NPA, a multi-headed monster

February 9, 2012:  

Non-performing asset (NPA) is a multi-headed monster having multiple implications on the performance of banks. An immediate offshoot of rising NPAs is the higher provision required. Once an account is classified as NPA it goes through several phrases requiring progressively higher provisions.

A sub-standard Asset requires a provision of 15 per cent on secured portion and 25 per cent on the unsecured exposure. After 12 months as Sub-Standard Asset, it gets classified as Doubtful Asset 1(DA1) and requires a provision of 25 per cent on secured portion and 100 per cent on the unsecured portion.

Once the account crosses one year as DA1, it becomes Doubtful Asset 2 (DA2-1to 3 years) and requires a provision of 40 per cent on the Secured portion and 100 per cent on the unsecured portion.

Once it crosses three years, it becomes Doubtful Asset3 (DA3) and requires 100 per cent provision irrespective of the availability of security. Unsecured loans such as clean loans, educational loans attract 100 per cent provision even at DA1 stage.

Factoring Regulation Bill, a welcome reform

Factoring is a financial transaction whereby a business entity sells its receivables, i.e. invoices to a Factor at a discount. Although a receivable is a property right and is transferable, there was a long-felt need for a statutory framework for Factoring.

Passing of the Factoring Regulation Bill, 2011 by Parliament has almost gone unnoticed on account of other important Bills pending. The object of the Factoring law is to address the problem of delayed payments to micro and small business entities by large businesses for purchase of goods and services.

A special law, viz Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, was enacted in 1993, which was later incorporated into the Micro Small and Medium Enterprises Act, 2006. But in practice, these legislatiions did not improve the position of MSEs because of their dependence on large businesses for continued business. Salient features of the new Factoring Law need to be noted.

- Any company can commence Factoring by obtaining registration from the RBI as a non-banking finance company. Such registration shall be governed by the existing law applicable to NBFCs (Chapter IIIB of the RBI Act, 1934) as well as the new Factoring Regulation Act, 2011.

- Banks or corporations established under an Act of Parliament can also undertake factoring without being required to obtain registration from RBI. Thus, organisations like NHB, SIDBI, EXIM Bank can also undertake factoring.

- Definition of factoring also includes assignment of export receivables and thus includes 'forfaiting', subject to the requirements of the Foreign Exchange Management Act.

- Term receivables are widely defined to include toll or any other charges payable for use of infrastructure facilities. However, bank loans are excluded from the definition of receivables.

- The law applies to all business entities i.e. large, medium, small and micro entities, whether engaged in any manufacturing activity or trading or providing any services or in any other business activity. Applicability of the new law is, therefore, much wider and even large industrial houses and multinational corporations can avail factoring services;

- The definition of 'factoring' covers both, with recourse and without recourse factoring.

- The law requires that all transactions of assignment of receivables in favour of Factors shall be registered with the Central Registry established under the SARFAESI Act, 2002. The registry record shall be available for search by the public.

- Factors are declared to be credit institutions for the purposes of Credit Information Companies (Regulation) Act, 2005 and can have access to credit information relating to firms availing factoring services;

- Factors are not financial institutions for the purposes of SARFAESI Act and hence will not have rights of enforcement without the intervention of courts. But provisions of the Code of Civil Procedure, 1908 regarding summary suits are made applicable to claims of Factors to facilitate speedy recovery of receivables,

- The most important provision in the Act is insertion of section 8D in the Indian Stamp Act, 1899, granting exemption from stamp duty on documents executed for the purpose of assignment of receivables in favour of Factors notwithstanding anything to the contrary contained in any other law in force. In view of such exemption, assignment of receivables in favour of Factors becomes a viable proposition and is expected to give a boost to factoring.

Growth of factoring will solve the liquidity and working capital problems of numerous small and medium scale industries, which supply spare parts and operate as ancillary units of large manufacturing units and other business entities.

Traditionally, banks take lending decisions based on the borrower's capacity to pay and other securities. Factoring will be undertaken considering the capacity, standing and status of debtors. The new law is a major step in financial sector reforms, and needs to be appreciated.

(The author is Chief Advisor-Legal, IBA. The views expressed are personal)

Managing NPAs, maintaining NIMs, are immediate priorities: Sri B A Prabhakar,

Interview with CMD, Andhra Bank , Parnika Sokhi / Mumbai Feb 14, 2012, 00:39 IST

B A Prabhakar, who took over as chairman and managing director of Andhra Bank last month, has drawn up his to-do list. He shares his priorities in an interview withParnika Sokhi. Edited Excerpts:

Have you listed the areas needing immediate attention?
My immediate priorities are to concentrate on management of non-performing assets (NPAs) and net interest margins (NIMs). Slippages have gone up because of a few accounts but recoveries have been good. As a result, we have been able to show a net reduction in NPAs this quarter. We recovered about Rs 500 crore in the third quarter. We aim to show better results in the next quarter. Our NIM of 3.8 per cent is in line with our public sector peers. We aim to maintain this level. We want to also focus on branch expansion policy outside Andhra Pradesh.

