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

Presented by Mr. S. Ravi 22

 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.

Presented by Mr. S. Ravi 33

 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

Presented by Mr. S. Ravi 44

 FACTORS CONTRIBUTING TO
Poor Credit discipline NPAS
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

Presented by Mr. S. Ravi 55

 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

Presented by Mr. S. Ravi 66

 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.

Presented by Mr. S. Ravi 77

 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

Presented by Mr. S. Ravi 88

 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.

Presented by Mr. S. Ravi 99

 NPA MANAGEMENT – PREVENTIVE
Formation of theMEASURES
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
Presented by Mr. S. Ravi 1010
 NPA MANAGEMENT – PREVENTIVE
Risk assessment and Risk management
MEASURES
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

Presented by Mr. S. Ravi 1111

 NPA MANAGEMENT -
Compromise Settlement Schemes
RESOLUTION
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
Presented by Mr. S. Ravi 1212
 Compromise Settlement
Banks are Schemes
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.

Presented by Mr. S. Ravi 1313

 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

Presented by Mr. S. Ravi 1414

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

Presented by Mr. S. Ravi 1515

 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

Presented by Mr. S. Ravi 1616

 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

Presented by Mr. S. Ravi 1717

 Proceeding under Code of Civil
For claims below Rs.10 lacs, the banks and FIs can initiate
Procedure
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.

Presented by Mr. S. Ravi 1818

 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
Presented by Mr. S. Ravi 1919
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
Presented by Mr. S. Ravi 2020
 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.

Presented by Mr. S. Ravi 2121

SARFESI
SARFESI Act 2002
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.

Presented by Mr. S. Ravi 2222

Chapter
SARFESI Act 2002
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
Presented by Mr. S. Ravi 2323
 Whether
Second Amendment to
Companies Act and
SARFESI Provide
effective and
compatible
Presented by Mr. S. Ravi 2424
 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

Presented by Mr. S. Ravi 2525

 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.

Presented by Mr. S. Ravi 2626

 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

Presented by Mr. S. Ravi 2727

NEGOTIATION PROCESS FOR
SETTLEMENT OF
NON PERFORMING ASSETS

Presented by Mr. S. Ravi 2828

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.

Presented by Mr. S. Ravi 2929

 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.

Presented by Mr. S. Ravi 3030

 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

Presented by Mr. S. Ravi 3131

THANK YOU

Presented by Mr. S. Ravi 3232