INTRODUCTION

MEANING OF NPA:
Bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it has not been paid
within 30 days from the due date. Due to the improvement in the payment and settlement
systems, recovery climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as
from that date, a Non performing asset (NPA) shell be an advance where
i.

Interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan,

ii.

The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit(OD/CC),

iii.

The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,

iv.

Interest and/ or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and

v.

Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.

With a view to moving towards international best practices and to ensure greater transparency,
it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the
year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a nonperforming asset (NPA) shell be a loan or an advance where;
i.

Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,

ii.

The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC),

iii.

The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,

iv.

Interest and/ or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and

Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.

Definition of NPAs (NON -PERFORMING ASSETS)

An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank. A non performing asset was defined as a credit facility in respect of
which the interest and / or installment of principal had remained past due for a specified
period of time.

The specified period was reduced in a phased manner as under:

Year ending March 31

Specified period

1993

Four Quarters

1994

Three Quarters

1995 Onwards

Two quarters

An amount due under any credit facility is treated as past due when it has not been paid
within 30 days from the due date. Due to the improvements in the payment and settlement
systems, recovery climate, up gradation of technology in the banking sector, etc, it was
decided to dispense with the past due concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall be an advance where,
i.

Interest and/or installment of principal remain overdue for a period of more than 180 days

in respect of a term loan

ii.

The account remains our of order for a period of more than 180 days, in respect of an
overdraft/cash credit

iii.

Interest and/or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agriculture
purposes

iv.

Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.

With a view to move towards international best practices, it has been decided to adopt the 90
days overdue norm for identification of NPAs, from 31st March, 2004.

TYPES OF NPA:
1. Gross NPA
2. Net NPA

Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made
by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and
loss assets. It can be calculated with the help of following ratio:
Gross NPAs Ratio =

Gross NPAs

Gross Advances

Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burdenof banks. Since in India, bank
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:
Net NPAs =

Gross NPAs Provisions

Gross Advances - Provisions.

Classification of NPAs
Banks are required to classify NPAs further into the following three categories based on the
period for which the asset has remained non-performing and the reliability of the dues:

i.

Sub-standard Assets: A sub-standard asset is one which has remained NPA for a
period less than or equal to 18 months. In such cases, the current net worth of the
borrower, or the current market value of the security charged is not enough to ensure
recovery of the dues to the banks in full. Such assets will have well defined credit
weakness that jeopardize the liquidation of the debt and are characterized by the
distinct possibility that the bank will sustain a loss.

ii.

Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding
18 months. It has all the weaknesses inherent to a sub-standard asset with the added
characteristic that the collection or liquidation in full on the basis of currently
known facts is highly questionable and improbable.

iii.

Loss Assets: A loss asset is one where a loss has been identified by the bank or,
internal or external auditors but the amount has not been written off wholly.

NPA SOME ASPECTS AND ISSUES

1.

The NPAs of banks in India are considered to be at higher levels than those in other
countries. This issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and
disclosure measures initiated by RBI during recent years.

2.

The NPA Management Policy document of SBI lays down to contain net NPAs to less
than 5% of bank's total loan assets in confirmity with the international standard. It is,
therefore necessary that as per guidelines provided in NPA Management Policy
document, every effort be made at all levels to cut down the NPAs. All this requires
greater efforts and teamwork.

3.

It is essential to keep a constant watch over the non-performing assets not just to keep
it performing but also that once they become non-performing, effective measures are
initiated to get full recovery and where this is not possible, the various means are to
be initiated to get rid off the NPAs from the branch books.

4.

NPAs adversely affect the wealth condition of the branch advances as also the
profitability of the branch. Some of the reasons for this are as under:
(a)

Interest cannot be applied on the loan accounts classified as NPAs.

(b)

The Branch 'has to pay interest to central office on outstanding classified as

NPA.

5.

(c)

The Branch has to incur cost in supervision and follow up of such advances.

(d)

Provision has to be made on NPAs at Bank level.

Under Income Recognition, Assets Classification and provisioning, NPA may be Sub
standard, Doubtful or loss assets.
6) Once the assets are classified as NPA, the Branch Manager has to take all the
necessary steps to get the dues recovered there-under to maintain the good health of
advances and the higher profitability at the-Branch. This requires management of NPAs
in such a Planned and scientific manner that the percentage of NPAs to the total advances
will be minimum.

NARSIMHAN COMMITTEE'S RECOMMENDATIONS

Committee on Financial System (CFS) Narsimhan committee which reported in 1991,

meanwhile major changes have taken place in the domestic, economic and institutional
science, indicating the movement towards global integration of financial services. Committee
has presented second generation reforms.
a)

To strength the foundation of financial system.

b)

Related to this, streamlining procedures, upgrading technology and human

resource development.

c)
1.

Structural changes in the system.

It is recommended that an asset be classified as doubtful if it is in the sub standard

category for 18 months in the first instance and eventually for 12 months as loss if it
has been so identified but not written off. These norms, which should be regarded as
the minimum, may be brought into force in a phased manner.

