24-08-2012, 11:55 AM
Karnataka State Co-operative Apex Bank Ltd
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INTRUDUCTION:
NON PEERFORMING ASSETS (NPA):
Meaning:
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. Such Non Performing Asset shall have well defined credit weaknesses, which jeopardize the liquidation of the debt and characterized by distinct possibility that the bank would sustain same loss, if the deficiencies are not corrected.
The crucial factor that decides the performance of banks and the financial Institution now days is the spotting of Non-Performing Assets. Banks are now required to recognize such loans periodically and then classify the assets.
An asset becomes non-performing when the interest and/or installments of principal is delayed and not received before a stipulated time.
DEFINITION OF THE NPA:
In the words of Shorn of Jargon, “Non-Performing Assets” are loans given by banks, where borrowers are not able to service their interest on due dates. NPA is a part of banking throughout the world. Incidence of NPA is higher in public sector banks in comparison to private sector banks and Foreign Banks in India.
An asset becomes non-performing when it ceases to generate income for the bank.
MODERN CONCEPTS OF NPA:
NPA came into Indian Financial System consequent to introduction of prudential accounting norms as per Narasimhan Committee. An era of talking profits (even unrealized) was changed to providing for expected lose. Days of “counting the chickens before the eggs hatch” are over.
From the financial year 1991-92 the system of accounting came into existence. More and more new reforms were introduced in this year. New accounting systems for classification of loan and interest came into effect. The financial institutions and bank adopted income recognition rules. RBI also took keen interest in this regard and laid guidelines.
As a result the method of “asset classification” came into force. While introducing of basic committee recommendation where also taken into consideration. As per the norms of these standards income was recognized only in respect of standard or performing loans. Steps were taken to debit the borrowers account only when borrowers pay the outstanding interest and installments. Action and initiative were taken to recover as and when the interest and installment becomes due. This becomes mandatory for banks and financial institutions.
DOUBTFUL ASSETS:
These are the assets “the recovery of which is highly questionable and impossible” it is usually a non-performing asset for a period exceeding 3 years in respect of both agricultural and non-agricultural loans. In case of all types of loans, where installments are overdue for more than 3 years, the entire outstanding in term loan should be treated as doubtful. As in the case of sub-standard assets, rescheduling does not entitle a bank to upgrade the quality of advance automatically.
4LOSS ASSETS:
They are those were lose is identified as no recoverable by the bank/auditor/RBI/NABARD inspectors but the amount has not been written of wholly or partially. In other words, an asset which is considered unrealizable and/or of such little value that its continuance as a doubtful asset is not worthwhile, should be treated as a loss assets will include overdue loans in cases.
• Where decrees or execution petitions have been time barred or documents are lost or no legal proof is available to claim the debt.
• Where the members and their sureties are declared insolvent or have died leaving no tangible assets.
• Where the members have left the area of operation of the society (refers to the borrowers) in whose the respective loan account with SCB /CCB leaving no property and their sureties have also no means to pay the dues.
INCOME RECOGNITION:
The income recognition is linked to the concept of performance of the assets. In other words the income from performing assets only is to be recognized. The income from Non-performing Assets is recognized only to the extent of actual recovery made during the accounting year. Interest is not at all debited to all NPAs from the day on which they are first recognized as Sub-Standard, Doubtful or Loss assets. Branches are also required to note in the required to note in the ledger the date from which interest is not debited to these accounts.
PROVISIONING:
The amount of provision required to be created for each assets depends on the classification of the asset, availability/value of security, amount of ECGC/other Guarantee available, the age of the NPA etc.
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 outstanding 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.