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Dealing with non-performing assets

The identification and measurement of non-performing assets: a cross-country comparison

Non-performing assets (NPAs) are a recurring feature in financial crises. Poor asset quality translates into lower interest income and higher loan loss provisions, eventually leading to a deterioration in banks’ profitability and regulatory capital. Over time, high NPAs can lead to bank failures, ultimately threatening financial stability. This, in turn, has negative consequences for the banking system’s ability to provide financing to the real economy.

The timely identification of NPAs helps to ensure that the stock of problem assets are recognised on bank balance sheets. Applicable accounting standards on loan impairment and regulatory guidance on NPA entry and exit criteria – which are not harmonised across jurisdictions – set the broader context for the NPA identification process. Notwithstanding differences in both accounting and regulatory frameworks, determining whether and when an exposure is considered “non-performing” is not always clear-cut and requires banks and supervisors to exercise judgment, based on a combination of quantitative and qualitative factors that are common features of regulatory NPA identification regimes.

Effective NPA measurement practices increase the likelihood that NPAs are appropriately recognised in bank earnings and regulatory capital. The financial implications of NPAs boil down to determining whether and, if so, how much provisions are needed to write down the carrying value of an NPA to its estimated recoverable amount. Provisioning outcomes are heavily influenced by whether jurisdictions are bound by accounting standards, regulatory provisioning guidance or a combination of the two to recognise provisions through the profit and loss (P&L) statement. The various supervisory approaches used to deal with the treatment of accruing interest income on an NPA and loan write-off criteria, among others, also influence how NPAs impact earnings and regulatory capital.

Once a loan is placed on NPA status, the single biggest driver of the required level of provisions is the value assigned to collateral, which is a heavily assumption-dependent process. While international accounting standards do not prescribe valuation approaches, they require banks to value collateral based on the net present value (NPV) method; that is, to consider the time and costs required to acquire and sell collateral. The assumptions that underpin the NPV approach are particularly important in jurisdictions where the legal framework results in long delays for creditors to gain collateral access. Some jurisdictions impose regulatory prescribed haircuts on appraised collateral values supporting an NPA. These two valuation methods differ and can lead to vastly different provisioning outcomes.

Non-Performing Assets (NPA) Management: Finance Explained

Readers will likely agree that effectively managing non-performing assets (NPAs) is an increasingly critical issue for financial institutions.

This article will clearly explain what NPAs are, their underlying causes, quantifiable impacts, and most importantly, strategic management techniques to address them.

You will gain key insights into classifying NPAs, preventative and curative methods, recovery approaches, and the regulatory framework around these assets. The conclusion synthesizes takeaways and predicts future NPA trends.

Introduction to Non-Performing Assets (NPAs)

Non-performing assets (NPAs) are loans, advances, or other assets that become non-performing when the borrower defaults on making principal or interest payments. NPAs matter greatly for financial institutions as they directly impact profitability, liquidity, and capital adequacy.

This section will cover:

Understanding NPAs: Definition and Significance

The Reserve Bank of India (RBI) defines an NPA as a loan or advance that has been in default for a period of 90 days or more. High levels of NPAs signal problems in the loan portfolio and can negatively impact a bank’s profitability, asset quality, liquidity, and solvency positions. Managing and reducing NPAs is therefore critical for financial stability.

The Impact of NPAs on Financial Institutions’ Balance Sheets

As NPAs accumulate, banks must set aside more provisions and capital to absorb potential losses. This directly reduces profitability metrics like the Return on Assets (ROA). It also erodes the bank’s current capital if loan loss provisions exceed operating income. Furthermore, higher NPAs freeze up capital that could have been lent out to generate interest income. This ultimately impacts net interest margins and overall profitability.

Preview of NPA Management Techniques

Key techniques that will be covered for managing NPAs include:

Early recognition of stressed assets Collateral management and asset restructuring Effective monitoring and recovery mechanisms Write-offs of irrecoverable amounts Selling NPAs to asset reconstruction companies

Proactively managing NPAs is essential for financial institutions to limit balance sheet risk and maintain healthy operations. The following sections will explore NPA management strategies in further detail.

What is NPA in simple terms?

Non-Performing Assets (NPAs) refer to loans or advances where the borrower has failed to make interest or principal payments for at least 90 days. In simpler terms, an asset becomes non-performing when it ceases to generate income for the lender.

