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Wednesday, August 10, 2011


The origin of commercial banking can be trance able in the early times of human history in the ancient Rome and Greece, the practice of strong precious metals and coins at safe place and out money for public and private purpose an interest was prevalent in England. Banking has its origin with the London goldsmith who in the 17th century began to accept deposits from merchants and other valuables, as public enterprise, banking made its first appearance it Italy in 1157 when the bank of Venice was founded.

The next stage, in the development of banking came when the receipt for deposits with the gold smith began to be used as a means of payment, people stored keeping gold, silver and coins with gold smith in exchange for warehouse receipts or goldsmith notes these warehouse receipts became a medium of exchange and means of payment,

“A man without money is like a bird without wings, the Rumanian proverb insists the importance of the money. A bank is establishments, which money, the basic function of commercial banks are the accepting of all kinds of deposits and lending commercial banks are the accepting of all kinds’ deposits and lending of money.

The concept of NPA has been burning topic among the people associated with the banking sectors in the recent years, the subject of NPAs has been difficult to comprehend by lay people, the increasing competition in the industrial system and the patent deficiencies in commercial judgment on the part of bank official dom. No. doubt the level of NPA’s in few banks can cause alarm.

Indeed, the dynamic trend of baking sector in India has stretched a beam of light on many vital aspects of assets classification, income recognition and provisioning, complexity of NPA’s etc. in general; the assets are dividend into two category.

Performing assets or standard assets.
Non-performing assets.

Assets which do not give any trouble in generating predetermined income and / or installment may be called standard assets,

An assets which is ceased to generate income of the bank is called non-performing assets, the past due amount remaining uncovered for the two quarter consequently the amount would classified as NPA, it includes borrowers default or delays in payment of interest or principal loan amount.

“The term non-performing may be defined as “loans or advances whose credit quality has deteriorated such that full collection of principal and or interest in accordance with the contractual repayment terms of the loan or advances is in question “loan or advances is in question” loans or advances with pre established repayment programs are non performing when principal and or interest is due and uncollectible for 90 day’s or more beyond the scheduled payment date or maturity. In line with the international practices and as per the committee on the financial system (chairmen shri.m Narashimhan). The reserve bank of India has introduced, in a phased manner, prudential norms for income recognition, assets classification and provisioning for the advances portfolio of the banks so as to more towards grater consistency and transparency in the published accounts pertaining to all banks.

Meaning of NPA’S
As assets which ceases to generate income of the bank is called non performing assets, the past due amount remaining uncovered for the two quarter consequently the amount would be classified as NPA, it includes, borrowings or delays in payment of interest or principal loan amount.

A loan or lease that is not meeting its stated principal and interest payments ,banks usually classify as non performing assets, any commercial loans which are more than 90 days over due and any consumer loans which are 180 days overdue, more generally, an assets which is not producing income. The historical or evolutionary process of higher NPA’s is generally related to the following.

Lacunae in the credit recovering system
Inadequate legal provisions on bankrupted
Long drawn legal procedural difficulties in the execution of decreases awarded by course.
The above factors show that even the legal system is sympathetic towards borrowers and economic system and some may not.
However there is a total deterioration in assets quality and further the loan recovery system is in efficient..
For the first time after 50 years Indian banks seem to have learnt how they should progress in the interest of banking and economic and ho9w they should not have managed the NPA’s.

For the purpose of identification of NPA’s advance are classified into four broad head as mentioned below.

Term loans;
This includes terms loans, demand loans, bridge loans/ bonus loans, personal loans, crop loans, loan against bonds own deposits (LABOD) loan against government securities or shares.

Cash credit and overdraft:
It includes cash credit packing credits, advances against trust receipt overdraft against fixed deposit receipts or government securities or shares and the like.

Gills purchased and discounted:
It includes bills purchased or discounted, cheques purchased etc.

Other accounts:
These include other credit facilities not mentioned for examples advance bill duty drew back.

The RBI stressed the need for credit appraisal and credit supervision since the basic problem is at loan decision stage.
Stressed the need to monitor stock and operation and end use statements.
Detailed guide ones have been issued to take step to avoid sickness and also to nurse back the ailing units.
Stressed the need to constitute recovery cells, NPAS management departments and fixed recovery target for banking units.
The debit recovery tribunal (DRT) should dispose off the issues within the six moths.
On the filling of suits in a court of low the fallowing guidelines are prescribed which should be observed.
To check whether the charge (I&II) are properly registered enforceable.
To check whether the liability of guarantor is enforceable.