2.

Corporations and FIs should avoid the practice of "ever greening" by making fresh
advances to their troubled constituents only with a view to settling interest dues and
avoiding classification of the loans in question as NPAs. The committee notes that the
regulatory and supervisory authorities are paying particular attention to such breaches
in the adherence to the spirit of the NPA definitions and are taking appropriate
corrective action.

3.

The committee believes that objective should be to reduce the average level of net
NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. These targets
cannot be achieved in the absence of measure to tackle the problem of backlong
NPAs on one time basis and the implementation of strict prudential norms and
management efficiency.

4.

There is no denying the fact that any effort at financial restructuring in the form of
having off NPAs portfolio from the books of the corporation or measures to initiate
the impact of high level of NPAs must go hand with operational restructuring.

Cleaning up the balance sheets of banks would thus make sense only if simultaneous
steps are taken to prevent of limit the reemergence of new NPAs.
5.

Direct credit has a proportionately higher share in NPA portfolio of corporations and
has been one of the factors in erosion in the quality of asset portfolio. There is a
continuing need of Financial Corporations to extend Credit to SSI sector, which is
important segment of national economy but on commercial considerations and on
basis of credit worthiness. Government feels reluctant to accept the recommendation
for reducing the scope of directed credit under priority sector because timy sector of
industry and small businesses have problems with regard to obtaining credit and some
remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may
continue.

6.

With regard to income recognition in India, income stops occurring when

interest/installment of principal is not paid within 180 days. However, we should
move towards international Practices in this regard and introduce the norm of 90 days
in a phased manner by the 2002.

7.

As an incentive to Bank is to make specific provision, the consideration be given to

making such provisions tax deductible.

8.

Banks should pay greater attention to asset liability management to avoid mismatch
and to cover, among others, liquidity and interest rate risks.

9.

It should be encouraged to adopt statistical risk management techniques like value at

risk in respect of balance sheet term which are susceptible to market price fluctuation,
Forex rate volatility and interest rate changes. While the RBI and IDBI may initially,
prescribe certain normative models for market risk management, the ultimate
objective should be that of building up their models and RBI blacklisting them for
their validity on a periodical basis.

10.

There is a need for a greater use of computerized system than at present.

Computerization has to be recognized as an indispensable tool for improvement in
customer service, the institution and operation of better control systems, greater
efficiency in information technology.

11.

State Financial Corporations at present are over regulated and over administered.
Supervision should be based on evolving prudential norms and regulations which
should be adhered to rather than excessive control over administrative and other
aspects of organisation and functioning. Internal audit and internal inspection systems
should be strengthened.

12.

The main issues with regard to operations of Banks are to ensure operational
flexibility and measure of competition and adequate internal autonomy in matters of
loan sanctioning and internal administration.

13.

This calls for some re-examination and the present relevance of directed credit
programme ablest in respect of those who are able to stand on their own feet and to
whom the directed credit programmes with the element of interest concessionality
that has accompanied has become a source of economic rent. It is recommended that
directed credit sector be redefined to comprise the small and marginal farmers, the
tiny sector of industry, small business and transport operators, village and cottage
industry, rural artisans and other weaker sections. The credit target for this redefined
priority sector should hence forth be fixed at 10% of aggregate credit which would be
broadly in line with the credit flows to these sectors at present.

14.

The committee believes that the balance sheets of banks and FIs should be made more
transparent and full disclosure made in Balance sheet. This is to be done in phased
manner.

REASONS FOR AN ACCOUNT BECOMING NPA:

1.

Internal factors

2.

External factors

Internal factors:
1)

Funds borrowed for a particular purpose but not use for the said purpose.

2)

Project not completed in time.

3)

Poor recovery of receivables.

4)

Excess capacities created on non-economic costs.

5)

In-ability of the corporate to raise capital through the issue of equity or other

debt instrument from capital markets.

6)

Business failures.

7)

Diversion of funds for expansion\modernization\setting up new projects\

helping or promoting sister concerns.

8)

Willful defaults, siphoning of funds, fraud, disputes, management disputes,

mis-appropriation etc.
9)

Deficiencies on the part of the banks viz. in credit appraisal, monitoring and

follow-ups, delaying settlement of payments\ subsidiaries by government bodies

etc.,

External factors:
1)

Sluggish legal system

Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.

2)

Scarcity of raw material, power and other resources.

3)

Industrial recession.

4)

Shortage of raw material, raw material\input price escalation, power

shortage, industrial recession, excess capacity, natural calamities like floods,

accidents.
5)

Failures, nonpayment\ over dues in other countries, recession in other

countries, externalization problems, adverse exchange rates etc.

6) Government policies like excise duty changes, Import duty changes etc.,

IMPACT OF NPA:

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 doesnt 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 earning of bank.

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.

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 days
banks have special employees to deal and handle NPAs, which is additional cost to the
bank.

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.