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Non Performing Advances
1. Introduction 3
6. Statistical Information 11
Page 2 of 15
Unit1
Introduction
Unit 2
Page 3 of 15
Background for the Study
Impact of Non Performing Advances for a bank is in several ways. It is not only bank
loose interest income on these advances, but it incurs cost to maintain those NPAs in the
bank portfolio. Banks have to maintain provisions ,incur legal expenditure other
miscellaneous charges on account of NPAs.The impact of NPAs results in lower interest
rates for depositors, higher interest rate for borrowers , capital write offs, less return to
share holders etc…..
NPAs hit the economic conditions of a country in several ways. In proper utilization of
borrowed money will not generate any positive results to boost the economic conditions,
failure of businesses will create unemployment, high inflationary rate etc…
Objective of this study is to identify the importance of managing NPAs and ways of
managing in order to have stability in the banking industry.
2.3. Scope
In this report on management of Non Performing Advances, activities starting form pre
sanction to post sanction, impact on the economy and Bank’s financial position and ways
of managing NPAs will be covered
2.4. Hypothesis
2.5. Data
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Secondary Data was taken in compiling this project report.
2.6. Sample
Out of all commercial banks a leading private commercial bank with highest number of
branch network (among the private sector banks) was taken for the project study.
Unit 3
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Technical view on NPAs
“An asset becomes Non Performing when it ceases to generate income for the bank”
As per the norms of the Central Bank of Sri Lanka, bank maintains five statues for
monitoring the performance of asset portfolio which are – Current, Overdue, Sub-
standard, Doubtful and Loss.
Further Depending on the frequency of the loan recovery number of past due days will
differ. Following diagram 1 shows the Non Performing periods of loans with monthly
frequency and diagram 2 shows Non performing period for loans other than monthly
frequency, overdrafts, bills, etc….
Diagram 1
Asset classification is based on the DPD (days past due) counter for loan products with
monthly capital repayment frequency
Diagram 2
Asset classification is based on the DPD (days past due) counter for loan products other
than monthly capital repayment frequency and overdrafts
All the 61/90 days overdue loans fall in the category of non-performing assets and are
eligible for provisioning once the loan becomes substandard onwards.
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Once the loan is outstanding for 61/90 days, it is marked as NPA and interest income is
suspended for last 61/90 days and when the loan becomes substandard and thereafter,
provisioning for net of the collateral value is being done by the bank.
Unit 4
Page 7 of 15
Pre Sanction Process
All advances begin with the Credit Appraisal, where banks use different types of
appraising tools to ascertain the credit worthiness of the applicant.
Even though above factors are in placed for sound lending advances will fall in to Non
Performing.
Unit 5
Page 8 of 15
Macro & Micro Level factors
Macro Level factors which leads to NPAs could be broadly categorizes under Political,
Economics, Social and Technological
Political
Political interference in granting some advances deviating from basic credit principles
will end up with increasing NPAs. This is a very common factor in state own banks.
Economic
Changes in macro economic environment like inflation, high interest rates, depreciation
of currency, taxes, Industry barriers, Government policy changes etc….will result in
turning some lending of banks to Non Performing.
Rise in inflation, high interest rates will create new burden in meeting monthly
commitment. Depreciation of currency will impact on imports with upward movement on
prices. Other than that impose of taxes, change in fiscal policies to achieving political
objectives will also turn performing advances to bad.
Social Factors
Integrity of borrowers, ethics, values, education levels also influence the NPAs
Technological Factors
Adoption of latest technology also plays an important role in credit evaluation process.
Today in the banking sector sophisticated models are used in assessing and rating
borrowers. Non adoption of technology results in high cost of funds, delay in approval
process, missing of risk mitigating tools etc…. will influence the Non Performing
Advances.
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Biased Lending
When advances are granted with influence of officers in the approval process or at
management level not following basic credit principles, may result in Non Performing in
future.
Achievement of Targets
Branch managers are set targets for lending and towards the year end if targets are not
met loans are sometime granted without through analysis.
Achievement of Profits
Branch managers grant facilities taking risks to meet profits targets compromising basics
of credits. Example: Temporary overdrafts are high risks but managers take the risk and
grant due to high interest income
Integrity
Unit 6
Page 10 of 15
Statistical Information
Following diagrams show Gross NPA and Net NPA Ratio of Licensed Commercial
Banks for the period between 1998 and Up to March 2009
18.0
16.0
14.0
12.0
10.0
Series1
8.0
6.0
4.0
2.0
O
G
A
N
R
P
S
T
0.0
I
YEARS
9.0
8.0
NET NPA RATIO
7.0
6.0
5.0
Series1
4.0
3.0
2.0
1.0
0.0
**
98
99
00
01
02
03
04
05
06
20 7
ar **
0
08
09
19
19
20
20
20
20
20
20
20
20
YEARS
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Bank Growth Vs NPAs
Following were identified as major impacts of NPAs on Banks Growth/Stability
1. Deterioration of Profits
When an advance become NPA Interest due for last 3 month and future accruals
are required to transfer in to interest in suspense.
2. Increase in Provisions
3. Drop in Reserves
When a facility is not recoverable capital will be write off at last. This will have
an impact on Profits
Banks will have an issue in meeting specified Tear 1 & Tier 11 requirements.
When advances are not recoverable there fill be a liquidity issue in meeting
payments and granting further credit.Inorder to finance banks tend to borrow from
the market at high rate.
When it is known a bank is having a high Gross NPA ratio and Net NPA ratio
share value will be dropped.
8. Negative Image
In the long run bank will have a negative image due to NPAs.
Unit 8
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NPAs impact on Economy
In order to compensate the loss of interest in NPAs banks have to charged high
interest rate from other borrowers.this will have an indirect impact on inflation.
When funds to lend become scare due to NPAs country’s development will get
effected
3. Unemployment
Businesses ceased to exist due to inability to meet its repayment obligations. This
will create unemployment.
Due to high NPA position if liquidity crisis arises and bail out is required, this has
huge impact on whole banking sector
Unit 9
Practical Approach to Manage NPAs
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At the later part of the Project study question was asked from selected branch mangers
and credit officers of the bank to establish suggestions to Managing NPAs.
MIS information should be available for various reasons when taking credit
decisions. Ex: To rate a customer, to extract performance ratios
When all possible attempts for recovery is failed only option is to proceed with
legal action and this should be speedy otherwise this will be costly.
6. Integrity
Staff integrity is also vital factors. No member in the approval cycle should take a
decision based on financial rewards.
7. Rewarding staff
Unit 10
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Project Summary
It is the duty of the Senior management, Middle management and down the line all staff
involved in credit to ensure a quality advance portfolio. When processing appraisals all
must adhere to basic credit principles without deviating. Proper training should be given
to staff either internally or externally and bank should ensure it has experienced staff to
handle credit.Ethics and Values should be observed by all staff handling credits. Timely
monitory follow-up and supervision is required and customer should be contacted
promptly when any early warning signal is identified. Further message should be clear to
borrowers that they can’t default and be free since they are accountable for the money
borrowed.
Finally NPAs should treated as most critical factor for banks survival. It is not possible to
get away from NPAs. But should be Managed Properly.
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