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Define NPAs, Asset Classification, Reasons for NPA - Complete Coverage in one post
What are NPAs?
NPA (Non-Performing Asset): It is an asset which ceased to generate income for the bank. The conditions under which an asset becomes an NPA are as follows:
1. If interest or installment or both of principal remain overdue for a period of more than 90 days in respect of a term loan.
2. If Overdraft/ Cash Credit for an account remains 'out of order'.
3. If bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
4. If installment of principal or interest remains overdue for two crop seasons for short duration crops / one crop season for long duration crops.
RBI has classified non performing assets into the following three categories based on the period for which the asset has remained non performing and the realisability of the dues:
1. Sub Standard Assets: With effect from March 31, 2005, a sub_standard asset is one, which has remained NPA for a period less than or equal to 12 months.
2. Doubtful Assets: With effect from March 31, 2005, an asset is classified as doubtful if it has remained in the sub_standard category for a period of 12 months.
3. Loss Assets: A loss asset is one 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. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some rescue or recovery value.
Reasons for NPA:
1. Macroeconomic situations: When a country is not growing on expected lines i.e. GDP is not growing, no demand for goods, then industry suffers and not able to payback.
2. Increased Interest Rate: The loan is taken at a time when interest rates were much higher than the present interest rate.
3. When some sectors of the economy are doing bad like Infrastructure, Power due to Land acquisition and forest related issues and environment clearances.
4. Wilful defaulting: When one is able to pay but is not paying like Vijay Mallya.
Now what does the Bank / FIs do?
Firstly the Bank /FIs inspect whether there are genuine reasons or not for non-repayment of loans.
Here genuine reasons include factors that are beyond one's control and certain internal, external reasons.
In this case, for the revival of the corporates as well as for the safety of the money lent by the banks and FIs, timely support through restructuring is done. This system of restructuring of loans is called as Corporate Debt Restructuring.
What if the case is not genuine?
In this case Bank / FIs may
1. refer the case to Debt Recovery Tribunal (DRT).
2. refer to Asset Reconstruction Companies (ARC) as per SARFAESI Act, 2002.
3. file winding up petition in the court of law.
4. file criminal case against the wilful defaulter.
Let's first take the genuine case:
1. Corporate Debt Restructuring:
It has been implemented by RBI from August 2001.
It covers only multiple banking accounts or syndicated / consortium loan accounts of corporate borrowers where outstanding exposure is Rs 10 crore or more.
The accounts are eligible for consideration under the CDR system provided at least 75% of the creditors (by value of loan) and 60% of creditors (by number of loan) agree to the proposal.
Note: The scheme will not apply to accounts involving only one financial institution or one bank..
In case if the reason of non-repayment is not genuine then Bank / FIs can have following options:
1. Debt Recovery Tribunal (DRT):
These are established in various cities under "Recovery of Debts due to Banks and Financial Institutions (RDDBF) Act, 1993".
Banks / FIs can file an application with DRT or recover dues from persons / companies.
As per the act the issue is to be settled in 6 months.
In this case the success rate is around 20-30%.
2. Asset Reconstruction Companies (ARC):
This is formed under the "Securitization and Reconstruction of financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002".
It empowers the Banks & FIs to recover NPAs without the intervention of the court.
It was brought to overcome the inefficiency of DRTs.
Under this, Banks / FIs have the power to sell their Bad loans.
The loans which are of Rs 1 lakh and more fall in this category.
RBI has the power to issue licence to ARCs. Asset Reconstruction Company (India) Ltd is the first ARC established in India.
3. Filing of Criminal Cases: Criminal cases can be filed against the borrower if the banks feel the non-repayment of the debt is due to 'wilful default'. Example is Vijay Mallya defaulting on SBI, UCO, United Bank of India.
4. Winding up petitions:
Under the Companies Act, if a borrower fails to pay back the loan, a petition can be filed. For this a Official liquidator is appointed. It is a long procedure and may not give satisfactory results to banks.
Apart from the steps described above Banks can take other prudential steps, which are:
1.Corrective Action Plan: As per RBI Before the loan becomes an NPA, classify them as
SMA-0(Special Mention Account) = upto 30 days.
SMA-1 = 31 to 60 days.
SMA-2 =61 to 90 days.
In order to take corrective actions.
2. Joint lenders' forum: RBI has mandated to constitute a Joint Lenders' Forum at SMA-2 stage, if the loan exposure is more than Rs 100 Crore or more.
3. Strategic Debt Restructuring: RBI has announced to convert debt into equity i.e. Bank will assume the role of management (ownership).