existing credit facilities.
iv. Watch-list/Special Mention Category: The grading of the bank's risk assets is an important internal control tool. It serves the need of the Management to identify and monitor potential risks of a loan asset. The purpose of identification of potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the bank to protect against the loan asset becoming non-performing. Most of the banks have a system to put certain borrow able accounts under watch list or special mention category if performing advances operating under adverse business or economic conditions are exhibiting certain distress signals. These accounts generally exhibit weaknesses which are correctable but warrant banks' closer attention. The categorization of such accounts in watch list or special mention category provides early warning signals enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take necessary preventive steps to avoid their slippage into non performing advances. Early Warning Signals It is important in any early warning system, to be sensitive to signals of credit deterioration. Early warning signals can be classified into five broad categories viz.
* Management and
* External factors.
2) Management/Resolution of NPAs :
A reduction in the total gross and net NPAs in the Indian financial system indicates a significant improvement in management of NPAs. This is also on account of various resolution mechanisms introduced in the recent past which include the SRFAESI Act, one time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs. From the data available of Public Sector Banks as on March 31, 2003, there were 1,522 number s of NPAs as on March 31, 2003 which had gross value greater than Rs. 50 million in all the public sector banks in India. The total gross value of these NPAs amounted to Rs. 215 billion. The total number of resolution approaches ( including cases where action is to be initiated) is greater than the number of NPAs, indicating some double counting. As can be seen, suit filed and BI FR are the two most common approaches to resolution of NPAs in public sector banks. Rehabilitation has been considered/ adopted in only about 13% of the cases. Settlement has been considered only in 9% of the cases. It is likely to have been adopted in even fewer cases. Data available on resolution strategies adopted by public sector banks suggest that Compromise settlement schemes with borrowers are found to be more effective than legal measures. Many banks have come out with their own restructuring schemes for settlement of NPA accounts. State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of information between banks and FIs for curbing the growth of NPAs incorporated credit Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs. As per the recommendations of the working group, Banks and FIs are now required to submit the list of suit-filed cases of Rs. 10 million and above and suit filed cases of willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share this information with commercial banks and FIs so as to help them minimize adverse selection at appraisal stage. The CIBIL is in the process of getting operationalised.
3) Willful Defaulters: RBI has issued revised guidelines in respect of detection of willful default and diversion and siphoning of funds. As per these guidelines a willful default occurs when a borrower defaults in meeting its obligations to the lender when it has capacity to honor the obligations or when funds have been utilized for purposes other than those for which finance was granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent their access to capital markets. Sharing of information of this nature helps banks in their due diligence exercise and helps in avoiding financing unscrupulous elements. RBI has advised lenders to initiate legal measures including criminal actions, wherever require ed, and undertake a proactive approach in change in management, where appropriate.
4) Legal and Regulatory Regime
i. Debt Recovery Tribunals: DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain cases referred to them, by the banks and FI s for recovery of debts due to the same. The order passed by a DRT is appealable to the Appellate Tribunal but no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the amount due from him as determined by it. However, the Affiliate Tribunal may, for reasons to be received in writing, waive or r educe the amount of such deposit. Advances of Rs. 1 million and above can be settled through DRT process. An important power confer red on the Tribunal is that of making an interim order (whether by way of injunction or stay) against the defendant to debar him from transferring, alienating or otherwise dealing with or disposing of any property and the assets belonging to him within prior permission of the Tribunal. This order can be passed even while the claim is pending. DRTs are criticized in respect of recover y made considering the size of NPAs in the Country. I n general, it is observed that the defendants approach the High Country challenging the verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the Act is often challenged in the court which hinders the progress of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of infrastructure.
Lokadalats: The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987 helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counseling between the parties and to reduce burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million can be brought before the Lokadalat and every award of the Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any court against the award made by the Lokadalat. Several people of particular localities various social organizations are approaching Lokadalats which are generally presided over by two or three senior persons including retired senior civil servants,
defense personnel and judicial officers. They take up cases which are suitable for settlement of debt for certain consideration. Parties are heard and they explain their legal position. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. I f the compromise is arrived at, the parties to the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is not adhered to by the parties, the suits pending in the court will proceed in accordance with the law and parties will have a right to get the decree from the court. In general, it is observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets. In any case, we should continue our efforts to seek the help of the Lokadalat.
iii. Enactment of SRFAESI Act : The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act" (SRFAESI) provides the for mal legal basis and regulatory framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs, the Act deals with the following largely aspects,
* Securitization and Securitization Companies
* Enforcement of Security Interest
* Creation of a central registry in which all securitization and asset reconstruction transactions as well as any creation of security interests has to be filled.
Institution of CDR Mechanism: (Corporate Debt Restructuring)
The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable
entities facing financial difficulties. The CDR mechanism instituted in India is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR mechanism has been to
ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is intended
to preserve viable corporate affected by certain internal/external factors and minimize losses to creditors/other stakeholders through an orderly and coordinated restructuring programme. RBI has issued
revised guidelines in February 2003 with respect to the CDR mechanism. Corporate borrowers with borrowings from the banking system of Rs. 20crores and above under multiple banking arrangement are
eligible under the CDR mechanism. Accounts falling under standard, sub-standard or doubtful categories can be considered for restructuring.
2.3 Hypothesis Testing for Private Sector Banks:
H0 : There is no significant correlation between Net NPA and Net Profit of Private
Sector Banks for last 9 years
H1 : There is correlation between Net NPA and Net Profit of Private Sector Banks for
last 9 years.
Hypothesis Testing for Foreign Sector Banks:
H0 : There is no significant correlation between Net NPA and Net Profit o f Foreign
Sector Banks for last 9 years.
H1: There is correlation between Net NPA and Net Profit of private Sector Banks for last 9 years.
In all cases.
* There is Negative Co-relation between Net Profit & Net NPA of Public Sector Banks .
* There is Positive Co-relation between Net Profit & Net NPA of Private Sector Banks .
* There is Positive Co-relation between Net Profit & Net NPA of Foreign Sector Banks .
* Research Methodology : C.R. Kothari
* http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India
* http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to Banks of India
Source: E-mail December 20, 2014
Articles No. 1-99 / Articles No. 100-199 /
Articles No. 200-299 / Articles No. 300-399 / Articles No. 400-499/ Articles No. 500-599
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