Asset Quality, Credit Delivery and Management Final

8/4/2019 Asset Quality, Credit Delivery and Management Final

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It refers to the degree of financial strengthand risk in a bank's assets, typically loansand investments.

A comprehensive evaluation of asset qualityis one of the most important components inassessing the current condition and future

viability of the bank. It is measured by a lender's credit standards,

and the liquidity of securities held in theinvestment portfolio



Quality of bank’s assets impacts a bank’sfinancial performance

There can be a negative impact on earnings

due to:

› Lower interest income

› Higher provision to the loan loss reserve

› Increased administrative costs



Asset Quality problems can:› Diminish liquidity inherent in the loan portfolio

› Negative impact on the adequacy of bank

capital

› Reflects upon management’s competence



Credit risk in the bank’s assets

Determine if the borrowers will repay when

their obligations are due Significant because:

› Suggest problems for management, customers,

shareholders and regulators.

› Be an indicator of future charge-offs.

› Tend to identify poor managers and problem banks.

› Significantly affect earnings, capital and liquidity.



A Non- Performing Asset is Loan Account whereinterest or Loan instalment or both have not

been paid by the borrower for a period of 90

days or more from the due date.

In case of running account like Cash-Credit or

Overdraft A/c, if the account remains out of

order for a period of 90 days or more, the

account becomes Non-Performing Asset. Out of order means:

There have not been sufficient credits within a

period of 90 days after application of interest to

cover the interest amount.



GUIDELINES FOR CLASSIFICATION

OF ASSETS

DRAWING POWER:

i) The drawing power has been exceeded for a

period of 90 days or more.

ii) stock statement on which dp calculated is morethan 3 months old.

IRREGULAR DRAWINGS:

the accounts in which the irregular drawingspermitted for a continues period of 90 days will

become npa even though unit may be working or the

borrower’s financial position is satisfactory.



CREDIT LIMITS :

An account where the regular limit have not beenrenewed / reviewed within 90 days from the due

date will be classified as NPA.

- In case of constraints such as non availability of financial statements and other data and branch datashould furnish evidence to show that renewal /

review us already on – up to 180 days such accountwill not be treated as NPA.

- ADHOC LIMITS : not recovered within 90 days of thedue date will become NPA.



Asset Classification

non-performing assets are classified in to three

categories based on the period for which

the assets has remained as NPA andrealisability of the amount.

1. SUB STANDARD ASSETS2. DOUBTFUL ASSETS

3. LOSS ASSETS



LOSS ASSETS :

a loss asset is one where loss has been identified

by the bank or internal / external auditors or rbi

inspection.

i.e. a loan considered unrecoverable andcontinuance as a loan is not warranted although

there may be some salvage or recovery value.

Security value has reduced to less than 10% of theoutstandings.



SUB STANDARD :

Which have remained as an NPA for a period lessthan or equal to 12 months i.e. an asset will have

well defined credit weaknesses that jeopardize therecovery of the debt and are characterized that thebank will sustain some loss if deficiencies are notcorrected.

DOUBTFUL ASSETS :An asset would be classified as a doubtful asset if it

has remained in the sub standard category for aperiod of 12 months, i.e. a loan classified asdoubtful has all the weaknesses inherent in assetsthat were classified as sub standard, with the addedcharacterization that the weakness make recoveryhighly questionable and improbable.



EROSION IN THE VALUE OF

SECURITY

ACCOUNTS WHERE THERE ARE POTENTIAL THREATS FORRECOVERY ON ACCOUNT OF EROSION IN THE VALUE OFSECURITY/ASSET SHOULD BE STRAIGHTWAY CLASSIFIEDAS DOUBTFUL OR LOSS ASSET AS APPROPRIATE.

1. EROSION IN REALISABLE VALUE OF SECURITY IS LESSTHAN 50% - STRAIGHTAWAY CLASSIFIED UNDERDOUBTFUL.

2. IF THE REALISABLE VALUE OF THE SECURITY IS LESSTHAN 10% - STRAIGHTAWAY CLASSIFIED AS LOSS ASSET.



NON PERFORMING ASSET

AN ASSET, INCLUDING A LEASED ASSET, BECOMES NON-

PERFORMING WHEN IT CEASES TO GENERATE INCOME

FOR THE BANK

NPAs are largely a fallout of banks' activities with

regard to advances, the credit appraisal system,

monitoring of end-usage of funds and recovery

procedures.

Asset quality has a major effect on NPAs.



PROVISIONING NORMS

1. LOSS ASSETS – 100% OF THE OUTSTANDING SHOULDBE PROVIDED FOR.

2. DOUBTFULASSETS–

i) 100 percent of the unsecured portion,

ii) In regard to the secured portion, provision shouldbe made on the following basis-

Period in doubtful category Provision requirement (%)

Up to one year 20

One to three years 30

More than three years 100



SUB-STANDARD

A general provision of 10% on total outstanding.

The 'unsecured exposures', which are identified as

'substandard' would attract additional provisions of 10

per cent,



STANDARD ASSETS:

(a) direct advances to agricultural and SME sectors at

0.25 per cent;

(b) residential housing loans beyond Rs. 20 lakh at 1

per cent;

(c) advances to specific sectors, i.e., personal loans

(including credit card receivables), loans and advances

qualifying as capital market exposures, Commercialreal estate loans at 2 per cent

(d) all other advances not included in (a), (b) and (c)

above, at 0.40 per cent.



EFFECT OF NPA

CEASES GENERATING INCOME TO THE BANK.

INTEREST AND OTHER INCOME

TO MAKE PROVISIONS OUT OF EARNINGS

REFLECTS EFFICIENCY OF THE BANK-RATING OF BANK IS ALSO AFFECTED.



Asset quality placed as the most import parameter in

measurement of Banks performance under CAMELS

supervisory rating system of RBI.

CACS (Capital, Asset Quality, Compliance and Systems

& Control) in respect of foreign banks has been put in

place from 1999.



MAJOR FACTORS CONTRIBUTING

TO THE LOAN BECOMING NPA

ON BANK’S PART

SELECTION OF BORROWER.

UNVIABILITY OF THE PROJECT.

APPRAISAL NOT DONE PROPERLY.

DELAY IN SANCTIONS/DELIVERY OF CREDIT. UNREALISTIC REPAYMENT SCHEDULE

NON FOLLOWUP AND SUPERVISION -PRE-SANCTION / POST-SANCTION. -CONTINUOUS FOLLOWUP. -INSPECTIONS.



MAJOR FACTORS CONTRIBUTING

TO THE LOAN BECOMING NPA

II- ON BORROWER’S PART DIVERSION OF FUNDS a) EXPANSION b) DIVERSIFICATION c) MODERNISATION d) HELPING

ASSOCIATES. BUSINESS FAILURE a) PRODUCT b) MARKETING c) TECHNICAL d) INEFFICIENT

MANAGEMENT TIME / COST OVER RUN.



WILLFUL DEFAULT.

SIPHONING OF FUNDS

(MISUTILISATION)

FRAUDS -DEFECTIVE DOCUMENTS AND TITLE etc

External factors such as recession, input/powershortage , price escalation, natural calamities,accidents

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Asset Quality, Credit Delivery and Management Final