Keeping in view the desired goal, management of NPA would have the following three specific objectives.
Improving the quality of NPA to a performing status so that income on such assets is recognized.
Upgrading the status of the assets so as to reduce the provisioning requirements.

Reserve bank guidelines on purchase or sales of non performing financial assets:
Assets Classification Norms :
Prudential norms were made applicable to the USB’S since 1992-93. the STCB’s and DDB’s since 1996-97 and SCARDS and PCARDB’s since 1997-98.

The non performing financial assets purchased, may be classified as standard in the books of the purchasing bank for a period 90 days from the date of purchase, there after, the asset classification statues of the financial asset recovery in the books of the purchasing bank with reference tgo cash flow estimated while compliance with requirements.

The assets classification status of the existing exposures to the same obligator in the books of the purchasing bank will continue to be governed by record of recovery that exposure and hence may be different.

Where the purchase or sales does not satisfy any off the prudential requirements prescribed in these guidelines the assets classification status of the financial assts in the banks of the purchasing bank at the time of purchasing shall be the same as in the books of the selling bank.
There after the assets classification status will continue to be determined with reference to the date of NPA’s in the selling bank. Any restructure or reschedule or rephrase of the repayment schedule or the estimate cash flow of the non performing financial assets by the purchasing bank shall render the account as a non performing assets.

Provisioning norms books of selling bank:
When a bank sells its non performing financial assets to other banks , the same will be removed from its books on transfer. It the sale is at a price below the net book value (NBV) the short fall should be debited to the profit and loss account of that year.

If the sales are for a value higher then the NBV, the excess provision shall not be reversed but will be utilized to meet the short fall or loss on account of sale of other non performing financial assets.

Book of purchasing bank the asset shall attract provisioning requirement appropriate to its asset classification status in the books of the purchasing bank.

Accounting of recoveries any recovery in respect of a non performing asset purchased from other banks should first be adjusted against its acquisition cost recovery in exes of the acquisition cost can be recognized as profit.

Capital adequacy for the purchase purpose of adequacy, bank should assign 100% risk weights to the non performance financial assts purchased from other bank, in case the non performing assets purchased is as investment, then if would attract capital change for the market on capital adequacy restriction on capital adequacy would be applicable .

Exposure norms the purchased banks will reckon exposure on the obligor of the specific financial asset. Hence these banks should ensure compliance with the prudential credit exposure selling (both single and group) after recording the exposure to the obligors arising on account of the exposure norms would be applicable.

Disclosure requirements:
Banks which purchase non performing financial assets from other banks shall be required to make the following disclosers in the notes on accounts to their balance sheets.

Over due:
Any amount due to the bank under any credit facility is overdue if it is non paid on due date fixed by the bank.

Types of NPA’S:
A) Gross of NPA’S
B) Net of NPA’S

Gross of NPA’S
Gross NPA’s are the sum total of all loan assets that are classified as NPA’s as per RBI guidelines as on balance sheet date. Gross NPA reflects the quality of the loan made by bank it consists of all the non standard assets like as sub slandered, dough full and loss assets.

Net of NPA’S
Net NPA’s are those types of NPA’s in which the bank has deducted the provision regarding NPA’s “net NPA’s shows the actual burden of bank”
Since amount of NPA’s and the process of recovery and write off of loans is very time consuming, the provision, the banks have to make against the NPA’s according to the central bank guidance are quite significant , that is why the difference between gross and net NPA’s quite high it can be calculated.

Factors for rise in NPA’s:
The banking sectors has been facing the serious problems of the rising NPA’s but the problem of NPA’s is more in public sectors banks PSB are growing due to external as well as internal factors.

Internal factors:
Poor lending decision
Non compliance to lending norms
Lack of post credit supervision
Failure to appreciate good payees
Excessive over draft lending
Non transparent accounting policy

External factors:
Socio political pressure
Change in industry environment
Encounters macro economic disturbance
Natural calamities
Industrial sickness
Diversion of funds and will full difficulties.
Time or cost overrun in project implementation
Labors problems of borrowed firm
Business failure
Inefficient management
Absolute technology
Product obsolete.

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