NON PERFORMING ASSETS

Group 27 Puneet Arora Rahul Gupta Rohit Rai Vaibhav Kabra

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NPA an Overview
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Banking businesses is mainly that of borrowing from the public and lending it to the needy persons and business at a premium. Lending of money involves a credit risk. When the loans and advances made by banks or financial institutions turnout as non -productive, non-rewarding and non - remunerative then they will become Non Performing Assets (NPA) Any amount due to the bank under any credit facility, if not paid by the due date fixed by the bank becomes overdue, if interest or principal remain overdue for 90days in case of Bills (BP/BD) or Term Loan, it is termed NPA Further if Bank overdraft/ Cash Credit account remains out of order for more than 90 days, its considered as NPA Also if installments or interest remains overdue for one crop season on a loan for long term crop, its termed as NPA, similarly for short term Crop to term as NPA, account has to be overdue for two crop seasons.

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Classification of NPA
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A Standard Asset is one which does not disclose any problem and does not carry more than normal risks attached to the business. A Sub-standard Asset is one which has remained NPA for a period less than or equal to 12 months.

An asset would be considered Doubtful if it has remained NPA for a period exceeding 12 months.
A Loss Asset is one where the loss has been identified by the Bank but the amount has not yet been written off fully.

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Provisioning for NPA

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Standard Assets : Funded Assets General Provision Ranging from - 0.25 to 2.0%

Sub-standard Assets : 10% on total outstanding and an additional 10% (i.e., 20%) on The unsecured portion of the Advance.
Doubtful Assets : for assets in this category up to 1st year 20%, 1 to 3 years 30% and above 3 years 100% Loss Assets : 100%

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NPA in Indian Banks

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Credit Portfolio as on Mar-11 (Rs billion) 7,567 Market share (%) 18% NIMs (201011) 2.90% Return on Net worth (2010-11) 13%

Name of the bank SBI

Gross NPA % as on Mar-11 3.30%

PNB
BOB ICICI Bank Bank of India Canara Bank HDFC IDBI Axis Central Bank of India Total
Source: Moneycontrol.com

2,421
2,287 2,164 2,131 2,125 1,600 1,571 1,424 1,297

6%
5% 5% 5% 5% 4% 4% 3% 3%

3.50%
2.80% 2.30% 2.50% 2.60% 4.20% 1.80% 3.10% 2.70% 2.90%

24%
24% 10% 17% 26% 17% 16% 19% 18% 17%

1.80%
1.40% 4.50% 2.20% 1.50% 1.10% 1.80% 1.10% 2.20% 2.30%

Reason for NPAs

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Various studies have been conducted to analysis the reasons for NPA. What ever may be complete elimination of NPA is impossible. The reasons may be widely classified in two: (1) Over hang component (2) Incremental component Over hang component is due to the environment reasons, business cycle, natural calamity etc. Incremental component may be due to internal bank management, credit policy, terms of credit etc.

Outlook In Indian Context

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Although NPAs in Indian Banks fell in last five years from 3.3% to 2.3% its likely to increase to 2.5%-2.7%, and following issues will play the major role:

Deregulation of saving bank deposit rate will increase the interest rate sensitivity of banks Sharp growth witnessed in banking credit to power sector CAGR of 35% over last five years against total banking credit CAGR of 23%, and majority of state power companies are running in huge losses Overall Credit Profile of borrowers will weaken due to moderation in demand condition, increase in cost squeezing profit margin in highly competitive market. Further rising interest rates & unstable capital market restricted the funding options which is delaying the implementation of projects

References:

www.rbi.org.in http://www.moneycontrol.com/news/icra-reports/icra%60s-viewindian-banking-sector_559985.html ICRA research report: Indian Banking Sector dated June 23,2011t Indian Financial System