HOW THE MONEY FLOWS IN THE

BANKING SYSTEM…
PART OF PRIORITY
MONETARY POLICY SECTOR
LENDING
LOANS
AND +
ADVANCES
LENDING TO
RESERVES UNDER OTHER
SECTORS
BANK
DEPOSITS
CRR & SLR
AS PER RBI
+
GUIDELINES
INVESTMENTS

 Money Market
 Capital Market
+
 NON PERFORMING ASSETS
“An asset becomes non-performing, when it ceases to
generate income for the bank”

HISTORICAL PERSPECTIVE
 Committee on Financial System (CFS) headed by Shri M. Narasimham was constituted in the year 1991 and the
committee gave recommendations in line with the international practices.
 Subsequently, RBI introduced norms for
 Income recognition
 Asset classification
 Provisioning for advances
 The policy of income recognition should be objective.
 Banks are urged to ensure realistic repayment schedules on the basis of cash flows with borrowers.
 In spite of these precautions taken by banks, NPAs are on the rise either due to reasons beyond their control or
wilful defaulting.
 NON PERFORMING ASSETS

WHAT IS NON PERFORMING ASSET?

Interest and / or installment of principal remain overdue for a period

of more than 90 days in respect of a term loan.

OR

The installment of principal or interest thereon remains overdue for

two crop seasons for short duration crops/one crop season for long
duration crops.

OR

If the cash credit account or overdraft account becomes out of order.

 NON PERFORMING ASSETS
1 2 3
SUBSTANDARD ASSETS DOUBTFUL ASSETS LOSS ASSETS
 Which remained NPA for a  Which remained in the  Where loss has been identified by
period less than or equal to substandard category for a the bank or internal or external
12 months. period of 12 months. auditors or during RBI inspection
 It indicates well defined  It indicates that the but the amount has not been
credit weakness. weaknesses may lead to written off.
 Indicates distinct possibility liquidation.  It indicates continuance as a
that banks may sustain loss. bankable asset is not warranted.

90 Days 12 Months
TIME
0

BORROWER NPA …
STOPPED Doubtful Asset
PAYING BACK
Substandard Asset
 NON PERFORMING ASSETS

REASONS FOR MORE NPAs DURING 2013 TO 2015

1 2
Macroeconomic situation in the country. Increased Interest rates in recent past.

3 4
Aggressive lending by banks during good
System-based identification by SCBs.
times.

5
Some sectors like infrastructure, power 6
etc. are faring badly due to land
Wilful defaulting
acquisition, environment & forest related
issues, coal linkages etc.
 NON PERFORMING ASSETS

WHAT CAN THE BANKS DO?

If the bank feels that there is If the bank feels that there is no
genuine reason genuine reason
1. Restructuring the loan on 1. Referring the matter to Debt Recovery
easy terms with longer time Tribunals (DRTs)
period 2. Referring the matter to Asset
Reconstruction Companies (ARCs) as per
SARFAESI Act, 2002
3. Filing winding up petitions in court of
law
4. By filing criminal cases against the wilful
defaulters
 IF THE BANK FEELS THAT THERE IS GENUINE REASON

1
RESTRUCTURING OF LOANS
 Done through Corporate Debt Restructuring (CDR) mechanism.
 Implemented by RBI from August 2001.
 Aimed at corporates affected by certain genuine internal and external factors.
 It covers only multiple banking accounts, consortium accounts / syndicated loan accounts, where the
outstanding exposure is Rs. 10 crores or more.
 In CDR mechanism, lenders can allow
 Extension of repayment period.
 Reduction in interest rate.
 Moratorium for some period.
 Additional loan
 CDR is approved, if at least 75% of the banks by value of the loan and 60% by number agree to the proposal.
 Restructured loans will go out of the books of NPAs
 The biggest worry is more and more cases are coming up for restructuring, some times without genuine
reasons.
 IF THE BANK FEELS THAT THERE IS NO GENUINE REASON
1 2
DEBT RECOVERY TRIBUNALS ASSET RECONSTRUCTION COMPANIES
 These are established in various cities under the  These are formed as per the “Securitization and
“Recovery of Debts Due to Banks and Financial Reconstruction of Financial Assets and Enforcement of
Institutions (RDDBFI) Act, 1993”. Security Interest (SARFAESI) Act, 2002”.
 Banks or FIs can file an application with DRT to recover  It empowers Banks & FIs to recover NPAs without the
dues from persons / companies. intervention of the court.
 As per the Act, the issue is to be settled in 6 months.  This was brought to circumvent the inefficiency of DRTs.
 So far, the success rate is around 20% to 30%.  Banks have got powers to sell the “declared bad loans.”
 In addition, DRATs (Debt Recovery Appellate Tribunals)  This is applicable for loans with outstanding of Rs. 1 Lakh
are located at Allahabad, Chennai, Kolkata, Mumbai & and above.
New Delhi.
 RBI has power to issue licences to ARCs and Asset
Reconstruction Company (India) Ltd (ARCIL) is the first
ARC established in India.
 It is too early to comment on the success or failure of
ARCs.
 IF THE BANK FEELS THAT THERE IS NO GENUINE REASON

3 4
FILING OF CRIMINAL CASES WINDING UP PETITIONS
 Criminal cases can be filed against the  Winding up petitions can be filed, if the
borrower, if the bank feels that the non- borrower fails to pay back loan, under the
repayment of debt is due to “wilful default.” Companies Act.

 But, it is rarely resorted to by the banks.  “Official liquidator” will be appointed by the

competent authority, if there is genuine reason.

 It is long drawn procedure in courts and has not

given satisfactory results to Banks.