Banks NPA and Impact on Indian Economy

Introduction:- A well organized and efficient banking system is a pre-requisite for economic growth. Banks play an important role in the functioning of organized money market. in order to meet the banking needs of various sections of the society, a large network of bank branches has been established. There are four type of banking institutions.

a-      Commercial Banks

b-      Regional Rural Banks

c-       Co-operative Banks

d-      Development Banks (Term lending institutions)

Principal Enactment of Banking Functions:  There is an elaborate framework governing the functioning of banks in India. The principal enactment of which governs the functioning of various banks are as under:-

a-      Banking Regulation Act 1949

b-      Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970

c-      Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980

d-      State Bank of India Act, 1955

e-      Regional Rural Bank Act, 1976

f-       Companies Act, 1956

g-      Co- operative Societies Act, 1912 or the relevant state Co-operative societies Act

Besides the above enactment the provisions of Reserve Bank of India Act, 1934 also effect the functioning of banks. The Act gives wide powers to Reserve Bank of India to give directions to banks, such directions also have considerable effect on the functioning of banks.

Classification of Assets:-  The assets may be classified in two types

a-      Performing asset

b-      Non- Performing Asset (NPA)

W.e.f. 31^st march 2004 NPA is a loan or an advance where,

1-      Interest and/ or Installment of principal remain over due for a period of more than 90 days in respect of term loan.

2-      The account remain out of order for a period of more than 90 days in respect of an over draft/ cash credit.

3-      The bill remains over due for a period of more than 90 days in the case of bills purchased and discounted.

4-      Interest and/ or Installment of principal remain over due for two harvest seasons but for a period not exceeding 2 years, in case of an advance granted for agricultural purpose and in respect of advances granted for agricultural purpose w.e.f. 30^th September 2004, a loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains over due for two crops season and loan granted for long duration crops will be treated as NPA, if the installment of principal and interest thereon remain overdue for one crop seasons, and

5-      Any amount to be received remains overdue for a period of more than 90 days in respect of other account.

Reserve Bank of India has laid down norms for classification of assets and provisioning norms for NPA, however certain exceptions to these norms are discussed below:-

1. Temporary deficiencies e.g. non availability of current drawing power due to non-receipt of latest stock statement, temporary delay in renewal of limit on due date etc.
2. Natural calamities, where in the wake of natural calamities short term agricultural loans are converted into long term or there is rescheduling of repayment period or fresh short term loans are sanctioned, the term loans as well as fresh short term loan may be treated as current dues and need not to be classified as NPA.
3. Facilities Backed by Central Government Guarantee:- credit facilities backed by guarantee of the Central Government though overdue should be treated as NPA only when government repudiates its guarantee when invoked  (this exception is only for the purpose of asset classification and provisioning and not for the purpose of recognition of income.)

The Reserve Bank of India has issued guidelines to be followed by all scheduled commercial banks excluding regional rural banks for income recognition, asset classification provisioning and other related matters. Conceptually speaking a credit facility become NPA when it ceases to generate income for bank. The guidelines require that income should be recognized only on realization irrespective of the system of account followed by the bank. The guidelines further provide that if interest income from asset in respect of a borrower become subject to non-accrual fees, commission, and similar income with respect to the same borrower that have been accrued ceases to accrue in the current period should be reversed or provided for with respect for past period, if uncollected where interest is partly realized on any non-performing asset, such interest can be taken to the profit & loss account towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.

Advance secured against term deposits, national saving certificates eligible for surrender of Indira Vikas patra, Kisan Vikas Patra and LIP have been exempted from the above guidelines. Thus interest on such advances may be taken to income account or due date provided adequate margin is available in the respective account.

Regulation of account by the year end :- The identification  of NPA to be done on the basis of assets as on the Balance sheet date. If the account indicates inherent weakness on the basis of the data available, the account should be treated as NPA.

The account where regular/ advance credit limit have not been renewed/ reviewed within 180 days from the due date/ date of adhoc sanction, the account should be treated as NPA.

If any of the credit facilities granted to a borrower become non performing all the facilities granted to the borrower will have to be treated as NPA without having any regard to the performing status of other facilities.

Classification of advances:- The guidelines  require bank to classify their advances into four broad categories are as follows:-

a-  Standard Asset A standard asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset is not a non-performing asset.

b-  Sub Standard Asset A sub standard asset is one which has been classified as NPA for a period not exceeding 12 months.

c-  Doubtful Asset A doubtful asset is one which has remained NPA for a period exceeding 12 months.

d-  Loss of Asset  A loss of asset is one where loss has been identified by

1-      The Bank

2-      Internal or External auditor

3-      In Reserve Bank Inspection

Example every year banks transferred the amount of those accounts which declares as Non performing to the non performing asset and normally not in a position to recover the same from the account holder, following data is relating to NPA declared by banks during the financial year 2009-10

Main Sectors :-

1-  Housing Loan includes matter not only relating to providing money for approval of loan but also relating to modification of loan and then declared the account as NPA.

In this game those banks are also participating whose financial position are not good. These banks transferred Rs. 500 crore in NPA account. It means banks cannot recover this money.

It is estimating that from the above NPA 40% relating to real estate sector.

Note:- source of data dainik jagaran 22^nd November 2010

As an auditor you cannot comment upon corruption involve but you can comment upon the non performing account.

2- Education Loan is the other sector of NPA. In this case banks facing problem to find those people who had taken professional loan but not repaid after getting employment these account holder declares as defaulter.  3

As per annual report of Government of India for the year 2009-10 in education account total 1715016 account having amount of Rs. 32366.61 crore declares as outstanding as on 30^th September 2009.

The total outstanding loans of Public Sector Banks (PSBs) for education as on 31st March, 2009 stood at Rs.27646 crore, in 1603385 accounts. The increase in total loans outstanding over previous year in absolute and percentage terms was Rs.7829 crore and 39% respectively. Year-wise break-up of education loans outstanding as on March 31, 2004 to as on March 31, 2009 is given below:

Source: IBA. # Figures are provisional. * Growth over

March 2009.

You can analyze that year wise education loan outstanding increases so you should be very careful while checking education loan NPA

Impact on Indian Economy: - after NPA issue came into picture the share price of those concerns or companies fall on 25^th November 2010 which highlights in this issue

The data given below is as per data published in dainik jagaran on 26^th November 2010

Conclusion:- I hope after reading this article you will be very careful at the time of audit of banks because the statutory audit of banks are started from the last week of march and main focus of auditor is on NPA. Usually banks urged not to declare the account as NPA. You have to verify large NPA advances and the provisioning thereof. Design a format for noting down the particular of each advance while perusing the borrower credit file and account statement. The format should be designed to ensure that none of the significant information is missed out.

By Nandini Mishra