THEORETICAL ASPECT OF THE NPA - NON-PERFORMING ASSETS

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1 THEORETICAL ASPECT OF THE NPA - NON-PERFORMING ASSETS S. SARAVANAMBIGADEVI 1 A. MENAKA DEVI 2 1 Assistant Professor, Department of Commerce. Vellalar College for Women, Erode 2 Assistant Professor, Department of B.Com. Cooperation, Vellalar College for Women, Erode. ABSTRACT Co operative bank in India plays an important role in the economic development of the country. They are giving timely assistance to rural peoples by way of giving loans and other amenities. Urban Cooperative Bank (UCB) refers to the primary co-operative banks which were set up to meet the banking and credit requirements of urban and semi urban people and to protect them from exploitation. One of the vital problems which vitiate cooperative banking is inability of the borrower to repay their contractual obligations of interest and principal, leading to Non-Performing Assets (NPA). Management of NPA is burning issue now a day in banking sector. For that purpose The Narasimham Committee on Financial Sector Reforms has recommended that the policy on income recognition by banks should be in conformity with the international best practices which require classification of assets in two categories, viz., Performing Assets (PA) and Non-performing Assets (NPA). The concept of Non-performing Assets (NPA) was introduced for the first time in the Narasimham Committee report was tabled in Parliament on December 17th Keywords: Performing Asset, Loans, Overdraft, Assets and Classifications. INTRODUCTION The banks are commercial organization and the main business of banking is to collect the deposits from the public and lend it to the individuals, business concerns, institution etc. The lending business is associated with risk. One of the risks in lending is the possibility of account becoming nonperforming assets. Non-performing assets (NPAs) do not earn interest income and repayment of loan to bank does not take place according to repayment schedule affecting income of the bank and their by profitability The non- performing assets do not generate interest but at the same time require banks to make provision for such non- performing assets out of their current profit. The term Non-Performing Assets figured in the Indian banking sector after introduction of financial sector reforms in The prudential norms on income recognition, assets classification and provisioning thereon are implemented from the financial year , as per the recommendation of the committee on the Financial System (Narsimham Committee). These norms have brought in quantification and objectivity into the assessment and provisioning for NPAs. Reserve Bank of India constantly endeavors to ensure that prescriptions in this regard are close to international norms. The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time banks are required to make provision for such NPAs from their current output. PERFORMING ASSETS (PA) All those assets which generate periodical income are called as Performing Assets 77 icmrrjournal@gmail.com

2 NON - PERFORMING ASSETS While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically nonperforming loans. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms. Gross NPA and Net NPA The NPAs figure is normally given in terms of Gross NPA and Net NPA. It is necessary to understand the difference between them before proceeding further in this area. Gross NPA is the amount which has been lent by the bank and remaining outstanding regardless of any interest recorded and debited. In contrast to this, Net NPA is achieved when interest debited to borrower account and not recovered or recognized as income. According to guidelines issued by RBI, every bank is required to make provision for NPAs. Therefore, in simple terms, Gross NPAs is an advance which is considered irrecoverable, for bank has not made provisions, and which is still held in banks books of account. In order to obtain, net NPAs from gross NPAs, the following deductions are to be made: Interest due but not received: i.e. balances in interest suspense account. Claims received from credit guarantors and kept in suspense accounts pending final settlement. Part payment received and kept in suspensions; and Total provisions held. IDENTIFICATION OF ACCOUNT AS NPA RBI has laid down various criteria for classification of various types of advances as NPA which are as under. TERM LOAN Interest and / or installment of principal remain overdue for a period of more than 90 days. One will have to determine the due date of interest and installment. If either interest or installment which is due as on 30th December would be overdue more than 90 days as on 31st March 2006 and the account become NPA. OVERDRAFT / CASH CREDIT If an account remains out of order, it would become NPA. For this purpose an account would be treated out of order if i) The outstanding balance remains continuously in excess of sanctioned limit / drawing power, for 90 days or more, or ii) Even if the outstanding in the account is less than the sanctioned limit/ drawing power there are no credits in the account continuously for 90 days as on the date of balance sheet, or 78 icmrrjournal@gmail.com

