Current Affairs Lecture

Current Affairs lecture
Asset of Bank can be classified as -

• Standard Assets -
Loan account where borrower is repaying the principal and interest in timely fashion.
• Non Performing Asset
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 should not be an NPA.
Non Performing Asset (NPA)

• When the loan payments (principal or interest) have not been paid for a minimum period
of 90 days.
• Such asset fails to produce income for the bank.
• For the farm loans, NPA is NOT counted on number of days rather on number of cropping
seasons.
− in respect of a term loan, interest and/or instalments of the principal remain overdue
for a period of more than 90 days;
− in respect of an Overdraft/Cash Credit, the account remains ‘out of order’;
− The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted
− in respect of agricultural loans, the instalment of principal or interest thereon remains
overdue for—
NPA for Agri Loans -

• Long duration crops - overdue for one crop season.
• Short duration crops - overdue for two crop seasons.
For the purpose of these guidelines, "long duration" crops would be crops with crop season
longer than one year and crops, which are not "long duration" crops would be treated as
"short duration" crops.
Categories of NPAs
Based upon the period to which a loan has remained as NPA, it is classified into 3 types:
• Substandard Assets: An asset which remains as NPAs for less than or equal to 12 months.
• Doubtful Assets: An asset which remained in the above category for 12 months.
• Loss Assets: Asset where loss has been identified by the bank or the RBI, however, there
may be some value remaining in it. Therefore, loan has not been not completely written
off.
Net NPAs:
Based on Provisioning, NPA can be categorized as Gross and Net NPA
• Gross NPA: Gross NPAs are the sum of all the loans that have been defaulted by the
individuals
• Net NPA: Net NPAs are the amount that is realized after provision amount has been
deducted from the gross nonperforming assets.
Provisioning
• As per RBI norms, banks must set aside funds to cover losses against their NPA. This is
called Provisioning.
• Such ‘provisioning of funds’ decreases the profitability of the Bank.
• Provisioning is dealt in terms of Provisioning Coverage Ratio (PCR).
Provisioning Coverage Ratio (PCR)

• It is the ratio of provisioning to Gross NPA.
• It indicates the extent of funds a bank has kept aside to cover loan losses.
• High PCR can be beneficial to banks to buffer themselves against losses if the NPAs start
increasing faster.
Slippages: Slippages denote the fresh amount of loans that have turned bad in a year.
The slippage ratio of a bank is calculated as Fresh accretion of NPAs during the year /Total
standard assets at the beginning of the year multiplied by 100
Loan write off -
• Removed loans from asset side of bank
• After a loan turns bad, a bank writes it off when chances of recovery are remote.
• It helps the bank reduce not only its NPAs but also taxes since the written off amount is
allowed to be deducted from the profit before tax.
• After write-off, banks are supposed to continue their efforts to recover the loan using
various options. They have to make provisioning also.
Restructured loan -
When principal / interest rate / tenure of the loan is modified.
A wilful default would be deemed to have occurred if any of the following events is noted:
The unit has defaulted in meeting its payment/repayment obligations to the lender even
when it has the capacity to honour the said obligations.
Type of Borrowers -
• Prime Borrower - Has the capacity to repay loans.
• Subprime Borrower - Individual who is NOT having capacity to repay loan.
Sub-prime Crisis in USA (2007-08) were largely happened due Subprime Borrowers.
• Overleveraged Borrower - Company when borrows more than its capacity to repay
becomes Overleveraged borrower.
Thus, its debt to equity ratio becomes HIGH
Zombie Lending -
• Situation where in already weak bank keeps giving new loans to a subprime /
overleveraged borrower.
• Such Banks have large amounts of nonperforming assets (NPA) on their balance sheets
Could the zombies crowd out good borrowers?
There was evidence of indirect evergreening in India – weak firms increase leverage by
borrowing through related parties from weak banks, but decrease real investment – which
often goes undetected.
Evergreening of Loans
• Form of zombie lending
• Situation when a borrower taking a new loan to pay off his old loan.
• Create a false impression of the asset quality and profitability of banks
Window Dressing of Loans

The practice of manipulating financial statements or records to present a misleading or
distorted picture of the true financial
health of a bank or a corporate entity.
Teaser Loans -
Loans that offer a lower rate of interest in the first few years after which the rates are
increased.
National Financial Information Registry (NFIR) (in Budget 2023)