Some key things to know about NPAs:

NPAs negatively impact banks’ profits since no interest income is generated. This reduces the bank’s revenue and profits.  They are reflected on the balance sheet of banks and financial institutions under different categories based on period of default. For example, an asset under substandard category has been NPA for less than 12 months.  RBI has set provisioning norms for banks to set aside money to cover expected losses from NPAs. Higher NPAs require higher provisions which reduces bank’s profitability.  Banks classify loan accounts as NPAs based on RBI’s IRAC norms which measure repayment track record, financial health, business prospects etc.  Some common examples of NPAs are bad loans, advances and overdraft facilities where repayment has been delayed.  Main reasons for accounts becoming NPAs – poor lending practices, economic slowdowns, willful defaults, lack of follow-up etc.

In summary, NPAs are loans where the borrower has defaulted on payments for 90 days or more, reducing the bank’s income and requiring higher provisions. Identifying and resolving NPAs is crucial for banks to maintain healthy balance sheets and profitability.

Non-Performing Assets and its Provisioning for the Banks

The Reserve Bank of India defines a bank as a legal entity that acts as a financial institution and performs deposit and lending functions. The function of lending includes procuring loans as per the demand of the customer, and any loan procured by the bank to its customer is an asset of the bank on which the bank earns profits using interest. It is a type of service provided by the bank to its customers. This loan that the bank provides is given to the customers from the deposits of account holders in that particular bank.

Before 1991, the banks in India had no provision related to income recognition, classification of assets, and provisioning of assets. In 1991 the committee on the financial system, popularly known as Narsimham Committee It, was the first one to introduce these terminologies between the years 2010-11 Reserve Bank of India in its master circular UBD.PCB.MC.No.3/09.14.000/2010-11 dated July 2010 issued guidelines about income recognition, asset classification, provisioning, and other related matters, in this circular the Reserve Bank of India talks about non-performing assets, their classification, and provisioning.

Understanding The Concept Of Non-Performing Assets

The guidelines of the Narsimham committee became operational by 1996 when, on March 31st, 1996, three categories of assets were introduced: standard, sub-standard, and doubtful. In 2005, the Master circular issued by the Reserve Bank of India defined non-performing assets as a loan or advance of the interest or instalment of the principal amount that remains overdue for 90 days as of the date of the balance sheet, in simple words, Non-performing assets are those assets that do not generate income i.e. the loan that the bank lends to its customer is an asset to it,. It is a duty upon the customer to repay that loan within the timeline specified in the terms and conditions,. Still, at times banks come across the situation where the borrowers postpone or refuse to pay back the loan they procured from the bank.

Now, this asset, in the form of a loan becomes a non-performing asset , when it isn’t repaid by the borrower, including the principal amount and the interest.

As per the above-mentioned notification of the Reserve Bank of India, the bank gives 90 days to a borrower to repay the loan. If the borrower doesn’t repay in the said time frame, the assets, i.e. loan assets, are declared non-performing.

For example-

Person “A” borrowed a home loan of INR 2 lakhs from a bank.

The terms and conditions of the contract specifically stated that ‘A’ needs to repay the loan within 2 years along with the interests. Still, upon completion of 2 years, the borrower neither pays back the principal amount nor the interest of these 2 years.

Now, the bank will give a 90-day notice to pay the entire amount along with the interest.

If A fails to pay back the entire amount, this loan, which is an asset, becomes a non-performing asset for the bank.

How to Manage NPA?

NPA can be managed by the following.

Early label and sort: Banks must have a vital system to spot NPA accounts at the before. Any default in payment of principal or interest for 90 days should be faded as an NPA per RBI norms. Banks should rightly classify NPA accounts as sub-standard, suspect or loss assets.

Regular follow-up and monitoring: Banks should regularly follow up with defaulting borrowers through phone calls, letters, emails and even personal visits. The objective is to remind borrowers about repayment obligations, know reasons for default and try to work out resolution plans. Banks may offer benefits like extending loan tenors, waiving penalties, etc.

Loan restructuring: Where viable, banks may restructure NPA loans by rescheduling repayments, feeding moratoriums, easing interest rates, etc. The goal is to make the loan tolerable and better banks’ cases of full or partial recovery. Yet, frequent restructuring should be evaded.

Collateral invocation: Banks can invoke the security (collateral) against NPA loans and sell the assets to recover funds. Yet, poor collateral valuation and delayed legal methods for asset sale pose challenges to good collateral request.

Filing of legal cases: Where efforts to recover NPAs fail, banks must quickly initiate legal proceedings against willful defaulters. They can file cases in Debt Recovery Tribunals and the National Company Law Tribunal under the Insolvency and Bankruptcy Code for the speedy solution of NPAs.

