Important Points About NPA, PCA and BANKING OMBUDSMAN

Important Points About NPA, PCA and Banking OMBUDSMAN

Dear Aspirants, as we all know the importance of Banking Awareness section. It will be very useful for IBPS/SBI and other bank exams. Here the Team IG provides you all Banking Study notes in daily basis for those who are preparing for the exams. We provided the study notes of NPA, PCA and Banking OMBUDSMAN.

Non Performing Asset (NPA):

A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. In simple terms, an asset is tagged as non performing when it ceases to generate income for the lender.

NPA is used by financial institutions that refer to loans that are in jeopardy of default the so called NPL (A Non Performing Loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days) Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in NPLs and often results in massive write-downs.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) is a loan or an advance where;

• Interest and/or installment of principal remain overdue for a period of more than 91 days in respect of a term loan,
• The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
• The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
• Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
• Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
• Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.
• No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days.

Further classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

• Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months.
• Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months.
• Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the amount has not been written off, wholly or partly.

Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. All those assets which cannot be recovered are called as Loss Assets.

Some advanced tools like Experian India’s “Hunter Fraud Score” have also been launched that work on data mining and calculate some authentic score that can help banks detect fraud and lower their losses.

Reasons for Occurrence of NPAs

NPAs result from what are termed “Bad Loans” or NPL. Default, in the financial parlance, is the failure to meet financial obligations, say non-payment of a loan installment. These loans can occur due to the following reasons:

• Usual banking operations /Bad lending practices
• A banking crisis (as happened in USA, South Asia and Japan)
• Overhang component (due to environmental reasons, natural calamities, business cycle, Disease Occurrence, etc.)
• Incremental component (due to internal bank management, like credit policy, terms of credit, etc.)

The Problems caused by NPAs

NPAs do not just reflect badly in a bank’s account books, they adversely impact the national economy. Following are some of the repercussions of NPAs:

• Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate NPL losses
• Bank shareholders are adversely affected
• Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments.
• When bank do not get loan repayment or interest payments, liquidity problems may ensue.

Prompt Corrective Action (PCA):

To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. The process or mechanism under which such ac tions are taken is known as Prompt Corrective Action, or PCA.

The RBI said it was all set to revise guidelines entailing Prompt Corrective Action (PCA) plan required to be mandatorily set in motion by ailing banks. The PCA is triggered when banks breach certain regulatory requirements like minimum capital, return on asset and quantum of non-performing assets.

Why the need for PCA?

The 1980s and early 1990s were a period of great stress and turmoil for banks and financial in situations all over the globe. In USA, more than 1,600 commercial and savings banks insured by the Federal Deposit Insurance Corporation (FDIC) were either closed or given financial assistance during this period. The cumulative losses incurred by the failed institutions exceeded US $100 billion. These events led to the search for appropriate supervisory strategies to avoid bank failures as they can have a destabilising effect on the economy

The RBI had initiated PCA on Bank of Maharashtra, Bank of India, Central Bank of India, IDBI Bank, Indian Overseas Bank, Dena Bank, UCO Bank and Corporation Bank.

Too big to fail:

Due to the adverse impact on the economy, medium sized or large banks are rarely closed and the governments try to keep them afloat. Bank rescues and mergers are far more common than outright closures. If banks are not to be allowed to fail, it is essential that corrective action is taken well in time when the bank still has adequate cushion of capital to minimise the losses.

Reserve Bank of India PCA Framework for commercial banks

The Reserve Bank has specified certain regulatory trigger points, as a part of prompt

corrective action (PCA) Framework, in terms of three parameters, i.e.,

1. capital to risk weightedassets ratio (CRAR),
2. net non-performing assets (NPA) and
3. Return on Assets (RoA)

For initiation of certain structured and discretionary actions in respect of banks hitting such

trigger points. The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs.

The trigger points along with structured and discretionary actions that could be taken by the Reserve Bank are described below:

1. CRAR

(i) CRAR less than 9%, but equal or more than 6% – bank to submit capital

restoration plan; restrictions on RWA expansion, entering into new lines of business,

accessing/renewing costly deposits and CDs, and making dividend payments; order

recapitalisation; restrictions on borrowing from inter-bank market, reduction of stake

in subsidiaries, reducing its exposure to sensitive sectors like capital market, real

estate or investment in non-SLR securities, etc.

