01-09-2012, 04:18 PM
NPA Management
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INTRODUCTION
What is NPA?
To begin with, it seems appropriate to define nonperforming assets, popularly called NPA. Non Performing Advance is defined as an advance “where payment of interest of repayment of installment of principal (in case of term loans) or both remains unpaid for a period to two quarters or more”. An amount under any of the credit facilities is to be treated as “past due” when it remains unpaid for 30 days beyond due date.
What is NPA Management?
A bank creates an asset by lending 50% to 90% of the project cost. The bank has major stroke in an asset then the borrower, so it should be the responsibility of the bank to see and maintain the health of the asset, while creating an asset the Bank wants that the asset should be performing one from the beginning and remains so till its liquidation. But, sooner or later, it becomes or tends to become NPA; unless managed properly; due to various reasons. Then it becomes a problematic asset and needs intensive care.
TRADITIONAL CONCEPT:
Earlier to 1991, there was no such word as NPA in Indian Financial Institutions which followed traditional way of accounting procedures in respect of various accounts sticky or otherwise. The system pertaining to repayment of principal amounts and periodical interest are as under,
First the bank or financial institutions used to credit the interest accounts on a particular date or given per-specified period (monthly/quarterly/half yearly/yearly), irrespective of whether the borrower paid the interest or not.
There were no prompt actions during those days for recovery of principal/ installment and the interest. Recovery actions for interest and principal amount normally initiated either at the financial year or at the end of the financial year or at the time of expiry of documents. The standards set by the concerned authority are also not up to the level of international standards (for financial institutions and banks Basle Committee norms are internationally accepted standards). All borrower accounts were treated institution the same manner till recovery of procedures were initiated like filling the suits for recovery of outstanding interest and loan installment.
MODERN CONCEPT:
Non-performing Assets came into the Indian Financial System consequent to the introduction of prudential accounting norms. An era of taking profits (even unrealized) was changed to providing for expected loss.
From the financial year 1991-1992, the new system of accounting came into existence. More and more new reforms were introduced institution this year. New accounting system for classification of loan and interest come into effect. The financial institutions and banks adopted Iincome Recognition Norms. Reserve Bank of India also took keen interest in this direction and came out with specific guidelines.
As a result the method of “Asset classification” came into force, while introducing these guidelines internationally accepted standards of Basle Committee recommendations were also taken into considerations. As per the norms of these standards income was recognized only in respect of standard/performing loans.
Standard Asset
When the IRAC norms were introduced in the year 1996-97, no provisioning was required in respect of standard assets. From the year ended 31 march 2000, banks are required to make provision on Standard assets of a minimum of 0.25% of the total outstanding in this category. The provision made on standard assets may not be reckoned as erosion in the value of assets and will form part of owned funds of the bank.
The advances granted against term deposits, National Savings Certificate (NSC) eligible for surrender, Kisan Vikas Patra (KVP), Indira Vikas Patra (IVP), Life policies, Staff loans would attract provision of 0.25% prescribed for Standard Assets. The provision towards standard assets need not be netted from gross advances and should be shown separately as “Contingent provision against Standard Assets” under “Other liabilities and provisions-others”.
General provisioning requirement for ‘Standard advances’ from the present level of 0.25 per cent was increased to 0.40 per cent with effect from the financial year beginning April 1, 2007. Banks direct advances to agricultural and SME sectors would be exempted from the additional provisioning requirement.
Treatment of agricultural advances
In respect of advances granted for agricultural purposes where interest payment is on half-yearly basis synchronizing with harvest, banks should adopt the agricultural seasons as the basis. In other words, if interest has not been paid during the last two seasons of harvest (covering two half-years)* after the principal has become overdue then such an advance should be treated as NPA. Identification of NPA would be done on the same basis as non-agricultural an advance which at present is the 180 days delinquency norm. Crop loans for each season, viz., Rabi and Kharif has to be treated as separate account and IRAC norms have to be applied accordingly.
Provisioning Norms:
The primary responsibility for making adequate provisions for any deterioration in the value of loan assets is that of the bank management and the statutory auditors. The RBI inspectors furnish their assessment to the banks for assisting them in taking a decision in regard to making adequate and necessary provisions in prudential guidelines.
The system of classification of assets as above also forms the basis for determining the provisioning requirements in respect of such assets. The time lag between the accounts becoming doubtful recovery, its recognition, the realization of the security and the erosion overtime in the value of security charged to the Cooperation are taken into account, while determining the quantum of provision to be made in respect of each category of assets Based on these factors, the following provisioning norms have been prescribed