What are NPAs/ Non Performing Assets?

As per RBI circular,  non ­performing asset (NPA) is a loan or an advance where;

1. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
2. the account remains ‘out of order’, in respect of an Overdraft/Cash Credit (OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
4. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
5. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops,
6. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
7. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

In fact, if any amount to be received by the bank remained overdue for more than 90 days, it is classified as an NPA.

Reasons for rising NPAs

1. Domestic and global economic slowdown
2. Delays in statutory and other approvals especially for projects under implementation
3. Aggressive lending practices during upturn as evidenced from high corporate leverage.
4. Laxity in credit risk appraisal and loan monitoring in banks
5. Lack of appraising skills for projects that need specialised skills resulting in acceptance of inflated cost and aggressive projections.
6. Wilful default, loan frauds and corruption are among the key reasons.

What are the current trends  in Non Performing Assets?

• As of June 2016, the total amount of Gross Non-Performing Assets (NPAs) for public and private sector banks is around Rs. 6 lakh crore.
• The amount of top twenty Non Performing Assets (NPA) accounts of Public Sector Banks stands at Rs. 1.54 lakh crores.
• Indian Overseas Bank fares worst, having the highest ratio of NPA to total advances — 20.26 per cent. UCO Bank (18.66 per cent) and Bank of India (16.01 per cent) follow.
• In absolute terms, State Bank of India has the highest value of Gross NPA around Rs. 93,000 crores. Punjab National Bank (Rs. 55,000 crores) and Bank of India (Rs. 44,000 crores) come next.
• Basic Metal and Metal Products sector is the worst performing in terms of NPA ratio.
• As of June 2016, govt data show that a third of all outstanding advances (Rs. 4.33 lakh crore) given to the sector turned to NPA (Rs. 1.49 lakh crore).
• Textiles sector, and Beverages (excluding Tea and Coffee) and Tobacco sector follow, both having NPA ratio at around 17 per cent.

Current Mechanisms for expeditious resolution of Non Performing Assets are:

1. Insolvency and Bankruptcy Code (IBC), 2016
2. The SARFAESI Act
3. Debt Recovery Tribunal

RBI’s loan restructuring schemes

1.Corporate debt restructuring (CDR)

Corporate Debt Restructuring (“CDR”) mechanism is a voluntary non statutory mechanism under which financial institutions and banks come together to restructure the debt of companies facing financial difficulties due to internal or external factors, in order to provide timely support to such companies.The intention behind the mechanism is to revive such companies and also safeguard the interests of the lending institutions and other stakeholders. The CDR mechanism is available to companies who enjoy credit facilities from more than one lending institution.

2. Formation of joint lenders’ forum (JLF)

RBI’s joint lenders’ forum (JLF) guidelines came into effect in 2014 after the central bank put a new framework in place to tackle stressed assets. JLFs were intended to recognize stressed assets early and come up with a corrective action plan (CAP) within 45 days. The system, however, did not work seamlessly as there were disagreements between lenders on how to move forward on individual accounts.

To streamline some of these issues, RBI had asked banks to set up an empowered group (JLF-EG) which will be tasked to approve the restructuring package.

The JLF-EG will have a representative each of the State Bank of India and ICICI Bank Ltd (the largest state-owned and private sector lenders) as standing members. In addition, the group will have a representative each of the top three lenders to the concerned borrower. The members of this group will be of the rank of executive director or above.

Decisions taken by JLF will from now on be sent to this empowered group for approval.

3.Flexible structuring for long-term project loans to infrastructure (or 5/25 Scheme)

The central bank had first introduced this flexible financing scheme in July. Popularly known as the 5:25 scheme, it allows banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years. Existing projects were not initially covered under the scheme.

4.Strategic debt restructuring (SDR) scheme

Under SDR, banks who have given loans to a corporate borrower gets the right to convert the full or part of their loans into equity shares in the loan taken company.

The SDR scheme which was introduced by the RBI in June 2015,thus helps banks recover their loans by taking control of the distressed listed companies.

The SDR initiative can be taken by the group of banks or JLF that have given loans to the particular defaulted entity. The Joint Lender Forum (JLF) is a committee comprised of the entire bankers who have given loans to a potentially stressed or stressed borrower. At present, banks can form a JLF if the account by a borrower is classified as Special Mention Account 2 (not paid any money back during the last 60 days).

5. Sustainable structuring of stressed assets (S4A)

The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around. The scheme will be considered if the aggregate exposure (including accrued interest) of all institutional lenders in the account is more than Rs 500 crore (including rupee loans, foreign currency loans and external commercial borrowings).

Banking Regulation (Amendment) Ordinance, 2017 – The latest one

1. The government authorised the Reserve Bank of India (RBI) to issue directions to banks to initiate insolvency proceedings against defaulters under the bankruptcy code.
2. RBI on its own accord can issue directions to banks for resolution of stressed assets.
3. RBI may form committees with members it can choose to appoint to advise banks on resolution of stressed assets.

These measures, in effect, give the RBI and the central government powers to act directly against any company which has defaulted on its loans.

This action of the Union Government will have a direct impact on effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non performing assets, to bring them to a definite conclusion.

Other Options Proposed are to reduce Non Performing Assests

1. The finance ministry and RBI are also considering setting up of a “bad bank” to deal with the problem of non-performing assests, as suggested by chief economic adviser Arvind Subramanian in the Economic Survey.
2. Reserve Bank deputy governor Viral Acharya has also floated the twin concept of Private Asset Management Company (PAMC) and National Asset Management Company (NAMC) for resolution of stressed assets.
3. the proposition to set up a Public Sector Asset Rehabilitation Agency (PARA)

Why are the efforts curb NPAs not bearing fruits?

The 5/25 scheme which permitted extension of loan amortization period up to 25 years with interest reset every 5 years did not work as the higher interest burden due to tenor extension required additional borrowing which worsened the initial problem.

The sale of NPAs to Asset Reconstruction Companies (ARC) has so far been very low due to two main reasons: banks have been reluctant to sell Non Performing Assets at a price reflecting their realisable economic value; and, banks received only 15% of the NPA sales consideration in cash, while the rest was given by way of security receipts (SR) which meant that the seller bank continued to be exposed to the risk of short recovery of the loan from the borrower.

The Strategic Debt Restructuring scheme (SDR), unveiled in June, 2015, involved banks taking over companies by converting debt into equity, replacing the promoters and thereafter selling their equity holdings to new investors. However, as of December, 2016, only two such cases of sale had materialised.

The Scheme for Sustainable Structuring of Stressed Assets (S4A) was introduced in June, 2016, whereby the outstanding bank loan is required to be bifurcated into sustainable and unsustainable portions, enabling the borrower company to be revived and making it possible for the sustainable portion to be repaid.

Sources:

The Hindu , The Indian Express , Livemint , Economic Times , Investopedia , RBI circular , Pib, DNA