Tuesday, December 20, 2016
NPA
Know About NPA - An asset (loan), including a leased asset, becomes non performing when it stops generating income for the bank.
Note: Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset. It had been decided to adopt the '90 days' overdue' norm for identification of NPA, from the year ending March 31, 2004.
NPAs can be classified in three categories:
Sub_standard Assets: With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months.
Doubtful Assets: With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the sub_standard category for a period of 12 months.
Loss Assets - A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some rescue or recovery value.
Reasons for Occurrence of NPAs
NPAs can be termed as "Bad Loans" or defaults. It is the failure to meet financial obligations, non-payment of a loan installment. These loans can occur due to the following reasons:
(i) Normal banking operations
(ii) Bad lending practices
(iii) Incremental component (due to internal bank management, like credit policy, terms of credit, etc...)
(iv) Competition banks are enormously selling unsecured loans
The Problems caused by NPAs: NPAs do not just reflect badly in a bank's account books, they adversely impact the national economy.
Following are some of the impacts of NPAs:
1. Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses
2. Bank shareholders are adversely affected
3. Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments
4. When bank do not get loan repayment or interest payments, liquidity problems may ensue.
Result of NPAs on an organization
1. Decrease profitability.
2. Reduce capital assets and lending limits.
3. Increase loan loss reserves.
How to reduce NPA? - Non Performing Assets can be reduced by taking some major steps by the banks. Some steps are as follows by which bank can reduce NPA -
1. SARFAESI ACT 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.
The Act provides three alternative methods for recovery of non-performing assets, namely: -
i. Securitisation
ii. Asset Reconstruction
iii. Enforcement of Security without the intervention of the Court.
The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.
Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under sec.60 of CPC, are not covered under this Act
The Act empowers the Bank:
(i.) To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice.
(ii.) To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.
(iii.) To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.
(iv.) Any Security Interest created over Agricultural Land cannot be proceeded with.
If on receipt of demand notice, the borrower makes any representation or raises any objection, authorised officer shall consider such representation or objection carefully and if he comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate the reasons for non acceptance WITHIN ONE WEEK of receipt of such representation or objection.
A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT, but not with any civil court. The borrower / guarantor has to deposit 50% of the dues before an appeal with DRAT.
If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:
(i) Take possession of the security
(ii) Sale or lease or assign the right over the security
(iii) Manage the same or appoint any person to manage the same
2. Lok Adalats: Lok Adalat is for the recovery of small loans. According to RBI guidelines issued in 2001, they cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed are covered.
3. Compromise Settlement: It is a scheme which provides a simple mechanism for recovery of NPA. It is applied to advances below Rs. 10 Crores.
4. Credit Information Bureau: A Credit Information Bureau help banks by maintaining a data of an individual defaulter and provides this information to all banks so that they may avoid lending to him/her.
5. DEBT RECOVERY TRIBUNALS: The debt recovery tribunal act was passed by Indian Parliament in 1993 with the objective of facilitating the banks and financial institutions for speedy recovery of dues in cases where the loan amount is Rs. 10 lakhs and above.
