“A STUDY ON NPA MANAGEMENT PROCESS IN SBI WITH FOCUS ON REHABILITATION & RESTRUCTURING OF SMEs”

Ayesha Patnaik
 An overview of the presentation
• Objectives, methodology and limitations
• Conceptual Study
• NPA management- the SBI way
• Restructuring and Rehabilitation of SMEs
• Case Study
• Data Analysis
• Findings, Sugestions and Conclusion
 Objectives

 To learn the practical aspect

of NPA management

 To gain familiarity with

restructuring and rehabilitation
process

 To assess SBI Bhubaneswar

Circle’s performance with
relation to restructuring
 Methodology

• Collecting information from NPA manual of the bank

• Talks with SBI officers

• Data Collection
 Primary Data
 Secondary Data

• Data Analysis
 Simple statistical tools like ratios and percentages
 LIMITATIONS
• Time Constraint

• Only a single case study

• Financial statements belonging to pre-rehabilitation

phase of the unit studied not available

• Unavailability of appointment with the promoters of the

unit discussed in the case

• Limited to non- corporate restructuring

 ASSET QUALITY
- an introduction
STANDARD
SPECIAL MENTION
ACCOUNT

NPA
 NPA-Defined
As per IRAC norms issued by RBI, NPA is a loan
where

 installment of principal/interest or both

remains unpaid for 90 days

 the account remains out-of –order in case of an

cash credit account

 the installment of principal remains overdue for

2 or more crop seasons in case of short duration
crops and 1 crop season in case of long duration
crops
 NPA-classes
Sub Standard

Doubtful

 D1
 D2
 D3

Loss
 Resolution Strategies
• Restructuring / Rehabilitation
• Compromise Settlement Schemes
• Legal Proceedings
Filing case in civil courts
Debt Recovery Tribunal
Lok Adalats
Recovery through SARFAESI act
 Contd………….
• Sale of NPA to other banks

• Sale of NPA to ARC/ SC under Securitization and

Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002
(SARFAESI)

• Write offs
 NPA MANAGEMENT

The

Way
 NPA Budget

 MONITORING

 REPORTING

 SPECIAL MENTION ACCOUNT

 STRESSED ASSETS REVIEW

 SPECIAL BODIES FOR NPA MANAGEMENT

 NPA BUDGET
• Prepared annually by Corporate centre

• Sets targets for NPA reduction

• It is prepared for individual circle

• Performance is monitored and reviewed on a monthly basis in

NPA review meetings

• Responsibility is fixed on respective branch manager

   ACTUAL(2009-10) BUDGETED(2009-10)
NW-
  CIRCLE NW-I NW-II CIRCLE NW-I II

Opening balance
Write-off
Recovery

Upgradation
Transfer to
SAMG

Total Reduction

Fresh addition

Closing balance
 MONITORING
 AT BRANCH/FIELD LEVEL-branch
manager/field officer

 Monthly checklist and committees

 RASMECC,SMECCC and RACPC

 CIS & CBS

 REPORTING SYSTEM

 IRREGULARITY REPORT

 STRESSED ASSETS REVIEW REPORT

 STAFF ACCOUNTABILITY REPORT

SPECIAL MENTION ACCOUNTS
SPECIAL MENTION
ACCOUNT

SMA I
SMA II
SUB
STANDARD
DOUBTFUL

I
2
3
LOSS
SPECIAL MENTION ACCOUNTS
SMA lies in a zone in between standard asset and NPA.

 2 categories of SMA  
 SMA I – Interest not paid within 30 days of notice
 SMA II – Accounts that are not in default but display
early warning signals
 For better follow-up

Stressed Assets Review (SAR), but only for accounts

with outstandings above Rs 10 lacs. 
 STRESSED ASSETS REVIEW
• • For
Foraccounts
accountswith
withoutstandings
outstandingsabove
aboveRs
Rs10
10
lacs
lacs

• • SMA
SMAI,I,SMA
SMAIIIIand
andsub
substandard
standardassets
assets

• • Branch level activity

Branch level activity

• • Done
Doneininaatime
timebound
boundmanner
manner
 STRESSED ASSETS REVIEW REPORT

• Position of accounts

• Financial Indicators

• Reasons for irregularity

• Security position
Process Time Frame

Preparation and Submission 10

of report
 

Approval of measures 5
reccomended

Viability study if needed 45

TOTAL 60
 SPECIAL BODIES
SPECIAL BODIES
Stressed Assets Resolution Centre (SARC)
• NPAs originating in Business Process
Reengineering (BPR)
• Follow-up
• Filing of suit in DRTs or Civil Courts
• Appearing before the court
• Seizure and sale of mortgaged assets
• Formulation of rehabilitation package
Stressed Assets Management Branches (SAMB)
• Deal with high value accounts i.e. accounts
worth Rs 50 lac or more, on an exclusive basis.
 RESTRUCTURING

• MEANING

• ELIGIBILITY

• REMEDIES AVAILABLE
• The borrower is passing through
a temporary phase of loss
making

• Accounts only classified under

‘standard’, ‘sub standard’ and
doubtful categories may be
restructured
 Eligibility
• Viable or potentially viable