You said the bank doesn’t aim to lend to micro finance institutions (MFIs) as   of now. Is it on fears that the exposure to the industry could turn bad? 
No, we have a negligible amount of bad loans from that sector, but we have restructured three accounts there. The reason for not going aggressive in that sector is that we would like to have more clarity on the regulation and legal structure there. We can look at expansion in a big way only after we have clarity on those issues. All the accounts restructured from the sector are from Andhra Pradesh. About half the total exposure of Rs 300 crore in MFIs is from that state. So, incremental lending will take place selectively, and preferable outside Andhra.

Which are the target sectors to increase exposure?
We would like to have an even growth in small and medium enterprises, and the retail category. We have not fixed any targets, as such, but these will be two focus areas that will enable us to meet our priority sector commitments. Loans to large corporate bodies form about 50 per cent of our portfolio and whatever credit growth we are targeting has to also come from that segment.

What are your plans to boost fee income?
That is one area we’ll have to work on. We are planning to take up third-party product distribution in a big way. That is where the focus on retail comes in. But we will also focus on increasing the retail liabilities and assets.

Your growth targets for advances and deposits?
We are planning to achieve credit growth of about 16 per cent and deposit growth of about 18 per cent by the end of this financial year.

We will wait for guidance on monetary aggregates from the Reserve Bank of India (RBI) before drawing up plans for the next financial year. That will give us some idea on the potential growth in the coming year.

Any thoughts on revising the interest rates on loans and deposits?
We’d like to wait for RBI’s next policy announcement.

Your hiring plans for the next financial year?
We are planning to hire about 1,450 clerks and 800 officers to take care of next year’s branch expansion and also to take care of the attrition in the bank. We plan to add at least 150 branches next year.

Banking on staff for recovery

Lenders are dedicating full-fledged teams to curtail the threat of rising defaults. Parnika Sokhi & Abhijit Lele / Mumbai Feb 15, 2012, 00:02 IST

Every day, between 7.30 pm and 11 pm, a top official of a public sector bank gets text messages from 46 zonal managers. The messages contain details on recovery figures of respective zones, with additional information on ranking of centres, based on recoveries.

The zonal managers have to send these numbers daily. Failure to do so will see an email from the chairman’s office seeking the details. The official says he has been doing this chore daily for the last one year. This helps keep a tab on the accounts which have slipped into the non-performing asset (NPA) category.

This is not a one-off incident. Banks reeling under asset quality pressure have beefed up recovery efforts. And, it has percolated to the ground level. Branch level staff are also being deployed for collection of dues.

“We have a recovery team of about 200 employees. Of this, a majority were redeployed from other departments in the third quarter,” said B A Prabhakar, chairman and managing director of Andhra Bank. The bank is targeting a recovery of at least Rs 500 crore this quarter through its in-house team.

The last two quarters of a financial year have always seen a flurry of activity for credit deployment. However, the situation is different this year. With the slackening of credit demand due to high interest rates, hectic activity is being seen on meeting recovery targets.

Lenders are also resorting to referring bad accounts backed with securities to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) processes.

Nupur Mitra, chairperson and managing director at Dena Bank, said the bank was using SARFAESI and one-time settlements in a big way. “We are also holding massive lok adalats for small accounts,” said Mitra. The bank has deployed clerical staff and nodal officers to do the task.

In rural areas, some banks are asking customers, while extending fresh loans, to at least pay the minimum interest to avoid the loan slipping into the non-performing category.

Bankers say since asset quality pressure is more in the agriculture and small and medium enterprises (SME) segments, maximum recovery efforts are given in these two categories.

State Bank of India (SBI), the country’s largest lender, which had gross NPAs of Rs 40,000 crore at the end of December, has seen 19 per cent of its bad loans in the farm sector and 28.7 per cent in the SME sector. SBI’s cash recovery and upgradation in the December quarter was about Rs 2,000 crore, compared to Rs 1,430 crore in the year-ago period.

The thrust on recovery also comes at a time when not much activity is seen in the stressed asset sale market, after RBI issued guidelines in October 2007, stating banks while selling NPAs, have to work out the net present value of the estimated cash flow associated with the realisable value of the available securities net of the cost of realisation. The sale price, generally, should not be lower than the net present value.

“We were able to recover 100 per cent of principle in accounts, where the offer from asset reconstruction companies was at 30 per cent,” said Sounadra Kumar, deputy managing director, SBI. “Given this experience, the preference is for in-house effort than sale of bad loans,” she added.