3 iii) Credit in the account are not sufficient to cover interest debited during the same period Thus, as on 31st March 2006, if any of the above criteria is satisfied the account would be classified as NPA. BILLS PURCHASED / DISCOUNTED If the bills purchased or discounted remains overdue for a period of more than 90 days from its due date. AGRICULTURAL ADVANCES: A LOAN GRANTED FOR i) Short duration crops will be treated as NPA if the installment of principal or interest thereon remains overdue for two crop season. ii) Long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season. For the purpose of these guidelines long duration crops would be crops with crop season longer than one year and crops, which are not long duration crops would be treated as Short duration crops. Thus an auditor will have to verify the nature/ duration of crop circle and accordingly verify whether an agricultural account is NPA as on 31st March OTHER CREDIT FACILITY In case of any other credit facility, if the amount to be received remains overdue for more than 90 days, then the account will be classified as NPA. INCOME RECOGNITION i) Income from NPA is not recognized on accrual basis but is booked as income only when it is actually received. Therefore for interest on any NPA should not be recognized unless realized. However, interest on advances against term deposits, NSCs, IVPs and Life policies may be taken to income account on the due date, provide adequate margin is available in the account. ii) Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit. iii) If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realized. TYPES / CLASSIFICATIONS OF NPA NPA have been divided or classified into following four types Standard Assets: A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets. Sub-Standard Assets: All those assets (loans and advances) which are considered as nonperforming for a period of 12 months are called as Sub-Standard assets icmrrjournal@gmail.com

4 Doubtful Assets: All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. Loss Assets: All those assets which cannot be recovered are called as Loss Assets. These assets can be identified by the Central Bank or by the Auditors. SOURCES: "Glossary". Reserve Bank of India, Retrieved 27 April REASONS FOR NPAS (A.T.PANNIRSELVAM COMMITTEE FINDINGS) The Reason for the NPA (Non-Performing Assets are in two types. They are internal and external. INTERNAL REASON FOR NPA Wrong / Improper borrower identification. Willful defaults. Incompetent management. Financial indiscipline / diversion of funds. Non-submission of requisite at a submission of wrong/inadequate data/information. Time / Cost overruns due to delayed project implementation, etc. Differences / disputes among Company promoters or controlling family members. Technological obsolescence and low priority to technology up gradation. Inadequate attention to R & D. Poor Location choice. EXTERNAL REASON FOR NPA Poor stake / contribution of borrower. Poor Inventory / Receivable management. Delayed settlement of receivables of borrower by large Industrial houses, Government, Depts., PSUs, etc. Inability to compete in the market because of smaller size and new brand name. Entry into business at an inappropriate time of business cycle. Adverse exchange fluctuations. Non-availability / Irregular supply of critical raw materials or other inputs. Transport bottlenecks. CAUSES ATTRIBUTABLE TO BANK The causes attributable to banks are two types. They are Internal and External Internal Attributable Poor pre-sanction appraisal / unrealistic projections. Poor assessment of commercial viability (due to lack of inadequate data / knowledge on market industry). Delayed decision-making at operative level itself or due to multiplication of processing tiers (without real value addition). Delayed disbursements. Non-compliance of terms of sanction. Incomplete / Defective documentation icmrrjournal@gmail.com

