Non Performing Assets Flashcards
1
Q
- Define NPA in simple words.
- What are other 5 definitions?
A
- NPA is an asset which ceases to generate any income for the bank.
- NPA is defined as a loan or an advance in respect of
* Interest/instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.
* The account remains ‘out of order’ in respect of an Overdraft/ Cash Credit- OD/CC
* The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted
* The instalment of principal or interest there on remains overdue for two crop seasons for short duration crops.
* The instalment of principal or interest thereon remains overdue for one crop season for long duration crops.
2
Q
Define
1. Term Loan
2. Overdraft
3. Cash Credit
A
- A Term Loan is a monetary loan that is repaid in regular payments over a set period of time
- Overdraft is a facility given by the bank to individuals and companies, to withdraw money more than the balance available in their respective accounts.
- Cash credit is a type of short term loan provided to companies to fullfil their working capital requirement.
3
Q
Asset classification
A
A. Standard asset/Performing Asset: An asset which doesn’t pose any threat and generates continuous income.
1. Regular Asset(payment on or before due date)
2. SMA-0(Special Mention Account): Interest or payment overdue for less than 30 days.
3. SMA-1: Interest or Payment overdue for more than 30 days and less than 60 days.
4. SMA-2: Interest or payment overdue for more than 60 days and less than 90 days.
B. Non Performing Asset:Interest or instalment of principal remain overdue for a period of more than 90 days in terms of term loan.
1. Sub Standard Asset: An asset which remains NPA for less than or equal to 12 months
2. Doubtful Asset: An asset which remains in sub standard asst category for 12 months.
(a) Doubtful Asset-1: NPA upto 24 months
(b) Doubtful Asset-2: NPA upto 48 months
(c) Doubtful Asset-3: NPA beyond 48 months
3. Loss Asset: An asset where loss has been identified by the Bank or the RBI
4
Q
Define
1. Gross NPA and Gross NOA ratio.
2. Net NPA and Net NPA ratio.
3. Provisioning and Provisioning Coverage ratio
A
- Gross NPA:
Gross NPA is tha sum of all loan assets that are classified as NPAs as per RBI norms.
It reflects the quality of the loans made by banks.
Gross NPA ratio: Gross NPA/GrossLoans - Net NPA:
Net NPA= Gross NPA- Provisions
It shows the actual burden of banks.
Net NPA ratio= Net NPA / Gross Loans - Provisioning:Set aside of money from profits to compensate a probable loss caused on lending a loan is called provisioning.
Provisioning is done to cover risk.
Provisioning Coverage Ratio:
PCR is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses.
PCR, a measure of the funds set aside by banks to cover Bad Loans i.e. NPAs
5
Q
Provisioning value in percentage for
1. Standard Asset
2. Sub Standard Asset
A. Secured loans
B. Unsecured loans
3. Doubtful Asset
A. Secured loan
B. Unsecured loan
4. Loss Asset
A
- 0.4%
- A. 15%
B. 25% - A. Doubtful Asset 1: 25%
Doubtful Asset 2: 40%
Doubtful Asset 3: 100%
B. 100% - 100%
6
Q
“A” started implementing the prudential guidelines on asset classification, income recognition, and provisioning of loan assets based on the recommendations of “B” Committee in a phased manner commencing from “C” (date) and modified the guidelines on a number of occasions.
A
A. RBI
B. Narasimham Committee
C. April 1st, 1992
7
Q
Causes of Rising NPAs
Internal Factors
External Factors
A
Causes of Rising NPAs
Internal Factors
- Funds borrowed for a particular purpose but not utilized for the said purpose.
- Delay in completing the project
- Business failure
- Willful defaults, Siphoning of funds, management disputes etc.
- Manipulation of debtors using political influence
- Mis management
- Heavy borrowings
External Factors:
- Due to natural reasons such as floods, droughts, earthquakes etc.
- Industrial recession
- Sluggish legal system
- Lack of Infrastructure & Scarcity of raw material, power, labour and other resources.
- Unhelpful attitude of Government
- Taxation laws
- Severe competition
8
Q
Define
1. Wilful defaulter
2. Siphoning of funds
A
- Wilful Defaulter:
A wilful defaulter is an entity or a person that has not paid the loan back despite the ability to repay it. - Siphoning of Funds:
Siphoning of funds refers to the occurrence of a situation that the unit has failed in meeting its repayment commitments to the lender bank and also the funds borrowed from the bank was not utilized for the specific purpose for which the credit was released.
9
Q
Impact of Rising NPAs
A
Impact of Rising NPAs:
- NPAs generate no interest income for the bank; As per RBI norms, the bank is required to provide provisioning for those loans.
- NPA not only affects profitability of bank but also liquidity because the bank has fewer funds to lend out or recycle.