• All non corporate SME banking with SBI

• All corporate SME banking with SBI

• All corporate SME with funded and non funded

outstanding upto Rs 10 Cr under
multiple/consortium banking arrangement
Viability defined
• Its average DSCR (Debt Service Coverage
Ratio)* is more than 1.25
• DSCR is more than 1 in any given year

DSCR = Net Profit After Tax + Depreciation + Interest on

Term Loan

Installment on Term Loan + Interest on Term Loan

 REMEDIES AVAILABLE
Waiver of Penal Interest and Damages

Working Capital Term Loan

Funded Interest Term Loan

Rephasement

Conversion of funded interest/Term Debt into equity

 WCTL
o Irregular when the amount outstanding exceeds the
drawing power.

o WCTL = Principal dues-adjusted drawing power

o repayable as a term loan i.e. in monthly/quarterly

installments comprising of interest and principal.

o repayment period is not to exceed seven years.

 FITL
• The unpaid interest of both term loan and cash
credit account is segregated and funded
separately

• FITL does not amount to fresh flow of funds

from the bank to the borrower.

• repaid within a period not exceeding three to

five years
 Conversion of Funded
Interest/Debt into equity
facility can be extended only to listed non-
SSI sick/weak units.

30% of the paid up capital of the company

promoters to buy back the shares after a

specified period at a predetermined price
 Concessionary Rate Structure
RELIEF MEASURE BENCHMARK INTEREST RATE
PRESCRIBED BY RBI

FITL 1.5% below SBAR

WCTL 1.5% below SBAR

Funding of cash losses till break 1.5% below SBAR
even
Existing working capital 1.5% below SBAR

Source: RBI Master Circular

 ASSET CLASSIFICATION
 Standard asset – Sub Standard
all assets classified as NPA upon restructuring
shall be eligible for upgradation after observation
of ‘satisfactory performance’ for ‘specified period’

 A standard asset restructured for the second

time – Sub Standard

NPA- Same as prior to restructuring

 SPECIAL NORMS

Accounts which were standard

accounts on September 1, 2008
would be treated as standard
accounts on restructuring
provided the restructuring is
taken up on or before June 30,
2009.
REHABILITATION
Defining features

 Active involvement of BIFR

 For sick units i.e., units with

accumulated losses more than 60% of
it’s networth

 Joint effort of bank, Government,

electricity board etc
 THE PROCESS
 Filing of reference with BIFR

 Appointment of operating agency

 Submission of proposal

 Scrutiny

 Sanction
 THE PROPOSAL

Submitted to the Operating Agency

Projections of:-
• Capacity Utilisation
• Sales
• Profit After Tax
• Debt Service Coverage Ratio
• Funds Flow Statement
• Projections of Working Capital
 BASIS OF EVALUATION
Competence and integrity of
promoters/management

Amount of resources committed by the

promoters- 15% of the cost of rehabilitation as
per RBI guidelines

 Commercial and Technical Viability

 VIABILITY STUDIES
Commercial viability
 ...................... in a position,
 after implementing a relief package
 spread over a period not exceeding seven years from the
commencement of the package from banks, financial
institutions, Government (Central/State), Government
agencies, share holders, labour, suppliers of goods and
services and other creditors, as may be necessary
 to continue to service its repayment obligations as agreed
upon
 including those forming part of the package
 without the help of the concessions after the aforesaid
period
• Projected sales

• Projected profitability, which is

denoted by Profit After Tax (PAT)

• Total Net Worth

• TOL/TNW

• Current Ratio

• Average DSCR (Debt Service Coverage

Ratio)
 PROVISIONING

Special provisions to be maintained over

and above the norm

 Difference between fair value of advance

before rehabilitation and fair value of
advance after rehabilitation package is
granted
CASE STUDY
• Spaa Straw Board Industries Pvt. Ltd is a
paper manufacturing unit

• Operating in Titilagarh

• Promoted by Prafulla Kumar Meher, a

mechanical engineer by education
• Incorporated in 1984 but started
operations in 1990

• Manufacturer and supplier of paper and

paper products

• Made losses from day 1

• Applied to BIFR 1994, declared sick the

same year

• Accumulated loss worth Rs 243.64 lacs

• SBI issued working capital loan of Rs 58

lacs
 Projections
Parameter 1995-96 1996-97

Capacity 75% 85%

utilisation
Production 3375 3825

Sales 455.18 516.63

Net Profit 53.11 58.65

Parameters 1995- 1995- 1996-97 1996-
96(audited) 96(estimate (audited) 97(estimate
d) d)

Capacity 60.37% 75% 60 85

utilisation

Production 3375
2717 2661 3825

Sales in (Rs 447.74 455.85

lacs) 453.71 516.63

Net (in Rs 55.56 53.11

lacs) Profit 6.72 58.65
 Causes of failure………
• import duty on paper went from
15% to 0%

• Hike in excise duty from 5% to 8

% leading to hike in prices of
raw materials

• Frequent bouts of load shedding

in the factory
 Rehabilitation Part II
Justifications …….
 Experience gained by promoters

 Promoters promise to bring in

equity worth Rs 56 lacs

 Spaa had added 3 new names to

the list of its clients
 YEAR
Item 2000-2001 2001-2002

Sales and other 578.96 573.63

income

PBDIT 88.54 82.59

Less: (i)depreciation 32.77 21.98

Profit after 55.77 60.61

depreciation and tax

Income Tax Provision 00.000 00.00

Net Profit 55.77 60.61

 Rehabilitation II succeeded
as……………..
Registration of the unit with the
registrar of newspaper industry.