5 Inadequate supervision, absence of effective monitoring (post disbursement) & delays in detection of symptoms & initiation of remedial measures. Over-stress on long relationships / family / group connections even at the cost of commercial viability of projects. Ritualistic reviews (i.e. without proper or objective assessment of risks & requirements). Non-availability of audited financial statements in time and too much reliance on provisional / un-audited data. Lack of Networking / Information Systems amongst branches / Banks enabling borrowers to misuse Bank funds. EXTERNAL ATTRIBUTABLE Changes in regulatory prescriptions causing change in norms for classification. Long drawn legal processes for recovery of loan. Delay in action for rehabilitation of accounts and finalization of rehabilitation package either at the Bank level or at the BIFR level. Non-compliance or delay in compliance of terms of rehabilitation package by borrower. Lack of exchange of information / coordination between financial institutions & Bank. Non-availability of powers for enforcing securities (possession & sale) unlike those enjoyed by SFCs. CAUSES BEYOND BOTH THE BORROWER AND THE BANK General slow-down in the Economy / Recessionary trends. Depressed capital markets and consequent delay in arrangement of funds for the project. Frequent adverse changes in the govt. policies, excise and customs duties, decategorisation of items reserved for SSI, price preferences, cash incentives, product reservation quota system, etc. Changes in policies regarding pollution control including legal decisions as in case of aquaculture and few chemical industries, which virtually ruined them, resulting in huge NPA with banks. Isolated or general law and order problem resulting in stoppage of industrial production and movement of goods. Inadequacy of infrastructure, in particular power resulting in high cost of production and hence lesser marketability of products. Political uncertainties. Ineffective functioning of BIFR / DRT. Outdated laws, labourunrest, Riots, Lockouts, Strikes, etc. Cascading effect of debt Relief Schemes resulting in poor loan repayment environment. Insensitivity of Govt. towards non-payment of dues by PSUs and procedural delays in invocation of govt. guarantees. Slow disposal of recovery cases. Poor selection of schemes and proponents under Govt. sponsored schemes by the different govt. agencies. Delayed release / Non-payment of subsidies allocated by Central / State Govt. etc. which have been factored into the project cost at the time of appraisal. Adverse Court Judgment icmrrjournal@gmail.com

6 CAUSES OF NPA Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses Bank shareholders are adversely affected. Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments. When bank do not get loan repayment or interest payments, liquidity problems may ensue. PSU banks and DFIs have been used as instrument of public policy. Landings under populist schemes like loan melds, directed lending to certain sectors like mini-steel, mini paper, mini-cement units, sugar and cotton spinning co-operative are examples. Most of these loans have joined the ranks of NPAs. Projects financed in the pre-reforms era, with high earnings, low promote, stake with viability based on high tariffs and fiscal concessions have turned sick. The largest to join the ranks of NPAs will be some of the large projects in the core sector financed after opening to private investments. Three decades of government ownership have rendered banks organizationally weak. Faulty appraisals, absence of effective post sanction monitoring, lack of initiative to take timely action against willful defaulters, indecision on existing out of bad loans through OTS due to fear of investigation agencies like CBI. All contributed in no small measures to the worsening situation on NPA front. The mandatory referral to BIFR provides ideal sanctuary to willful defaulters. Large corporate usually delayed payments to SSI and contributed indirectly to the NPA of SSI units. If any installments or interest is not received from creditors at that time bank does not renewed within time in case of cash credit or overdrafts accounts. NPA accounts information is not sent by branch officer to the head office. As a result NPA figures of the head office become smaller. NPA categories are not considered from time to time. IMPACT OF NPAs The impact of NPAs on the performance of banks largely depends on the management of assets and the priority given to recovery of NPAs. Secondly it is important to distinguish between NPAs, which are temporarily classified as such, due to the strict prudential norms stipulated by RBI, and the chronic NPAs where initiation of legal proceedings or enforcement of securities is ultimate means of recovery. Indian banking industry saddled with high NPAs. The reason diversions of funds and willful default have been found to be the major contributing factors for NPAs in public and private. K.H.Vora (2007) in his study entitled Management of Non-Performing Assets and Asset Reconstruction Company observed the impact of NPAs. The effect of NPA on the bank is as under There is loss of interest income. The current profit is reduced, as banks have to make provision for NPA. Capital adequacy ratio is also affected as it is directly related to the quality of assets icmrrjournal@gmail.com

