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Quick Success Series: NPA Management

QUICK SUCCESS
January, 2015

Quick Success
Series

SERIES was initiated in the year


2010 by Team SBLC Deoghar with a motive of
learning support to the candidates of romotional
examinations of different grades in the Bank they
had to undergo. With the passage of time QSS
became popular among its readers and SBLC
Deoghar is receiving overwhelming demand for its
updated version year after year from employees of
SBI located in various parts of the country. We
extend our sincere thanks to the readers of QSS for
placing with us the demand of QSS whenever the
date of promotional test is announced.
We take this opportunity to acknowledge active
persuasion of Sri Manish Tandon, our Circle
Development Officer for its updation before
schedule.
I take pride in representing a Team comprising of
Sri Champak Das, Chief Manager (Training),
Sri Rakesh Roshan, Chief Manager (Training) &
Sri Mukul Manohar, Chief Manager (Training), who
have maintained the trend of SBLC Deoghar and
are constantly contributing towards its value
addition and keeping it relevant, up to date for the
users & they took extra pain for its updation.

NPA MANAGEMENT

We hope that QSS 2015 edition will be equally


useful for various promotional exams. Though
every care has been taken while updating the
contents, we also request our readers to point out
any lapses at the earliest. This book is however not
a substitute for circular instructions issued by the
Bank from time to time. For detailed guidelines
please refer to Banks latest circulars. Soft copy of
this edition is available on our ftp://10.151.51.33 in
QSS folder & on SBI TIMES>PATNA CIRCLE>SBLC
Deoghar site.
Team SBLC Deoghar is humbled by the response
and recognition, it is receiving from various
readers. Our Team wishes the readers grand

success in their endeavours.

S P Singh
Assistant General Manager,
State Bank Learning Centre,
Deoghar- 814112
Phone- 06432-232895
Fax - 06432-231810
E-mail: agmstc.deoghar@sbi.co.in
Updated by Champak Das
Chief Manager, SBLC Deoghar
Mobile- 9431866154
Email- champak.das@sbi.co.in

Updated upto 15th January


2015

Quick Success Series: NPA Management


January, 2015
In line with the international practices and as per
the recommendations made by the Committee on
the Financial System (Chairman Shri M.
Narasimham), the Reserve Bank of India has
introduced, in a phased manner, prudential norms
for income recognition, asset classification and
provisioning for the advances portfolio of the
banks.

Doubtful Assets : An asset would be classified as


doubtful if it has remained in the substandard
category for a period of 12 months.
Loss Assets: A loss asset is one 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.

Non Performing Assets

@ The outstanding in the account based on


drawing power calculated from stock statements
older than three months would be deemed as
irregular. A working capital borrowal account will
become NPA if such irregular drawings are
permitted in the account for a continuous period
of 90 days even though the unit may be working
or the borrower's financial position is satisfactory.
@ An account where the regular/ ad hoc credit
limits have not been reviewed/ renewed within
180 days from the due date/ date of ad hoc
sanction will be treated as NPA.
@ All the facilities granted by a bank to a
borrower and investment in all the securities
issued by the borrower will have to be treated as
NPA/NPI and not the particular facility/
investment or part thereof which has become
irregular.
@ The bills discounted under LC favouring a
borrower may not be classified as a Nonperforming advance (NPA), when any other
facility granted to the borrower is classified as
NPA.

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 90
days in respect of a term loan. (Any amount
due to the bank under any credit facility is
overdue if it is not paid on the due date fixed
by the bank)
The account remains out of order in respect
of an Overdraft/Cash Credit (OD/CC). An
account should be treated as 'out of order' if
the outstanding balance remains continuously
in excess of the sanctioned limit/drawing
power. In cases where the outstanding
balance in the principal operating account is
less than the sanctioned limit/drawing power,
but there are no credits continuously for 90
days as on the date of Balance Sheet or
credits are not enough to cover the interest
debited during the same period,
The bill remains overdue for a period of more
than 90 days in the case of bills purchased and
discounted,
The installment of principal or interest
thereon remains overdue for two crop
seasons for short duration crops.
The installment of principal or interest
thereon remains overdue for one crop season
for long duration crops. long duration crops
would be crops with crop season longer than
one year.
@ Advances against term deposits, NSCs eligible
for surrender, IVPs, KVPs and life policies need not
be treated as NPAs, provided adequate margin is
available in the accounts. Advances against gold
ornaments, government securities and all other
securities are not covered by this exemption.
Categories of NPAs
Substandard Assets: A substandard asset would
be one, which has remained NPA for a period less
than or equal to 12 months.

Accounts where there is erosion in the value of


security/frauds committed by borrowers
i. Erosion in the value of security can be reckoned
as significant when the realizable value of the
security is less than 50 per cent of the value
assessed by the bank, Such NPAs may be
straightaway classified under doubtful category
and provisioning should be made as applicable to
doubtful assets.
ii. If the realizable value of the security is less
than 10 per cent of the outstanding in the
borrowal accounts, the existence of security
should be ignored and the asset should be
straightaway classified as loss asset.
Government guaranteed advances
1) The credit facilities backed by guarantee of the
Central Government though overdue may be

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January, 2015
treated as NPA only when the Government
(d) advances to Commercial Real Estate
repudiates its guarantee when invoked.
2) State Government guaranteed advances and
investments in State Government guaranteed
securities would attract asset classification and
provisioning norms if interest and/or principal or
any other amount due to the bank remains
overdue for more than 90 days.
PROVISIONING NORMS
1) Loss assets
Loss assets should be written off. If loss assets are
permitted to remain in the books for any reason,
100 percent of the outstanding should be
provided for.
2) Doubtful assets
100 percent of the extent to which the
advance is not covered by the realisable value
of the security.
In regard to the secured portion, provision
may be made on the following basis, at the
rates ranging from 25 percent to 100 percent
of the secured portion depending upon the
period for which the asset has remained
doubtful:
Up to one year
: 25%
One to three years
: 40%
More than three years
: 100%
In cases of NPAs with balance of Rs. 5 crore
and above stock audit at annual intervals by
external agencies would be mandatory.
Collaterals such as immovable properties
charged in favour of the bank should be got
valued once in three years.
3) Substandard assets
A general provision of 15 percent on total
outstanding.
The unsecured exposures which are
identified as substandard would attract
additional provision of 10 per cent, i.e., a
total of 25 per cent on the outstanding
balance.
4) Standard assets
(a) Direct advances to agricultural and Small and
Micro Enterprises (SME) sectors - 0.25%.
(b) All other loans and advances - 0.40%
Medium Enterpises will attract 0.40%
(C) Advances to Commercial Real Estate (CRE)
Sector - 1.0%

Residential Housing Sector (CRE - RH) at 0.75 per


cent
Wilful Defaulters
A "wilful default" would be deemed to have
occurred if any of the following events is noted:(a) The unit has defaulted in meeting its payment
/ repayment obligations to the lender even when
it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment
/ repayment obligations to the lender and has not
utilised the finance from the lender for the
specific purposes for which finance was availed of
but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment
/ repayment obligations to the lender and has
siphoned off the funds so that the funds have not
been utilised for the specific purpose for which
finance was availed of, nor are the funds available
with the unit in the form of other assets.
Diversion and siphoning of funds
The terms diversion of funds and siphoning of
funds should construe to mean the following:