Provisioning for losses: Banks must make fair provisions for loan losses to account for likely write-offs against NPAs. This helps reduce the effect of NPAs on banks’ profitability. Provisioning needs are set by the RBI.

Making internal powers: Banks must better their internal methods, scanning tools, staff skills and governance forms to better detect, control and resolve NPAs in the long run. Technology can be key in tracking loans, placing red flags and streamlining processes.

By following these steps in an integrated manner, banks can manage their NPAs more effectively and minimize losses, although external reforms are also needed to improve the overall NPA resolution web

Financial Institutions: Soundness and Resilience

India’s financial sector has displayed stability and resilience, with ongoing improvement in asset quality, capital position and profitability during H1:2023-24. Macro stress tests for credit risk indicate that even under a severe stress scenario, all banks would be able to comply with minimum capital requirements. Stress in the NBFC sector has been assessed to be higher under a high-risk stress scenario relative to the March 2023 position. Contagion risks may warrant monitoring on account of increased inter-bank exposure.


2.1 The soundness and resilience of India’s banking sector has been underpinned by ongoing improvement in asset quality, enhanced provisioning for bad loans, sustained capital adequacy and rise in profitability. Credit growth remains robust, mainly driven by lending to services and personal loans. Deposit growth has also gained momentum due to transmission of previous rate increases resulting in repricing of deposits and higher accretion to term deposits. Lending by non-banking financial companies (NBFCs) accelerated, led by personal loans and loans to industry, and their asset quality has improved. Bilateral exposures among entities in the Indian financial system continued to expand.

2.2 This chapter presents stylised facts and analysis relating to recent developments in the domestic financial sector. Section II.1 analyses the performance of scheduled commercial banks (SCBs) in India through various parameters, viz., business mix; asset quality; concentration of large borrowers; capital adequacy; earnings; and profitability. Their resilience is evaluated through macro stress tests and sensitivity analyses. Sections II.2 and II.3 examine the financial parameters of urban cooperative banks (UCBs) and NBFCs, respectively, including their resilience under various stress scenarios. Sections II.4, II.5 and II.6 provide insights into the soundness and resilience of insurance sector, mutual funds, and clearing corporations, respectively. Section II.7 concludes with a detailed analysis of the network structure and connectivity of the Indian financial system, with contagion analysis under adverse scenarios.

The Future Of Online Dispute Resolution In 2024

In the context of arbitration, an enforceable award is a decision made by an arbitrator or an arbitration panel that is legally binding and can be enforced in court. This is one of the key features that distinguish arbitration from other forms of dispute resolution like mediation.

E-mediation is a form of mediation conducted entirely online, utilizing digital platforms and tools to facilitate dialogue and negotiation between parties in a dispute. This method is particularly advantageous for resolving conflicts where parties are geographically distant

In today’s fast-paced business environment, small businesses often encounter conflicts that can disrupt operations and drain resources. Whether it’s disagreements over service contracts, issues with suppliers, or disputes with customers, the traditional route of resolving conflicts through

Payment disputes are a common issue in the construction industry, where projects often involve multiple parties and complex contracts. When disagreements arise over payment terms, delays, or non-payment, they can significantly impact project timelines and budgets. Arbitration

As 2024 unfolds, the realm of Online Dispute Resolution (ODR) stands at the cusp of revolutionary changes. In an era where digital interaction is ubiquitous, the demand for efficient, technology-driven conflict resolution is at an all-time high. This article explores the dynamic evolution and innovative trends shaping ODR’s future, underscoring its growing significance in our increasingly online world. The past few years have seen ODR transition from a niche concept to a mainstream solution, offering a glimpse into its potential future trajectory. As we delve into what 2024 holds, it’s crucial to understand how these developments are not just reshaping dispute resolution, but also influencing legal practices globally. This shift towards a more digital approach in resolving disputes signifies a broader trend of technological integration across various sectors.

In this context, 2024 is more than just a new year; it’s a symbol of the maturation and expansion of ODR. This article aims to provide insights into the emerging trends, challenges, and the overall impact of ODR, offering a comprehensive outlook on what the future holds for this rapidly evolving field.

The Rise of ODR: A Reflection on the Past

ODR’s journey is a testament to the power of technology in transforming traditional practices. Its origins trace back to the early days of the internet when e-commerce began to boom, and with it, the need for efficient online dispute resolution mechanisms. Initially, ODR was seen as a tool for resolving low-value e-commerce disputes, but over time, it has grown to encompass a wide array of conflicts, ranging from consumer disputes to complex commercial disagreements.