- High NPAs degrade a bank’s credit rating, lowering its credibility
- Assets and Liability Mismatch will widen
- Reduce the earning capacity of loans and badly affect the Return on Investment - ROI.
- NPAs affect the risk facing ability of banks.
- As per RBI norms, every bank must maintain a Capital Adequacy Ratio - CAR of 9% or higher. As NPAs go up, forcing the bank to allocate further capital in order to maintain the CAR.
10
Q
- Expand DRT
- Created date, enacted act and reason for creation.
- Who appoints the Presiding Officer?
- Qualifications to be a Presiding Officer
- Expand DRAT and why it was established if there is already DRT
- Number of DRTs and DRATs in India as of March 2023
- When could be the case be filed in DRT?
A
- Debt Recovery Tribunal - DRT
- Debt Recovery Tribunals were created in 1993 through a Recovery of Debts Due to Banks and Financial Institutions Act, 1993 to speed up cases for financial recovery by Banks.
- The central Government appoints a debt recovery tribunal, which comprises the Presiding Officer.
- An individual must be or should have been qualified to become a District court Judge to be eligible for becoming a Presiding officer of a Tribunal.
- Anyone who is dissatisfied with the DRT’s decisions can appeal them to the Debt Recovery Appellate Tribunal (DRAT) in India.
- As of March 2023, there are 39 DRTs and 5 DRATs present in India.
- Where the debt due from the borrower is more than Rs. 20 Lakhs, the case could be filed in DRT
11
Q
- Define CIRP and briefly explain the process involved in it.
- Define CDR and briefly explain the process involved in it.
A
- Corporate Insolvency Resolution Process - CIRP
The Corporate Insolvency Resolution Process - CIRP is a recovery mechanism made available to creditors as under the Insolvency and Bankruptcy Code, 2016 - IBC.
In case a corporate entity becomes insolvent (unable to repay debt), the concerned creditor or the corporate entity (the debtor) itself, may initiate CIRP.
If a corporate entity (debtor) becomes insolvent and commits a default, a financial creditor, an operational creditor or the corporate debtor itself may approach the National Company Law Tribunal - NCLT - the Adjudicating Authority for insolvency resolution of corporate persons - to hand-over an application for initiating CIRP against the defaulter. - Corporate Debt Restructuring - CDR
Corporate Debt Restructuring is a voluntary process under which banks aid those companies, who are facing financial difficulties due to internal or external factors, to restructure their debts.
The motive behind this mechanism is to provide timely support to the companies and revive them.
It is for reducing the burden of the debts on the company by decreasing the interest rates paid and increasing the time the company has to pay the obligation back.
12
Q
- CRILC
- Who constituted CRILC to collect, store and publish data on all borrowers’ credit exposures?
- When and why was CRILIC built?
- When should banks have to provide credit information to CRILC about their borrowers?
A
- Central Repository of Information of Large Credits - CRILC
- RBI has constituted a Central Repository of Information on Large Credits - CRILC to collect, store, and publish data on all borrowers’ credit exposures.
- CRILC was built in 2014 precisely to help financial institutions and banks to assess their Non-Performing Assets - NPAs and also share this information with other institutions.
The idea behind the creation of this concept was for financial institutions to notify the status of their stressed borrowers and submit the information to a central database of the Reserve Bank of India. - Banks will have to provide credit information to CRILC about their borrowers with an aggregate fund-based and non-fund based exposure of and over Rs.5 crores.
13
Q
- Expand CIBIL
- When and why was CIBIL founded?
- How are CIBIL scores measured?
A
- Credit Information (Bureau) of India Ltd. - CIBIL
- CIBIL maintains a database of borrowers that banks and financial institutions may easily access.
It helps banks by maintaining and sharing data related to repayment history of individual borrowers.
It was the first Credit Information Company in India founded in 2000. - CIBIL Scores are measured on a scale between 300 and 900, with 900 indicating the highest and 300 being the lowest
14
Q
- Expand SARFAESI Act and mention the year of the act also.
- What will this Act do?
- Mention the loans that are not eligible under this Act.
A
- Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act - SARFAESI Act - The [SARFAESI] Act, 2002
The Act permits Banks Financial Institutions to recover their NPAs without the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh and above. - Loans not eligible under SARFAESI Act, 2002
Loans with outstanding up to Rs. 1 lakh
Agriculture land cannot be sold
The amount due is less than 20% of principal & interest
Where security is not charged to bank
15
Q
- Expand ARC and briefly explain its function.
- Minimum capital requirement to set up an ARC.
A
- Asset Reconstruction Companies specialize in the recovery and liquidation of NPAs
Banks, which wish to clean their balance sheet at one go, may divest their NPAs to an ARC at a discount value, after which it is the latter’s responsibility to recover the outstanding dues from the borrowers directly. - To set up an ARC, minimum capital requirement should be Rs. 300 crore.
