A comprehensive slide describing the issue of Non performing assets with context to the Indian Economy.

1. NON PERFORMING
ASSETS
YASH MISHRA
B.TECH III year, BIOTECHNOLOGY
15121036
IHS 303

2. INTRODUCTION
What are non performing assets?
● A loan or lease that is not meeting its stated interest and principal payments.
● A loan is an asset for a bank as the interest and principal helps create a stream of
cash flow.
● Banks usually treat assets as non-performing if they are not serviced for some
time.If payment has not been made as of its due date then the loan gets classified
as past due.
● Once a payment becomes really late the loan gets classified as non-performing. A
non performing asset (NPA) is a loan or advance for which the principal or interest
payment remained overdue for a period of 90 days.

3. CURRENT STATE IN INDIA
● India ranks fifth in the world with respect to amount engaged in NPA.
● The total amount for gross non-performing assets (NPA) is showing a increasing trend
both public and private banks in past few years
● According to the Reserve Bank of India’s latest “Financial Stability Report”, Gross Non-
Performing assets (NPAs) rose from 9.2% in September 2016 to 9.6% in March 2017.
● Stress tests conducted by the RBI indicate that this number could rise to 10.2% under
the baseline scenario.
● Also of the total pending NPA ,⅘ th belongs to Public Sector Banks.

4. ● The banks with highest
amount of Gross NPA
are SBI, Punjab National
Bank,BOI ,etc.

5. CLASSIFICATION OF NPAs
Classified into 3 types:
● Substandard
● Doubtful
● Loss

6. NPA and STRESSED ASSETS
● A stressed asset is an indicator of the health of the banking system.
● It is a combination of NPA, Restructured loans and Written off assets.
● Assets of the banking system comprises of loans given and investment in bonds
made by banks.
● Quality of the asset indicates how much of the loans taken by the borrowers are
repaid in the form of interests and principal.

7. REASONS FOR GROWTH IN NPAs
Governance Factors:
● Diversion of funds by companies for purposes other than for which loans were
taken
● Due diligence not done in initial period of disbursement of loan
● Inefficiency in post disbursement analysis of the problem
● During the time of economic boom, overt optimism shown by corporates was
taken on face value by banks and adequate background check was not done in
advancing loan
● Another factor that can contribute is the low level of expertise in many big public
sector banks, the constant rotation of duties among officers and the apparent lack
of training in lending principles for the loan officers

8. Economic Reasons:
● Economic downturn seen since 2008 has been a reason for increasing bad loans
● Global demand is still low due to which exports across all sector has shown a
declining trend for a long
● In case of sectors like electricity the poor financial condition of most of the SEBs is
the problem; in sectors like steel the collapse in global prices suggest that a lot more
loan will get stressed in coming days
● Economic Survey 2015 suggests that over leveraging by corporates is another major
reason
Political Factors:
● Crony Capitalism
● Under political pressure banks are compelled to provide loans in sectors that are
mostly stressed

9. IMPACT OF NPAs
● The higher is the amount of non-performing assets (NPA) the weaker will be the
bank’s revenue stream
● As the NPAs of the banks will rise, it will bring a scarcity of funds in the Indian
markets. Banks will not be willing to lend if they are not sure of the recovery of their
money
● The shareholders of the banks will lose of money as banks themselves will find it
tough to survive in the market
● This will lead to a crisis situation in the market.