The evolution of ODR has been marked by significant milestones. The adoption of ODR by renowned international organizations and its integration into legal systems worldwide highlights its growing acceptance and credibility. The early 2000s marked the beginning of this shift, with various platforms emerging to offer online mediation and arbitration services. These platforms were initially simple, focusing on text-based communication and basic negotiation tools.

However, the last decade has witnessed a technological leap in ODR capabilities. Advanced platforms now offer a plethora of features including video conferencing, AI-assisted negotiation, and automated decision-making tools. This transformation is not just about technological advancement but also reflects a changing mindset towards dispute resolution. The increasing preference for ODR over traditional methods among individuals and businesses alike illustrates a significant cultural shift towards embracing digital solutions.

Dealing with Insolvency: IBC’s impact and role in the resolution process

Prior to the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), the issues surrounding insolvency and debt resolution were governed by several laws and adjudicatory fora. This multitude of statutes and authorities was perceived to have rendered the insolvency and debt recovery process inadequate, ineffective and protracted, leading to the enactment of the IBC. The IBC has now become an effective tool for facilitating the exit of distressed firms, thereby allocating scarce economic resources towards more productive uses and aiding in the recovery of amounts from non-performing assets (NPAs).

The Economic Survey 2016-17 stated that the origin of the NPA problem plaguing Indian lenders can be traced to decisions taken by firms in the mid-2000s to launch new projects worth billions of rupees, particularly in infrastructure-related areas such as power generation, steel and telecom, setting off the biggest investment boom in India’s history. The survey further stated that higher-than-expected costs, lower revenues, and greater financing costs all squeezed corporate cash flow, quickly leading to debt servicing problems.

Since then, the IBC has ushered in significant changes. The Economic Survey 2022-23 stated that since its inception in December 2016, 5,893 corporate insolvency resolution processes (CIRPs) had commenced by end September 2022, of which 67 per cent have been closed. Of these cases, around 21 per cent were closed on appeal, review, or settlement, 19 per cent were withdrawn, 46 per cent ended in orders for liquidation, and 14 per cent culminated in the approval of resolution plans. The survey also records that in 2021-22, the total amount recovered by banks through the IBC exceeded that recovered through other means, including Lok Adalats, debt recovery tribunals or under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

What Can We Expect in 2024 in UK Restructuring?

There are a few things that we can be almost certain of in 2024, and others are things to add to the watchlist, but with a potential change in government on the cards, there are likely to be a few curveballs thrown into the mix that none of us can predict.

Increasing Insolvencies

For one thing, trading conditions remain difficult – although inflation has fallen, interest rates rose steadily during 2023, making borrowing and repayments more expensive. Consumer confidence is low and economic growth during 2024 is projected to be weak. There are no longer any props from the government to support businesses, interest costs remain high and with HM Revenue and Customs (HMRC) now taking a robust approach to recovering tax debts and an increase in winding up petitions, we can expect 2024 to be a financially difficult year for many businesses.

During 2023, we saw company insolvencies exceeding pre-pandemic numbers, and with reports in the press often citing the pandemic as one of the reasons for a business failing, are we only now starting to see the real fallout from 2020 and 2021?

With insolvencies expected to increase in 2024 to around 7,000 per quarter,[1] restructuring professionals can expect to be busier – although as the insolvency figures for 2023 show, the bulk of insolvencies (over 80%) tend to be liquidations, and this is unlikely to change.

Development of Restructuring Plans (RPs)

During 2023, the court sanctioned 11 RPs – perhaps not the leap in numbers many had expected but still twice as many as 2022. Those operating in the SME market may have been dissuaded from proposing a plan after HMRC strongly opposed the plans proposed by Great Annual Savings and Nasmyths – both mid-market companies.

Although it was hoped that RPs would be a useful tool to assist with restructuring mid-market companies, given the position taken by HMRC (now enshrined in its guidance), this most likely takes RPs off the table for those companies where the ability to pay the secondary preferred element is not often possible.

We have not seen, nor do we expect to see any time soon, a streamlined RP process for mid-market companies. There was talk about dealing with the convening hearing on paper, which would have helped to keep a lid on costs, but as far as we know, that proposal has been shelved for the time being.

With costs being another major issue, challenges by dissenting creditors increasing those costs, the risks of an appeal and the fact that, in some cases, the courts are now extending timetabling for the sanction hearing, we wonder if – for the time being at least – RPs are out of reach for the mid-market. The McDermott case is a recent example of where the sanction hearing was moved from November 2023 to February 2024 and is now listed for a six-day hearing – the longest sanction hearing we have seen to date.