(ii) CRAR less than 6%, but equal or more than 3% – in addition to actions in hitting

the first trigger point, RBI could take steps to bring in new Management/ Board,

appoint consultants for business/ organizational restructuring, take steps to change

ownership, and also take steps to merge the bank if it fails to submit recapitalization

plan.

(iii) CRAR less than 3% – in addition to actions in hitting the first and second trigger

points, more close monitoring; steps to merge/amalgamate/liquidate the bank or

impose moratorium on the bank if its CRAR does not improve beyond 3% within one

year or within such extended period as agreed to.

2. Net NPAs

(i) Net NPAs over 10% but less than 15% – special drive to reduce NPAs and

contain generation of fresh NPAs; review loan policy and take steps to strengthen

credit appraisal skills, follow-up of advances and suit-filed/decreed debts, put in

place proper credit-risk management policies; reduce loan concentration;

restrictions in entering new lines of business, making dividend payments and

increasing its stake in subsidiaries.

(ii) Net NPAs 15% and above – In addition to actions on hitting the above trigger

point, bank’s Board is called for discussion on corrective plan of action.

3. ROA less than 0.25% – restrictions on accessing/renewing costly deposits and CDs,

entering into new lines of business, bank’s borrowings from inter-bank market,

making dividend payments and expanding its staff; steps to increase fee-based

income; contain administrative expenses; special drive to reduce NPAs and contain

generation of fresh NPAs; and restrictions on incurring any capital expenditure other

than for technological upgradation and for some emergency situations.

FDIC PCA Framework

The PCA framework prescribes five levels of trigger points based on capital measures, i.e. total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, for insured state-chartered non-member banks. The five PCA categories are (i) well capitalized, (ii)adequately capitalized, (iii) undercapitalized, (iv) significantly undercapitalized, and (v)critically undercapitalized.

    (i) Well capitalized

(a) Total risk-based capital ratio of 10% or greater; and

(b) Tier 1 risk-based capital ratio of 6% or greater; and

(c) Leverage ratio of 5% or greater.

    (ii) Adequately capitalized

(a) Total risk-based capital ratio of 8% or greater; and

(b) Tier 1 risk-based capital ratio of 4% or greater; and

(c) A leverage ratio of 4% or greater, OR a leverage ratio of 3% or greater if the bank is

rated composite 1 under the CAMELS rating system in the most recent examination

of the bank.

    (iii) Undercapitalized

(a) Total risk-based capital ratio of less than 8%; OR

(b) Tier 1 risk-based capital ratio of less than 4%; OR

(c) A leverage ratio of less than 4%, OR a leverage ratio of less than 3% if the bank is

rated composite 1 under the CAMELS rating system in the most recent examination

of the bank.

    (iv) Significantly undercapitalized

(a) Total risk-based capital ratio of less than 6%; OR

(b) Tier 1 risk-based capital ratio of less than 3%; OR

(c) A leverage ratio of less than 3%.

    (v) Critically undercapitalized

(a) The tangible equity to total assets (leverage ratio) is equal to or less than 2%.

BANKING OMBUDSMAN:

The Banking Ombudsman Scheme is an expeditious and inexpensive forum for bank customers for resolution of complaints relating to certain services rendered by banks. The Banking Ombudsman Scheme is introduced under Section 35 A of the Banking Regulation Act, 1949 by RBI with effect from 1995 and was revised in 2002. The current scheme became operative from 1 January 2006, and replaced and superseded the banking Ombudsman Scheme 2002. From 2002 until 2006, around 36,000 complaints have been dealt by the Banking Ombudsmen. There are 20 regional offices of Banking Ombudsmen in India. The latest offices are opened Jammu & Raipur.

The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services covered under the grounds of complaint specified under Clause 8 of the Banking Ombudsman Scheme 2006.

As of now, twenty Banking Ombudsmen have been appointed with their offices located mostly in state capitals. The addresses and contact details of the Banking Ombudsman offices have been provided under Annex I of the Scheme.