• NFIR will be designed with help of RBI.
• NFIR will contain info on both individual borrower and company borrowers.
• NFIR will contain info on all the loans taken by them through banks, NBFCs, bonds, etc.
• Thus, NFIR Will provide 360 degree information about a loan applicant’s creditworthiness.
• Will help the lenders process the loan application in a more faster and accurate manner
Public Credit Registry

• Recommended by YM. Deosthalee committee by RBI.
• Extensive database of credit information of borrowers that is accessible to all lending and
credit decision-making institutions
Credit Information Companies in India

Function: Collect, analyze, and maintain credit information.
Regulation: Licensed by the Reserve Bank of India (RBI).
Functions of Credit Bureaus:

Data Collection: From banks, lenders, and financial institutions.
Credit Reports: Detail borrowers' credit history, payments, and defaults.
Credit Scores: Reflect creditworthiness based on credit history.
Risk Analysis: For lenders to assess loan or credit application risks.
CIBIL (Credit Information Bureau (India) Limited), Equifax, and Experian.
Prompt Corrective Action (PCA)

1. PCA is a framework under which banks with weak financial metrics are put under watch
by the RBI.
2. It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking
sector.
3. Essentially PCA helps RBI monitor key performance indicators of banks, and taking
corrective measures, to restore the financial health of a bank.
4. The PCA framework deems banks as risky if they slip some trigger points - capital to risk
weighted assets ratio (CRAR), net NPA, Return on Assets (RoA) and Tier 1 Leverage ratio.
5. This framework is applicable only to commercial banks and not to co-operative banks
• Thus, RBI will take corrective actions such as RBI giving strict warning, conducting deeper
audit & supervision.
• PCA is a direct action tool (Qualitative or Selective tool)
Supervisory Action Framework (SAF)

1. Reserve Bank of India (RBI) has introduced Supervisory Action Framework (SAF) which
monitors Co-operative Banks for faster resolution.
2. The SAF is similar to the Prompt Corrective Action (PCA) framework which is imposed on
commercial banks.
3. Co-operative Banks, which are distinct from commercial banks, were born out of the
concept of co-operative credit societies where members from a community group
together to extend loans to each other.
Asset Reconstruction Company

• It is a specialized financial institution that deals with the acquisition and resolution of non-
performing assets (NPAs) or distressed assets from banks and financial institutions.
• ARCs are typically established to help banks and financial institutions manage their bad
loans and improve their financial health.
• These companies purchase NPAs from banks at a discounted price and then work to
recover the value of these assets through various means, such as debt restructuring, asset
sales, or other strategies.
• This is being considered as the government's version of a bad bank or Public Sector Asset
Rehabilitation Agency (PARA) bank.
NARCL:
− Establishment: Part of India's strategy to address NPAs in banking.
− Role: Consolidates and manages stressed assets from banks.
Functioning:
− As an ARC: Buys bad loans at discounts and works on recovery. Cleans Balance Sheets:
Helps banks focus on core activities.
Impact on Banking Sector:

− Strengthens Finances: By absorbing NPAs, improves banks' health. 'Bad Bank' Concept:
Aids in segregating bad assets from banks.
− Associated Entities:
India Debt Resolution Company Ltd (IDRCL): Manages resolution of acquired assets.
− Regulatory Framework:
RBI Guidelines: Operates under Reserve Bank of India’s regulations.
Related Laws: Involves understanding of IBC and SARFAESI Act.

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Current Affairs lecture

Asset of Bank can be classified as -

Non Performing Asset (NPA)

NPA for Agri Loans -

Provisioning Coverage Ratio (PCR)

Window Dressing of Loans

National Financial Information Registry (NFIR) (in Budget 2023)

Public Credit Registry

Credit Information Companies in India

Regulation: Licensed by the Reserve Bank of India (RBI).

Functions of Credit Bureaus:

Credit Reports: Detail borrowers' credit history, payments, and defaults.

Credit Scores: Reflect creditworthiness based on credit history.

Risk Analysis: For lenders to assess loan or credit application risks.

CIBIL (Credit Information Bureau (India) Limited), Equifax, and Experian.

Prompt Corrective Action (PCA)

Supervisory Action Framework (SAF)

Asset Reconstruction Company

Impact on Banking Sector:

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