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CA Gokul B Rathi
NON PERFORMING ASSETS
(NPA)
Presented By :-
CA Gokul B. Rathi
098500 41311
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CA Gokul B Rathi
Performing Asset : 
Is an account which does not disclose any
problems & carries not more than normal risk
attached to the business.

All loan facilities which are regular !
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CA Gokul B Rathi
Non Performing Assets (NPA): 
NPA is defined as a loan or an advance in respect of which the
interest &/or installment of principal remains “overdue” for a
period of more than 90 days in respect of a term loan or
remains “out of order” for a period of more than 90 days in
respect of an Overdraft /Cash Credit.

Any amount due to the Bank under any credit facility, if not
paid by the due date fixed by the bank, becomes ‘overdue’.

An asset, including a leased asset, becomes non-performing
when it ceases to generate income for the bank.
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CA Gokul B Rathi
Non Performing Asset: •
A loan granted for short duration crops will be treated as NPA if the
installment of principal or interest thereon remains overdue for two crop
seasons. A crop season for each crop means the period upto harvesting of
the crops raised.
•
A loan granted for long duration crops will be treated as NPA if the
installment of principal or interest thereon remains overdue for one crop
season. ( Long duration crops = crop season longer than 1 year & short
duration crops means which are not long duration crops )
•
A bill purchased & discounted will be NPA if it remains overdue for a period
of more than 90 days from the date it is due.
•
Any amount to be received remains overdue for a period of more than 90
days in respect of other accounts.
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CA Gokul B Rathi
OUT OF ORDER: 
An account should be treated as ‘out of order’ if the
outstanding balance remains continuously in excess of
sanctioned limit /drawing power. Even if the outstanding in
the account is within limit/DP, but there are no credits
continuously for 90 days or credits are not enough to cover
interest debited, the account should be treated as ‘out of
order’ .
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CA Gokul B Rathi
NPA Identification – A Regular Exercise: 
NPA identification is an ongoing process. An
asset should be classified as NPA within a
month of its’ becoming NPA & provisions for
NPA should be done on quarterly basis rather
than at year end only.
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CA Gokul B Rathi
Temporary Deficiencies:
Record of recovery should be seen before any a/c is treated
as NPA. However, solitary entry at the year end which brings
the account in order on year end but the a/c again
becomes irregular subsequently, such a/c should be
treated as NPA. An a/c should not be treated as NPA just
because of some temporary deficiencies which are rectified
subsequently.

An a/c should be classified as NPA when there is threat of
loss or recoverability of advance is in doubt.

Recovery in the a/c should be from genuine sources & not
because of grant of additional credit facilities to the
borrower.
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CA Gokul B Rathi
Borrower wise & not Facility wise

When a loan a/c of a borrower is treated as NPA,
all the other loan a/cs of the borrower, even if they
are otherwise regular, should be treated as NPA as
NPA classification should be borrower wise & not
facility wise.

When various advance a/cs of a borrower are in
different categories of NPA, then the provisioning
shall be as per the lowest category applicable.
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CA Gokul B Rathi
Special Purpose Advances: 
Agricultural Loans in areas suffering from Natural Calamities,

Housing Loan to Staff

Credit facilities guaranteed by Central would become NPA only if
the guarantee is repudiated by the Govt. State Govt.
Guaranteed Advances are treated at par with other advances.

Project financing - For Infrastructure & Non infrastructure
sectors

Gold Loans – For Agricultural purposes & for non – Agricultural
purposes

Loans against FDs / IVPs / KVPs / Life Policies are not treated
as NPA if adequate margin is available.

