What is the new rules for npa?

The RBI NPA circular of 2022 delineates several types of NPAs:

1. Substandard NPA: NPAs that are overdue for fewer than 12 months or equal.

2. Suspicious NPA: NPAs that fall into the substandard category for 12 months or less.

3. Loss of Assets: NPAs recognized as losses incurred by banks or financial institutions, as per RBI inspections.

Provisioning Rules

The Reserve Bank of India establishes uniform provisioning rules for all banks dealing with NPAs:

• Ten percent provision applies to the total amount, without considering securities or government guarantees.

• NPAs in the lower category require an additional 10 percent provision, totaling 20 percent of the outstanding amount.

• Suspicious or unsecured NPAs necessitate a 100 percent provision.

Factors Contributing to NPAs

Factors contributing to NPAs include:

• Lending to individuals or entities with uncertain creditworthiness, posing higher risks.

• Inadequate assessment of a loan's viability and potential capital loss over time.

• Diversion of funds by company promoters to other purposes.

• Financing of ineffective projects.

• Insufficient credit information sharing among commercial banks.

• Inefficient recovery of loans from delinquent borrowers.

Impact of NPAs

NPAs have adverse effects on the banking system:

• Reduction in bank profits.

• Diminished capital adequacy of banks and financial institutions.

• Reduced willingness to lend and assume risks.

• Shift of focus from profitability to debt risk management.

• Increased funding costs.

Preventive Measures

Banks employ preventive measures to mitigate NPAs:

• Scrutiny of an individual/corporation's CIBIL score before loan approval.

• Utilization of compromise and settlement schemes.

• Adoption of alternative dispute resolution mechanisms, such as debt recovery tribunals and people's courts, for speedy settlements.

• Active dissemination of defaulter information to deter further financing.

• Asset restructuring strategies.

• Strict actions against major NPAs.

• Embracing legal reforms, including bankruptcy and bankruptcy code implementation.

RBI Guidelines on NPAs (RBI 2021)

The RBI guidelines on NPAs include initial steps to prevent NPAs:

• Strict adherence to resolution plan deadlines by lenders.

• Incentives to encourage agreement on ongoing resolution plans.

• Improving the restructuring system, especially for large loans.

• Imposing higher borrowing costs for non-cooperative borrowers.

• Liberal regulatory treatment for asset sales.

• Allowing lenders to spread sales losses over two years if disclosed.

• Facilitating specialized agencies for acquiring distressed companies.

Debt Recovery and Settlement

Banks formulate and implement their policies for debt recovery, including loan repayment and negotiation of agreements.

• Folk courts handle small NPAs, typically up to Rs. 20 lakhs, offering a flexible and cost-effective approach for settling disputes.

• NCLT and NCALT replace BIFR and AAIFR under IBC for resolving larger NPA cases.

• Selling NPAs to other banks is permitted after being on the seller bank's books for more than two years.