7 It also affects the liquidity position of bank as also recycling of funds due to asset liability mismatch. Banks at times have to borrow at high cost to fulfill their commitment/ obligations, which increases the cost of funds. The high level of non- performing assets also affects the image of the bank in the public. The credit rating of the bank also affected due to high NPA and consequently business prospects in the country & abroad. The NPA has effect on the moral of the staff and may shy away from doing credit business due to fear of NPA. The bank cannot remain competitive in the market due to various adverse effects on the balance sheet and profit. STEPS TAKEN TO REDUCE NPA Massive recovery campaigns are launched. Infrastructure / adequate machinery are provided to branch to render a helping hand. Branch managers are exhorted to exercise extraordinary care in the selection of fresh borrowers so that new borrow accounts does not enter in NPA list. Lot off understanding needed among bank staff and customers to address themselves to the problem of recovery. Prompt control / follow up monitoring measures help to prove borrow accounts becoming irregular. PREVENTION OF NPAs Monitoring and Follow up Measures with the Income Recognition and Asset Classification Norms becoming stricter, Branches are required to be more alert and proactive in monitoring the accounts. For this purpose, monthly interest application has become a useful tool to tackle potential delinquencies or defaults in standard accounts. To retain the asset quality, it is necessary for bank branches to: Recover the over dues or at least the critical amount through active follow up with borrowers. Put the accounts under holding on operations in case of temporary cash flow mismatches. Reschedule the repayment terms as per expected cash flows. Restructure the dues in keeping with the expected cash flows and gaps in cash flows, if any as per guidelines of the bank in their recovery policy. RECOVERY MEASURES-LEGAL MEASURES: Recovery through courts Debt recovery tribunal Corporate debt restructuring National company law tribunal Asset reconstruction companies RRC Act of state Government Recovery Action Innovations by banks Research/reports etc. All these means have to be effectively pursued for resolution of NPA 83 icmrrjournal@gmail.com

8 SUGGESTIONS Even though the total NPA of both the banks are small, the banks have to follow even more stringent measures to tackle problem of Non-performing assets as its operations are small compared to other nationalized bank, it will largely affect its profits. It is seen in the Co-operative banks that most of the borrowers are get the loans from the bank because of their relationship with the higher authorities of the particular banks. It should not be happened. Loans should be lent to the clients based on their credit worthiness. The bank has to maintain friendly relationship with the clients and conduct recovery camps for the effective recovery of loans. There must be an effective and regular follow-up with the customers and need to watch is there any diversion of funds. This process can be taken up at regular intervals. As concern to future feasibility of the banks, provision is necessary. It is advisable for the bank to classify the assets according to the prudential norms of Reserve bank of India and keep aside prescribed amount of provision as a reserve to future likelihood of bank concern. The Co-operative banks should provide training and awareness programs regarding the repayment of loans, effective use of funds, repercussions of nonpayment etc., for effective utilization of available funds and for smooth recovery. The Co-operative banks have to take the necessary action against the defaulters like publishing their names in the local news papers, which will help other Co-operative banks and credit institutions. If the defaults are due to reasons beyond the control of borrower i.e. draughts, floods, natural disasters etc, the banker should suitably restructure the loans taking into consideration of the genuine difficulty of the borrowers. CONCLUSION Non-performing asset is one which does not generated income for the bank. In other words, an advance account which ceases to yield income is a non- performing asset. NPA is not just a problem for bank, but also bad for the economy of the country. The money which is locked in NPA is not available for productive activities. It adversely affects the profit of the bank and result in higher rate of their diligent credit customer. Step should be taken appropriately on the time to avoid NPAs. Qualitative appraisal, Supervision and follow ups should be taken for the present advanced to avoid the further NAPs. It is essential to restructure the strategies for recovery process; this will improve bank general capabilities and meets the prudential requirements. REFERENCES 1. Arya, M. K. (2013). Non-Performing Assets and the Survivability of Banks. Bauddhik, Ashly Lynn Joseph, D. M., A study on Analysisng the Trend of NPA level in Private Sector Banks and Public Sector Banks, International Journal of Scientific Research, 2014, 4 (7), Babu, D. K., Performance Evaluation of Urban Coopearive Bank in India, IOSr Journal of Business and Management, 2012,1 (5), Beri, G. (2008). Marketing Research. New Delhi: The Tata McGraw-Hill COmpanies icmrrjournal@gmail.com

9 5. Brinda, J. N., Management of Non- performing Assets in Virudhunagar District Centarl Cooperative Banks- An Over View, Middle East Journal of Scientific Research,2014, Chandan Chatterjee, J. M., Management of Non- Performing Assets- A Current Scenario. International Journal of Social Science and Interdisciplinary Research, 2012,vol.1 (11), D.Rana, R. (2010). Management of Performing and Non-performing Assets- A Study of selected Urban Co-operative Banks in South Gujarat. Surat: Veer Narmad South Gujarat University icmrrjournal@gmail.com