 Obtention of EPM rate contract

The promoters took keen interest in

technological upgradation of the
unit.
 Findings……………….
The bank did not enforce plough back of
profits into the unit

 The bank does not play a consultative role

in rehabilitation of the unit.

 Right of recompense not exercised

 Suggestions……………
 Should enforce plough back of profits
irrespective of their size

 Bank should come forth with suggestions so

as to accelerate the process of rehabilitation

 Right of recompense must be exercised more

often
DATA ANALYSIS
 ADVANCES AND NPA-the complete picture
(1) (2) (3) (4)
Categor Standard S-standard Doubtful Loss
y
SEGMENT 2010 2009 2010 2009 2010 2009 2010 2009

SSI 974.99 887.09 19.06 21.41 7.33 16 8.04 5.84

SBF 1774.85 1383 77.55 54.52 30.28 33.62 34.36 20.76

C and I 2796.24 2554.3 17.48 30.4 12.25 22.91 6.04 5.91

Agricultural 2532.47 1950 31.23 10.66 6.49 10.56 17.46 6.63

Personal 5995.69 5295.4 85.86 61.84 62.11 75.29 35.05 22.46

Misc. 28.03 48.67 .0027 - - - 2.75 1.49

Total 14102.3 12118.5 231.19 178.84 118.79 158.4 103.73 63.13

Source: CIS Data,SBI LHO,Bhubaneswar

 TOTAL
SEGMENT TOTAL NPA NPA as % of total
ADVANCES advances
2010 2009 2010 2009 2010 2009

SSI 1009.78 930.35 34.79 43.26 3.45 4.65

SBF 1917.04 1491.91 142.18 108.91 7.42 7.3

C and I 2832.01 2613.54 35.76 59.23 1.26 2.27

Agricultu 2587.65 1977.87 55.18 27.86 2.13 1.41

ral
Personal 6178.71 5455.02 183.01 159.6 2.96 2.93

Misc. 30.79 50.17 2.75 1.49 8.95 2.99

Total 14529.07 12518.86 453.67 400.35 3.12 3.2

Source: CIS Data,SBI LHO,Bhubaneswar

 Restructurings for 2009-10
SSI SBF C&I Total
Term 9 93 18 120
Loan
Cash 13 9 6 28
Credit
Total 22 102 24 148
Source: CIS Data,SBI LHO,Bhubaneswar
ASSET CATEGORY NUMBER
STANDARD 130
S-STANDARD 16
DOUBTFUL 2
16000 14556 In Rs Crs.
14000 12518
12000

10000

8000 GROSS NPA

Column1
6000

4000 16.05 % and

13.25% growth
2000 in total
400 453 advances and
0
NPA
2009
2010 respectively
 SECTOR-WISE BREAK OF ADVANCES (in %)- 2009
0.36
39.5 SME
42.44
Agricultural
Personal
Miscellaneous
17.7

SECTOR-WISE BREAK UP OF ADVANCES (in %)- 2010

0.39
40.2 SME
43.5
Agricultural
Personal
Miscellaneous
15.8
 SECTORAL BREAK UP OF NPA (in %)- 2009
25

52.89 SME
Agricultural
Personal
40.05
Miscellaneous

6.8

YEAR 2010 0.55

40.39
46.9 SME
Agricultural
Personal
12.14 Miscellaneous
 TOTAL ADVANCES TO SME CONTRIBUTION TO TOTAL SME
SECTOR(2009) NPA(2009)
SSI
18% SSI
C&I 20%
28%

C&I
52%

SBF
30%

SBF
52%
TOTAL ADVANCES TO SME SECTOR CONTRIBUTION TO TOTAL SME
(2010) NPA(2010)

C&I SSI
SSI 17% 16%
18%

C&I
49%

SBF
33%
SBF
67%
SECTORAL BREAK UP OF RESTRUCTURINGS
0.2

SME

90.8
SME SEGMENT WISE BREAK UP OF RESTRUCTURINGS

16.21 14.86

SSI
SBF
C&I

68.91
FACILITY-WISE BREAK UP OF RESTRUCTURINGS

18.92

Term Loan
Cash Credit
3rd Qtr

81.08
 Findings…………..
 Proportion of SME NPA greater

 Most number of delinquencies observed for SBF

 Term loan accounts more vulnerable

 SBI restructures accounts proactively

 SBI does not grant interest rate concessions

easily
 Suggestions

The bank may consider revisiting the

procedure it adopts for ensuring creditor
discipline in case of term loan accounts.

The bank may allocate some of it’s

resources towards DEBT REPAYMENT
awareness creation.