Investments where Interest/Principal is overdue beyond 90
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days
CA Gokul B Rathi
Project Loans: 
For Infrastructure Projects –
2)
NPA before DCCO, if 90 days overdue if not restructured
NPA if fails to commence commercial operations within 2
years from original DCCO, even if regular, if not restructured

For non Infrastructure Sector: -
1)
NPA before DCCO, if 90 days overdue if not restructured
NPA if fails to commence commercial operations within 6
months original from DCCO, even if regular, if not restructured
1)
2)
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CA Gokul B Rathi
Restructuring of Advances: 
Three Stages: -
a)
Before commencement of commercial production
/operation.
b)
After commencement of commercial production
/operation but before the asset has been classified as
Sub-standard.
c)
After commencement of commercial production
/operation but before the asset has been classified as
Sub-standard or Doubtful.
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CA Gokul B Rathi
Restructuring of Advances: 
Standard Asset to be classified as Substandard upon restructuring

NPA Account upon restructuring would slip into further lower category

All restructured accounts treated as NPA upon restructuring are eligible for
upgradation to Standard if satisfactory performance is observed during
specified period. If satisfactory performance not observed during specified
period, Asset Classification to be with reference to the Pre Restructuring
Repayment Schedule

Any additional finance granted on restructuring to be treated as Standard
Asset upto a period of 1 year after 1st installment becomes due as per
Restructuring Package. If satisfactory performance not observed during the
specified period, additional finance would be placed in the same category
as other accounts
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CA Gokul B Rathi
Gross & Net NPA: 
Gross NPA are the sum total of all loan assets that are
classified as NPAs as per RBI guidelines as on Balance
Sheet date. Gross NPA reflects the quality of the loans
made by banks. It consists of all the non standard assets,
i.e. sub-standard, doubtful & loss assets.

If Gross NPA of any Co-operative Bank is more than 10%of
Gross Advances in any year, it comes under Supervisory
Action Framework of RBI.

Net NPA = Gross NPA – Provision for BDDR
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CA Gokul B Rathi
Classification Of NPA: 
Standard Assets :- Advance account which does not
disclose any problem & does not carry more than normal
business risk.

Substandard Assets – Which has remained NPA for a
period less than or equal to 12 months.

Doubtful Assets – Which has remained NPA for a period
more than 12 months.

Loss Assets – where loss has been identified by the bank
or internal or external auditors or the RBI inspection,
salvage value of security is negligible & the entire asset
is proposed to be w/off after necessary approvals.
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CA Gokul B Rathi
Provisioning Norms: Asset
Classification
Standard
Sub-standard
Particulars
Provision
Required %
Direct Advances to Agriculture & SME Sectors
0.25
Commercial Real Estate Advances
1.00
All other Loans & Advances not included in above
0.40
Secured Exposure
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Unsecured Exposure for Escrow A/cs available in
case of Infrastructure lending, infrastructure loan
accounts
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Other Unsecured Exposure
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CA Gokul B Rathi
Provisioning Norms: Asset
Classification
Doubtful
Loss
Particulars
-
Provision Required
%
Secured
Unsecured
D1 (Upto 1 year)
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100
D2 (One to Three years)
40
100
D3 (More than 3 years)
100
100
Loss Asset
100
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CA Gokul B Rathi
INCOME RECOGNITION POLICY: 
Income from NPA Accounts is booked only when actually received
& is not accounted for on accrual basis. Even in case Govt.
guaranteed advances, interest is to be recognized only when
realized.

Interest on Advances against FDRs, KVPs, NSCs, IVPs & LIC Policies
is to be accounted when due if sufficient margin is available in the
account.

Fees & Commission earned on rescheduling is to be recognized on
accrual basis over the period covered by reschedulement.
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CA Gokul B Rathi
INCOME RECOGNITION POLICY: 
When an account becomes NPA, interest, fees, commission, etc,
debited to account but is not actually realized needs to be
reversed or provided for.

When Bills Purchased & Discounted becomes NPA at the close of
any year, interest accrued on such bills in the previous year
should be reversed or provided for if not realized already.

In case of Govt. Guaranteed Advances, interest debited but not
realized needs to be provided for.

In case of Equipment Leasing undertaken by the Bank, interest
component in the Lease account which has become NPA needs
to be reversed if unrealized.

