NPA | Bankruptcy | Debt

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 2

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 3

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.PROVISIONING NORMS Standard Assets – general provision of a minimum of 0. Ravi 4 .25% Substandard Assets – 10% on total outstanding balance. S.

S. The parameters set for their functioning did not project the paramount need for these corporate goals.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 banks had little freedom to price products. Ravi 5 . cater products to chosen segments or invest funds in their best interest Presented by Mr.

S. Ravi 6 . 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. the SCBs functioned as units cut off from international banking and unable to participate in the structural transformations and new types of lending products.FACTORS CONTRIBUTING TO NPAS Since 1970s.

S. Presented by Mr. Ravi 7 .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.

Ravi 8 .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.

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.CURRENT STATUS OF NPAS All SCB’s average Net NPA Ratio for 2005-06 is 1. S. Ravi 9 .22 (As per RBI’s Statistics) The banks have been able to report lower NPA percentage mostly by providing against or writing off NPAs.

RBI also releases a list of borrowers with aggregate outstanding of Rs. which indirectly prevents accounts turning into NPAs on account of bank’s own failure Presented by Mr. S.NPA MANAGEMENT – PREVENTIVE MEASURES Formation of the Credit Information Bureau (India) Limited (CIBIL) Release of Wilful Defaulter’s List.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. Ravi 10 .

However.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 with special reference to fixing of staff accountability. these accounts do not need provisioning Presented by Mr. Reporting quick mortality cases Special mention accounts for early identification of bad debts. Board of Directors are required to review NPA accounts of Rs. Ravi 11 . Loans and advances overdue for less than one and two quarters would come under this category.1 crore and above and file suits in such cases. S.

NPA MANAGEMENT . Ravi 12 .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 Presented by Mr. S.

5 crore and less as on 31st March 2007.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. S. Presented by Mr. Guidelines were modified in July 2000 for recovery of NPAs of Rs. Ravi 13 .

Ravi 14 . contribution of the promoter and availability of security Presented by Mr. S.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.

Ravi 15 .Lok Adalats Small NPAs up to Rs. S.20 Lacs Speedy Recovery Veil of Authority Soft Defaulters Less expensive Easier way to resolve Presented by Mr.

All participants in the CDR mechanism must enter the ICA with necessary enforcement and penal clauses.10 crores and above. DRT or other legal proceedings The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA). outside the purview of BIFR.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. Ravi 16 Corporate Debt Restructuring . Packages given to borrowers are modified time & again Drawback of CDR – Reaching of consensus amongst the creditors delays the process Presented by Mr. S. The CDR system is applicable to standard and substandard accounts with potential cases of NPAs getting a priority. The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with outstanding exposure of Rs.

However. 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. On adjudication. the personal properties if the guarantors can also be attached and sold. 1993 (DRT Act) by filing an application for recovery of dues before the Debt Recovery Tribunal constituted under the Act. DRT has powers to grant injunctions against the disposal. a recovery certificate is issued and the sale is carried out by an auctioneer or a receiver.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. Ravi 17 . S. realization is usually time-consuming Steps have been taken to create additional benches Presented by Mr.

the banks and FIs can initiate proceedings under the Code of Civil Procedure of 1908. The courts are empowered to pass injunction orders restraining the debtor through itself or through its directors. as amended.Proceeding under Code of Civil Procedure For claims below Rs.10 lacs. in case necessary. The foreclosure proceedings. 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. in a Civil court. Ravi 18 . parting with or dealing in any manner with the subject property. The sale of subject property is normally carried out by way of open public auction subject to confirmation of the court. where the DRT Act is not applicable. Presented by Mr. etc from disposing of. S. representatives. Courts are also empowered to pass attachment and sales orders for subject property before judgment.

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. which has been repealed by passing of the Sick Industrial Companies (Special Provisions) Repeal Bill of 2001.BIFR has been given the power to consider revival and rehabilitation of companies under the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA). S. The shelter of BIFR misused by defaulting and dishonest borrowers It is a time consuming process Presented by Mr. Ravi 19 BIFR AND AAIFR .

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. the quality and skills of judges. Ravi 20 . NCLT will abolish SICA.NATIONAL COMPANY LAW TRIBUNAL In December 2002. the Indian Parliament passed the Companies Act of 2002 (Second Amendment) to restructure the Companies Act. However. newly appointed or existing. 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. 1956 leading to a new regime of tackling corporate rescue and insolvency and setting up of NCLT. S. performance and services of a bankruptcy court by providing specialized qualification for the appointment of members to the NCLT.

which originally sold the NPA. the excess provision will be utilized to meet the loss on account of sale of other NPA.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. Presented by Mr. the short fall should be debited to P&L account and if it is higher. 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. Ravi 21 . S.

Ravi 22 . Presented by Mr. S. 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.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.

enforcement of security interest. S.SARFESI Act 2002 Chapter II of SARFESI provides for setting up of reconstruction and securitization companies for acquisition of financial assets from its owner. Drawback – differentiation between first charge holders and the second charge holders Presented by Mr. settlement of dues payable by the borrower or take possession of secured assets Additionally. as manager and receiver. whether by raising funds by such company from qualified institutional buyers by issue of security receipts representing undivided interest in such assets or otherwise. ARCs can act as agents for recovering dues. sale or lease of a part or whole of the business of the borrower and rescheduling of payments. Ravi 23 . The ARC can takeover the management of the business of the borrower.

Whether Second Amendment to Companies Act and SARFESI Provide effective and compatible enforcement Presented by Mr. Ravi 24 . S.

The second amendment and SARFESI are a leap forward but requirement exists to make the laws predictable. S. 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. Ravi 25 Second Amendment & SARFESI .

S. NCLT would be over-burdened with workload. Ravi 26 Second Amendment & SARFESI . The second amendment stops short of providing a comprehensive bankruptcy code to deal with corporate bankruptcy. Change in eligibility criteria for making a reference would itself generate a greater workload.Tribunals have largely failed to serve the purpose for which they were set up. Presented by Mr.

Ravi 27 .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 Second Amendment & SARFESI Need for new laws & procedures to handle bankruptcy proceedings in consultation with RBI Presented by Mr. S.

Ravi 28 . S.NEGOTIATION PROCESS FOR SETTLEMENT OF NON PERFORMING ASSETS Presented by Mr.

Strength and Zeal of bank's field staff. What message is bank sending out (No in a fraud case. Success rate. Ability & Source of the guarantor. Time frame. Realizable sale value. S. Bank’s ability to sell. Ravi 29 .Factors Affecting the Acceptance of Proposal by Bank Bank’s Documentation.) Banks Policy. Vulnerability of the borrower/guarantor. Presented by Mr. Ability & Source of the borrower. Security value.

Ravi 30 . Visit factory/Collaterals/residence.Preparation Stage Thorough study of the case Find out our strengths and weaknesses in the case. Indicate that Bank is willing to compromise. Follow-up with the Borrower and Guarantors. Presented by Mr. Find out properties not charged to the bank. Find out the vulnerable point/weaknesses of the borrower. S.

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.ROLE OF CHARTERED ACCOUNTANTS Assist and Prepare Viability study Conduct Business. S. Ravi 31 .

THANK YOU Presented by Mr. Ravi 32 . S.

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