All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.

Type of Complaints resolved by banking ombudsman:

The Banking Ombudsman can receive and consider any complaint relating to the following deficiency in banking services:

• non-payment or inordinate delay in the payment or collection of cheques, drafts, bills etc.;
• non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof;
• non-acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof;
• non-payment or delay in payment of inward remittances ;
• failure to issue or delay in issue of drafts, pay orders or bankers’ cheques;
• non-adherence to prescribed working hours ;
• failure to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a bank or its direct selling agents;
• delays, non-credit of proceeds to parties’ accounts, non-payment of deposit or non-observance of the Reserve Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account maintained with a bank ;
• complaints from Non-Resident Indians having accounts in India in relation to their remittances from abroad, deposits and other bank related matters;
• refusal to open deposit accounts without any valid reason for refusal;
• levying of charges without adequate prior notice to the customer;
• Non-adherence to the instructions of Reserve Bank on ATM / Debit Card and Prepaid Card operations in India by the bank or its subsidiaries
• Non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on credit card operations
• Non-adherence to the instructions of Reserve Bank with regard to Mobile Banking / Electronic Banking service in India by the bank
• Non-disbursement or delay in disbursement of pension (to the extent the grievance can be attributed to the action on the part of the bank concerned, but not with regard to its employees);
• Refusal to accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government;
• Refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of Government securities;
• Forced closure of deposit accounts without due notice or without sufficient reason;
• Refusal to close or delay in closing the accounts;
• Non-adherence to the fair practices code as adopted by the bank;
• Non-adherence to the provisions of the Code of Bank’s Commitments to Customers issued by Banking Codes and Standards Board of India and as adopted by the bank ;
• Non-observance of Reserve Bank guidelines on engagement of recovery agents by banks;
• Non-adherence to Reserve Bank guidelines on para-banking activities like sale of insurance / mutual fund /other third party investment products by banks
• Any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.

A customer can also lodge a complaint on the following grounds of deficiency in service with respect to loans and advances

• non-observance of Reserve Bank Directives on interest rates;
• delays in sanction, disbursement or non-observance of prescribed time schedule for disposal of loan applications;
• non-acceptance of application for loans without furnishing valid reasons to the applicant; and
• non-adherence to the provisions of the fair practices code for lenders as adopted by the bank or Code of Bank’s Commitment to Customers, as the case may be;
• non-observance of any other direction or instruction of the Reserve Bank as may be specified by the Reserve Bank for this purpose from time to time.
• The Banking Ombudsman may also deal with such other matter as may be specified by the Reserve Bank from time to time.

When can one file a complaint?

One can file a complaint before the Banking Ombudsman if the reply is not received from the bank within a period of one month after the bank concerned has received one’s complaint, or the bank rejects the complaint, or if the complainant is not satisfied with the reply given by the bank.

The place, one can lodge his/her complaints:

One may lodge his/ her complaint at the office of the Banking Ombudsman under whose jurisdiction, the bank branch complained against is situated. For complaints relating to credit cards and other types of services with centralized operations, complaints may be filed before the Banking Ombudsman within whose territorial jurisdiction the billing address of the customer is located.

The complainant can be filed by one s authorized representative (other than an advocate).

The Banking Ombudsman does not charge any fee for filing and resolving customers complaints.

Compensation Amount:

The amount, if any, to be paid by the bank to the complainant by way of compensation for any loss suffered by the complainant is limited to the amount arising directly out of the act or omission of the bank or 20 lakhs (Two Million), whichever is lower.

The Reasons for rejecting a complaint:

The Banking Ombudsman may reject a complaint at any stage if it appears to him that a complaint made to him is:

• not on the grounds of complaint referred to above
• compensation sought from the Banking Ombudsman is beyond 20 lakhs (Two Million).
• requires consideration of elaborate documentary and oral evidence and the proceedings before the Banking Ombudsman are not appropriate for adjudication of such complaint
• the complaint is without any sufficient cause
• the complaint that it is not pursued by the complainant with reasonable diligence
• in the opinion of the Banking Ombudsman there is no loss or damage or inconvenience caused to the complainant

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