Interest & Other Income on NPA Accounts realized out of
additional credit facilities cannot be taken to Income.
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CA Gokul B Rathi
Why Loan Accounts go Bad ?
BORROWER-SIDE








Lack of Planning
Diversion of Funds
Disputes within
No contribution
No modernization
Improper monitoring
Industrial Relations
Natural Calamities
BANKER – SIDE





Defective Sanction
No post-sanction
supervision, etc
Delay in releases
Directed lending
Slow decision making
process
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CA Gokul B Rathi
IMPACT OF NPA: Profitability
Liquidity & Opportunity Cost
Waste of valuable Management time
Loss of credibility as high NPA reflect poorly on Management
Impact on Share Price
Gross NPA more than 10% in case of Co-op. Banks, Supervisory Action
follows & restrictions imposed.
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CA Gokul B Rathi
PREVENTIVE MEASURES FOR NPA: Identifying borrowers with genuine intent
Early recognition of the problem a/cs.
Timeliness & adequacy of response
Monitoring of credit turnover in CC/OD A/cs.
Containing diversion of funds, Monitoring willful defaulters.
Adequacy of collateral security in case of large borrowal
accounts
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CA Gokul B Rathi
TOOLS FOR RECOVERING NPA: LOK ADALATS
DEBT RECOVERY TRIBUNALS (DRT)
SARFAESI ACT, 2002 (Securitization & Reconstruction of Financial
Assets & Enforcement of Security Interest Act, 2002)
ASSET RECOVERY CONSTRUCTION COMPANY INDIA LIMITED
(ARCIL)
CORPORATE DEBT RESTRUCTURING (CDR)
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CA Gokul B Rathi
DEBT RECOVERY TRIBUNALS (DRT): 
To recover their bad Debt quickly & efficiently.

33 Debt Recovery Tribunal & 5 Debt Recovery Appellate
Tribunal

It is the special court established by Central Government for
the purpose of recovering money belonging to the banks or
financial institutions.

The judges of this court are the retired judges of High Courts.

In this court, only the recovery cases of Rs.10 Lacs & above
can be filed.
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CA Gokul B Rathi
SARFAESI Act: 
The Act provides three alternative methods for recovery of
non-performing assets, namely: - Securitization
- Asset Reconstruction
- Enforcement of Security without the intervention of the
Court.

Bad loans with outstanding above Rs. 1.00 Lac.

NPA loan accounts where the amount is less than 20% of
the Principal & Interest are not eligible to be dealt with
under this Act.
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CA Gokul B Rathi
This Act empowers the Bank:

To issue demand notice to the defaulting borrower &
guarantor, calling upon them to discharge their dues in
full within 60 days from the date of the notice.

To give notice to any person who has acquired any of the
secured assets from the borrower to surrender the same
to the Bank.

To ask any debtor of the borrower to pay any sum due or
becoming due to the borrower.

Any Security Interest created over Agricultural Land
cannot be proceeded with.
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CA Gokul B Rathi
CDR Mechanism: 
CDR mechanism will cover only multiple banking
accounts / syndication / consortium accounts .

An outstanding exposure of banks & institutions
to the extent of Rs.20 Crore & more.
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CA Gokul B Rathi
SOME TIPS FOR AUDITORS: 
Verify the previous year’s audited NPA Statement to
confirm that all the Accounts which were NPA last
year have been covered in Current Year Statement
except those which are closed or upgraded.

If closed, whether from genuine sources. If
upgraded, whether from proper recovery in the
account.

Tally the number of accounts.

Verify whether unrealized Interest has been reversed
in respect of accounts which have slipped during the
year.
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CA Gokul B Rathi
SOME TIPS FOR AUDITORS: 
Verify that proper classification has been done with
reference to Date of NPA.

Whether valuation report for Immovable Properties is
on record & it is within 3 years. See that, valuation is
taken as per Valuation Report at Distress Value.

In case of depreciable assets, depreciation has been
considered at the time of valuation.

Securities shown are properly under lien of the Bank.
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CA Gokul B Rathi
SOME TIPS FOR AUDITORS: 
All the accounts related to particular borrower have been
treated as NPA under lowest category applicable &
provision made accordingly.

In case of D1 & D2 accounts, unsecured portion is
provided for @ 100%.

Verify overdue/overdrawn/SMA accounts to ensure that
all NPA A/cs have been covered in the Statement &
provided for.

Ensure that a/cs are not upgraded after restructuring
except cases covered by special regulatory treatment.

Ensure that OIR as per Balance Sheet tallies with that as
per NPA Statement.
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THANK YOU !
CA Gokul B Rathi
CA GOKUL B. RATHI, PUNE
[email protected]
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