MANAGEMENT OF

NON-PERFORMING ASSETS
PRESENTATION BY
MR. S. RAVI
 DEFINITION OF NPAS
A NPA is a loan or an advance where;
Interest and/ or installment of principal remain
overdue for a period of more than 90 days in
respect of a term loan,
The account remains “out of order” in respect of
an overdraft/ cash credit
The bill remains overdue for a period of more
than 90 days in the case of bills purchased and
discounted
The installment or interest remains overdue for
two crop seasons in case of short duration crops
and for one crop season in case of long duration
crops

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 CATEGORIES OF NPA
Substandard Assets – Which has remained
NPA for a period less than or equal to 12
months.
Doubtful Assets – Which has remained in
the sub-standard category for a period of 12
months
Loss Assets – where loss has been identified
by the bank or internal or external auditors
or the RBI inspection but the amount has
not been written off wholly.

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 PROVISIONING NORMS
Standard Assets – general provision of a
minimum of 0.25%
Substandard Assets – 10% on total
outstanding balance, 10 % on unsecured
exposures identified as sub-standard & 100%
for unsecured “doubtful” assets.
Doubtful Assets – 100% to the extent advance
not covered by realizable value of security. In
case of secured portion, provision may be
made in the range of 20% to 100% depending
on the period of asset remaining sub-standard
Loss Assets – 100% of the outstanding

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 FACTORS CONTRIBUTING TO NPAS
Poor Credit discipline
Inadequate Credit & Risk Management
Diversion of funds by promoters
Funding of non-viable projects
In the early 1990s PSBs started suffering from
acute capital inadequacy and lower/ negative
profitability. The parameters set for their
functioning did not project the paramount need
for these corporate goals.
The banks had little freedom to price products,
cater products to chosen segments or invest
funds in their best interest

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 FACTORS CONTRIBUTING TO NPAS
Since 1970s, the SCBs functioned as units cut
off from international banking and unable to
participate in the structural transformations
and new types of lending products.
Audit and control functions were not
independent and thus unable to correct the
effect of serious flaws in policies and directions
Banks were not sufficiently developed in terms
of skills and expertise to regulate the
humongous growth in credit and manage the
diverse risks that emerged in the process

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 FACTORS CONTRIBUTING TO NPAS
Inadequate mechanism to gather and
disseminate credit information amongst
commercial banks

Effective recovery from defaulting and overdue

borrowers was hampered on account of
sizeable overhang component arising from
infirmities in the existing process of debt
recovery, inadequate legal provisions on
foreclosure and bankruptcy and difficulties in
the execution of court decrees.

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 IMPACT OF NPAS ON OPERATIONS
Drain on Profitability
Impact on capital adequacy
Adverse effect on credit growth as the
banker’s prime focus becomes zero percent
risk and as a result turn lukewarm to fresh
credit.
Excessive focus on Credit Risk Management
High cost of funds due to NPAs

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 CURRENT STATUS OF NPAS
All SCB’s average Net NPA Ratio for 2005-06 is
1.22 (As per RBI’s Statistics)
The banks have been able to report lower NPA
percentage mostly by providing against or
writing off NPAs.
The provision to certain extent was facilitated
by higher profits on account of treasury
management
The better Net NPA ratio was also facilitated by
higher credit off take resulting in larger asset
portfolio/ book size.

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NPA MANAGEMENT – PREVENTIVE MEASURES
Formation of the Credit Information Bureau
(India) Limited (CIBIL)
Release of Wilful Defaulter’s List. RBI also
releases a list of borrowers with aggregate
outstanding of Rs.1 crore and above against
whom banks have filed suits for recovery of
their funds
Reporting of Frauds to RBI
Norms of Lender’s Liability – framing of Fair
Practices Code with regard to lender’s liability
to be followed by banks, which indirectly
prevents accounts turning into NPAs on
account of bank’s own failure
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NPA MANAGEMENT – PREVENTIVE MEASURES
Risk assessment and Risk management
RBI has advised banks to examine all cases
of wilful default of Rs.1 crore and above and
file suits in such cases. Board of Directors
are required to review NPA accounts of Rs.1
crore and above with special reference to
fixing of staff accountability.
Reporting quick mortality cases
Special mention accounts for early
identification of bad debts. Loans and
advances overdue for less than one and two
quarters would come under this category.
However, these accounts do not need
provisioning
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NPA MANAGEMENT - RESOLUTION
Compromise Settlement Schemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Proceedings under the Code of Civil Procedure
Board for Industrial & Financial Reconstruction
(BIFR)/ AAIFR
National Company Law Tribunal (NCLT)
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 (SRFAESI)
Liquidation

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Compromise Settlement Schemes
Banks are free to design and
implement their own policies for
recovery and write off incorporation
compromise and negotiated
settlements with board approval
Specific guidelines were issued in May
1999 for one time settlement of small
enterprise sector.
Guidelines were modified in July 2000
for recovery of NPAs of Rs.5 crore and
less as on 31st March 2007.