For 2024, it would not be surprising if mid-market practitioners decide to watch how RPs develop from the sidelines rather than risk further pushback from creditors and the court, and, of course, incurring the significant costs to test the judicial temperature.

For larger corporates/multinationals, HMRC is often of no concern, and the size of those companies justifies the costs of an RP. However, the outcome of the Adlerappeal and the impact of that decision may change the dynamics for those companies too.

Where we may see RPs being used more prolifically is by foreign companies looking to take advantage of the flexibility and accessibility of an RP before the English court.

During 2023, we saw several foreign companies proposing either a scheme of arrangement or an RP in conjunction with parallel proceedings in their own jurisdictions – Cimolaiused both an English RP and Italian Concordato proceedings to restructure. However, the outcome of the Adler appeal might change the reception RPs have received cross-border.

If the sanctioning of the Adler RP is overturned, trying to unwind an RP that has already been implemented in part could be problematic. It will, therefore, be interesting to see how the court deals with this if the sanction is overturned. It was hoped that the Adler appeal judgment would be handed down before the end of 2023. It was not, but it is likely to arrive imminently.

How Data Analytics Can Help Financial Institutions Combat NPAs

The Indian banking sector is leveraging digital innovation and advanced technology to address the issue of delinquencies and non-performing assets (NPAs) in retail lending

The digital lending market is projected to experience a growth rate of 48% by 2023

Incorporating AI and behavioural segmentation allows for a more empathetic and personalised approach, leading to significant improvements in amounts collected and loans written off

The Indian economy has witnessed a remarkable transformation in recent years, with digital innovation permeating various sectors and revolutionising traditional business models. This wave of technological disruption has opened new avenues for the growth of Indian banking and finance companies and presented a unique opportunity to address the issue of delinquencies and non-performing assets (NPAs) in retail lending.

For quite some time, India’s financial institutions have grappled with the burden of delinquencies and NPAs, which have impeded economic growth, strained banking systems, and hampered the flow of credit. There are several reasons for NPAs in the Indian banking sector, including high exposure in priority sector lending, poor economic decisions by borrowers, inadequate credit appraisal and due diligence, deficient security, a lack of oversight of the loans and fraud by borrowers.

The Indian government has taken several measures to reduce the burden of delinquencies and NPAs, with banks not far behind. Indian financial institutions have devised effective strategies to mitigate this challenge and minimise their losses. In fact, it is projected that the gross NPAs of Indian banks will plummet to an impressive low of 4% by the close of the fiscal year 2023-24, while the retail segment gross NPAs are also expected to be range bound at 1.8 – 2% over the medium term.


Central to this success is the adoption of advanced technology and the integration of robust data analysis capabilities offered by new-age technology platforms that identify potential delinquencies early for corrective actions and also assist in identifying, managing, and mitigating NPAs.

AI and the Next Wave of Transformation – Global Asset Management Report 2024

The global asset management industry’s assets rose to nearly $120 trillion in 2023, reverting from a decline the year before. However, asset managers are facing a variety of challenges to their growth. Investors are gravitating to passively managed funds and other products that have lower fees even as asset managers’ costs increase. Their efforts to create new products that would differentiate them from competitors have largely fallen short, with investors sticking mostly to established products with reliable track records. Historically, the industry has been able to weather these pressures thanks to revenue growth that has been largely driven by market appreciation. In the years ahead, however, market appreciation is expected to slow, creating further challenges to the industry.

In the face of these pressures, asset managers will need to rethink the way they operate in order to maintain the growth and profitability of past years. The most viable way forward is by using an approach that we call the three Ps: productivity, personalization, and private markets. Asset managers should increase productivity, personalize customer engagement, and expand into private markets.

As the artificial intelligence (AI) technological revolution gathers momentum, asset managers have an opportunity to invest in AI and integrate it into their operations in ways that can enhance a three Ps strategy. AI can boost productivity by enabling improved decision making and operational efficiencies. (See the exhibit.) It can be leveraged to create and manage personalized portfolios at scale and to tailor the customer experience. And AI can enhance the efficiency of deal teams in private markets and boost their ability to drive value creation. In adopting AI to facilitate these key moves, asset managers should view the technological possibilities as transformational tools for their organization.

As part of this year’s report, we surveyed asset managers with collectively more than $15 trillion in assets under management to gather their views on the role of AI in their business. The vast majority of survey respondents expect to see significant or transformative changes in the short term, and two-thirds either have plans to roll out at least one generative AI (GenAI) use case this year or are already scaling one or more use cases.

Waiting is not an option when it comes to investing in AI. The technology is rapidly developing, and asset managers that do not start their journey now risk being left behind.


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