NON PERFORMING ASSETS NORMS & CAPITAL ADEQUACY RATIO

NON PERFORMING ASSETS

Simplicity, we can understand that a loan (an asset for the bank) turns as NPA when the EMI, principal or interest component for the loan is not paid within 90 days from the due date. Asset or Loan Classification Norms Standard Assets: which is not NPA Sub-standard Assets : The assets remain NPA >= to 12 months. Doubtful Assets : More than 12 months being Sub-standard Assets then it comes the doubtful debts. Loss Assets : A loss asset is one where loss has been indentified by the bank or internal or external auditors or the RBI inspection but amt has not been written off wholly

RBI has directed the banks to make provisions or set aside money when an account turns bad.
ASSET CLASSIFICATION
1. Standard assets 2. Sub standard asset 3. Doubtful debts

PERIOD FOR WHICH ASSET REMAINS A BAD LOAN

PROVISION REQUIREMENT

Non as the borrower pays his dues regularly 0.40% of the loan amount on time normally . As asset which remained NPA for a period less than or equals to 12 months As asset would be classified as doubtful if it has remained in the sub standard category for a period of 12 months. a) Secured: 25% o/s amt b) Unsecured: 100% o/s amt a) Secured: 40% o/s amt b) Unsecured: 100% o/s amt a) Secured:15% o/s amt. b) Unsecured : 25% on o/s amt & in some case it is 20%.

3a) Up to 1 year 3b) 1 to 3 year

3c) 3 year & above

4. Loss asset A loss asset is one where loss has been indentified by the bank or internal or external auditors or the RBI inspection but amt has not been written off wholly.

a) Secured: 100% o/s amt b) Unsecured: 100% o/s amt

100% o/s amt

As per RBI guidelines, NPA is defined as under: Non performing asset (NPA) is a loan or an advance where, interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, The account remains out of order in respect of an Overdraft/Cash Credit (OD/CC), remains overdue for a period of more than 90 days in the case of bills purchased and discounted. The installment of principal or interest there on remains overdue for two crop seasons for short duration crops. The installment of principal or interest there on remains overdue for one crop season for long duration crops. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines on securitization dated February 1, 2006. In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

CAPITAL ADEQUACY RATIO

Capital Adequacy Ratio (CAR) is defined as the ratio of bank's capital to its risk assets. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR).

Objectives of CAR
The fundamental objective behind the norms is to strengthen the soundness and stability of the banking system.

Concepts of Capital Adequacy Norms

Concepts of capital adequacy norms

Tier I Capital

Tier I I Capital

Risk weighted assets

Subordinated debt

MINIMUM REQUIREMENTS OF CAPITAL FUND IN INDIA:

* Existing Banks 9 % * New Private Sector Banks 10 % * Banks undertaking Insurance business 10 % * Local Area Banks 15%

CAR AND ITS IMPORTANCE

It is a measure of a banks financial strength. A bank with a higher capital adequacy is considered safer because if its loans go bad, it can make up for it from its net worth. CAR is the ratio that measures a banks capacity to meet time liabilities in difficult times . The Reserve Bank of India (RBI), currently prescribes a minimum capital of 9% of risk-weighted assets, which is higher than the internationally prescribed percentage of 8%. To protect the customers and depositors.

1. Tier-I Capital
Capital which is first readily available to protect the unexpected losses is called as Tier-I Capital. It is also termed as Core Capital. Tier-I Capital consists of : Paid-Up Capital. Statutory Reserves. Other Disclosed Free Reserves : Reserves which are not kept side for meeting any specific liability. Capital Reserves : Surplus generated from sale of Capital Asset

2. Tier-II Capital
Capital which is second readily available to protect the unexpected losses is called as Tier-II Capital. Tier-II Capital consists of : Undisclosed Reserves and Paid-Up Capital Perpetual Preference Shares. Revaluation Reserves (at discount of 55%). Hybrid (Debt / Equity) Capital. Subordinated Debt. General Provisions and Loss Reserves

3. Risk Weighted Assets

Capital Adequacy Ratio is calculated based on the assets of the bank. The values of bank's assets are not taken according to the book value but according to the risk factor involved. The value of each asset is assigned with a risk factor in percentage terms. Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets.

4. Subordinated Debt
These are bonds issued by banks for raising Tier II Capital. They are as follows : They should be fully paid up instruments. They should be unsecured debt. They should be subordinated to the claims of other creditors. This means that the bank's holder's claims for their money will be paid at last in order of preference as compared with the claims of other creditors of the bank. The bonds should not be redeemable at the option of the holders. This means the repayment of bond value will be decided only by the issuing bank.