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Restructuring and Rehabilitation
Banks are free to design and implement
their own policies for restructuring/
rehabilitation of the NPA accounts

Reschedulement of payment of interest

and principal after considering the Debt
service coverage ratio, contribution of
the promoter and availability of security

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 Lok Adalats
Small NPAs up to Rs.20 Lacs
Speedy Recovery
Veil of Authority
Soft Defaulters
Less expensive
Easier way to resolve

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 Corporate Debt Restructuring
The objective of CDR is to ensure a timely and transparent
mechanism for restructuring of the debts of viable
corporate entities affected by internal and external
factors, outside the purview of BIFR, DRT or other legal
proceedings
The legal basis for the mechanism is provided by the Inter-
Creditor Agreement (ICA). All participants in the CDR
mechanism must enter the ICA with necessary
enforcement and penal clauses.
The scheme applies to accounts having multiple banking/
syndication/ consortium accounts with outstanding
exposure of Rs.10 crores and above.
The CDR system is applicable to standard and sub-
standard accounts with potential cases of NPAs getting a
priority.
Packages given to borrowers are modified time & again
Drawback of CDR – Reaching of consensus amongst the
creditors delays the process

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 DRT Act
The banks and FIs can enforce their securities by
initiating recovery proceeding under the Recovery if
Debts due to Banks and FI act, 1993 (DRT Act) by filing
an application for recovery of dues before the Debt
Recovery Tribunal constituted under the Act.
On adjudication, a recovery certificate is issued and the
sale is carried out by an auctioneer or a receiver.
DRT has powers to grant injunctions against the
disposal, transfer or creation of third party interest by
debtors in the properties charged to creditor and to pass
attachment orders in respect of charged properties
In case of non-realization of the decreed amount by way
of sale of the charged properties, the personal
properties if the guarantors can also be attached and
sold.
However, realization is usually time-consuming
Steps have been taken to create additional benches

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Proceeding under Code of Civil Procedure
For claims below Rs.10 lacs, the banks and FIs can
initiate proceedings under the Code of Civil Procedure of
1908, as amended, in a Civil court.
The courts are empowered to pass injunction orders
restraining the debtor through itself or through its
directors, representatives, etc from disposing of, parting
with or dealing in any manner with the subject property.
Courts are also empowered to pass attachment and
sales orders for subject property before judgment, in
case necessary.
The sale of subject property is normally carried out by
way of open public auction subject to confirmation of
the court.
The foreclosure proceedings, where the DRT Act is not
applicable, can be initiated under the Transfer of
Property Act of 1882 by filing a mortgage suit where the
procedure is same as laid down under the CPC.

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 BIFR AND AAIFR
BIFR has been given the power to consider revival
and rehabilitation of companies under the Sick
Industrial Companies (Special Provisions) Act of
1985 (SICA), which has been repealed by passing of
the Sick Industrial Companies (Special Provisions)
Repeal Bill of 2001.
The board of Directors shall make a reference to
BIFR within sixty days from the date of finalization
of the duly audited accounts for the financial year at
the end of which the company becomes sick
The company making reference to BIFR to prepare a
scheme for its revival and rehabilitation and submit
the same to BIFR the procedure is same as laid down
under the CPC.
The shelter of BIFR misused by defaulting and
dishonest borrowers
It is a time consuming process
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NATIONAL COMPANY LAW TRIBUNAL
In December 2002, the Indian Parliament passed the
Companies Act of 2002 (Second Amendment) to
restructure the Companies Act, 1956 leading to a new
regime of tackling corporate rescue and insolvency and
setting up of NCLT.
NCLT will abolish SICA, have the jurisdiction and power
relating to winding up of companies presently vested in
the High Court and jurisdiction and power exercised by
Company Law Board
The second amendments seeks to improve upon the
standards to be adopted to measure the competence,
performance and services of a bankruptcy court by
providing specialized qualification for the appointment of
members to the NCLT.
However, the quality and skills of judges, newly appointed
or existing, will need to be reinforced and no provision has
been made for appropriate procedures to evaluate the
performance of judges based on the standards