10. ● The price of loans, interest rates will shoot up badly. Shooting of interest rates will
directly impact the investors who wish to take loans for setting up infrastructural,
industrial projects etc.
● All these factors would hurt the overall demand in the Indian economy
● Finally, it will lead to lower growth and higher inflation because of the higher cost of
capital

11. STEPS TAKEN TO TACKLE NPA
1. Loan Restructuring:
● When a borrower is not able to pay the EMI as per the initial terms of the loan ,the
bank reforms the initial deal and relaxes the terms for the borrower in various ways
so as to help him repay the debt, some of them are:
● Extension of term of repayment
● Additional finance
● Reduction of rate of interest
● This process might help in only partial recovery and at same time the bank may
end up losing more money if it goes for providing additional finance to the
already indebted borrower

12. 2. Strategic Debt Restructuring Scheme:
● This scheme provides for an alternative to restructuring. Wherever restructuring
has not helped, banks can convert existing loans into equity. The scheme provides
provision for creation of Joint Lenders Forum which is to be given additional
powers with respect to:
○ Management change in company getting restructured
○ Sale of non core assets in case company has diversified into sectors other
than for which loans were guaranteed
○ Decision by JLF on debt restructuring by a majority of 75% by value and 60%
by number
● On the positive side, willful defaulters are dissuaded as they fear the loss of their
company

13. Assessment of SDR:
● SDR is not performing well. Of the 21 cases where SDR was invoked only 4 were
closed
● Banks do not have expertise of managing companies. Hence RBI recommends the
banks to sell the shares as soon as possible
● But the problem is that the banks do not easily get a buyer for a company which is
already in loss, and even if they get one the buyer demands for unacceptable prices
● In the absence of potential buyers, bank wouldn’t want to hold onto these assets
indefinitely. Unless and until a mechanism is devised which charts out a course of
what to do thereafter, it doesn’t make much sense to do this conversion
● The Joint Lenders Forum mechanism has an inherent conflict between large banks
and small lenders

14. 3. Sustainable Structuring of stressed assets:
● This allows bank to split stressed accounts into two heads; a sustainable
portion that the bank thinks that the borrower can pay on the existing terms
and the remaining portion that the borrower is unable to pay(unsustainable
portion )
● The latter can be converted into equity or convertible debt giving the lenders
a chance to recover if the borrower is unable to pay the debt
● Usually an agency is hired by the bank that will decide what portion of the
debt in sustainable.
Appointment of an external agency makes the lending process more
transparent

15. OTHER GOVERNMENT INITIATIVES
● Banking Regulation (Amendment) Ordinance:
a. Empowers the RBI to direct Banks to initiate insolvency resolution
b. Gives advice to banking agencies on ways of tackling with its stressed asset
problems
c. Aims to check this menace in a time bound manner and helps in timely recovery
of the stressed assets
● SARFAESI ACT:The Securitization and Reconstruction of Financial assets and
Enforcement of Security Interest Act 2002 empowers the banking systems to
auction residential or commercial properties (except agricultural land) to recover their
loans
● Debt Recovery Acts: These laws established Debt Recovery Tribunals with the
power to recover debts of Banks and Financial Institutions

16. ● Concept of Bad Banks: The banking institutions sell their bad loans to an intermediary
and thus they write off their bad loan and intermediary has to recover the loan from the
defaulter
● Mediation for loan recovery: This concept was introduced so that genuine defaulter,
who are unable to pay off their loans, but are not able to put forward their situations
with the banking authorities, hire a mediator
● RBI has directed banks to give loans looking at the CIBIL score and is also encouraging
the banks to share information amongst themselves
● RBI has directed banks to report to Central Repository of Information on Large Credit
when principal/interest payment not made between 60 to 90 days

17. ● Public Asset Rehabilitation Agency (PARA):
Colloquially called “Bad Bank” , is a proposed agency to assume the Non-Performing
Assets (NPA) of public sector banks in India and to deal with the recovery of the bad loans;
proposed in the Economic Survey 2016-17.
○ It could solve the coordination problem
○ It could be set up with proper incentives by giving it an explicit mandate to
maximise recoveries within a defined time
○ It would separate the loan resolution process from concerns about bank capital.
○ It would purchase specified loans from banks and then work them out
○ Once the loans are off the books of the public sector banks, the government
would recapitalise them, thereby restoring them to financial health
○ Similarly, once the financial viability of the over-indebted enterprises is restored,
they will be able to focus on their operations, rather than their finances

18. CONCLUSION

19. THANK YOU