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 SALE OF NPA TO OTHER BANKS
A NPA is eligible for sale to other banks only if it has
remained a NPA for at least two years in the books of
the selling bank
The NPA must be held by the purchasing bank at least
for a period of 15 months before it is sold to other
banks but not to bank, which originally sold the NPA.
The NPA may be classified as standard in the books of
the purchasing bank for a period of 90 days from date
of purchase and thereafter it would depend on the
record of recovery with reference to cash flows
estimated while purchasing
The bank may purchase/ sell NPA only on without
recourse basis
If the sale is conducted below the net book value, the
short fall should be debited to P&L account and if it is
higher, the excess provision will be utilized to meet the
loss on account of sale of other NPA.

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 SARFESI Act 2002
SARFESI provides for enforcement of security
interests in movable (tangible or intangible assets
including accounts receivable) and immovable
property without the intervention of the court
The bank and FI may call upon the borrower by
way of a written legal notice to discharge in full his
liabilities within 60 days from the date of notice,
failing which the bank would be entitled to
exercise all or any of the rights set out under the
Act.
Another option available under the Act is to
takeover the management of the secured assets
Any person aggrieved by the measures taken by
the bank can proffer an appeal to DRT within 45
days after depositing 75% of the amount claimed
in the notice.

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 SARFESI Act 2002
Chapter II of SARFESI provides for setting up of
reconstruction and securitization companies for
acquisition of financial assets from its owner,
whether by raising funds by such company from
qualified institutional buyers by issue of security
receipts representing undivided interest in such
assets or otherwise.
The ARC can takeover the management of the
business of the borrower, sale or lease of a part or
whole of the business of the borrower and
rescheduling of payments, enforcement of security
interest, settlement of dues payable by the borrower
or take possession of secured assets
Additionally, ARCs can act as agents for recovering
dues, as manager and receiver.
Drawback – differentiation between first charge
holders and the second charge holders
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 Whether
Second Amendment to
Companies Act and
SARFESI Provide effective
and compatible
enforcement

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 Second Amendment & SARFESI
The second amendment and SARFESI are a
leap forward but requirement exists to make
the laws predictable, transparent and
affordable enforcement by efficient
mechanisms outside of insolvency
No definite time frame has been provided for
various stages during the liquidation
proceedings
Need is felt for more creative and commercial
approach to corporate entities in financial
distress and attempts to revive rather than
applying conservative approach of liquidation

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 Second Amendment & SARFESI
Tribunals have largely failed to serve
the purpose for which they were set
up. NCLT would be over-burdened with
workload. Change in eligibility criteria
for making a reference would itself
generate a greater workload.
The second amendment stops short of
providing a comprehensive bankruptcy
code to deal with corporate
bankruptcy.

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 Second Amendment & SARFESI
Does not introduce the required roadmap of
the bankruptcy proceeding viz:
Application for initiating
Appointments & empowerment of trustee
Operational and functional independence
Accountability to court
Monitoring and time bound restructuring
Mechanism to sell off
Number of time bound attempts for restructuring
Decision to pursue insolvency and winding up
Strategies for realization and distribution
Need for new laws & procedures to handle
bankruptcy proceedings in consultation with
RBI
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NEGOTIATION PROCESS FOR
SETTLEMENT OF
NON PERFORMING ASSETS

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Factors Affecting the Acceptance of
Proposal by Bank
Bank’s Documentation.
Security value. Realizable sale value.
Bank’s ability to sell.
Ability & Source of the borrower.
Ability & Source of the guarantor.
Vulnerability of the borrower/guarantor.
Time frame.
Strength and Zeal of bank's field staff.
What message is bank sending out (No in a fraud
case.)
Banks Policy.
Success rate.

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 Preparation Stage
Thorough study of the case
Find out our strengths and weaknesses in
the case.
Find out the vulnerable point/weaknesses of
the borrower.
Follow-up with the Borrower and
Guarantors.
Visit factory/Collaterals/residence.
Find out properties not charged to the bank.
Indicate that Bank is willing to compromise.

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ROLE OF CHARTERED ACCOUNTANTS
Assist and Prepare Viability study
Conduct Business, Assets & Share Valuation
Carry out Due Diligence Study for Business
Restructuring
Verification and Vetting of Documents
Preparation of Scheme of Arrangement
Consultancy on Taxation aspects
Monitoring of Accounts
Credit Audit of borrowers
Stock Audits

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THANK YOU

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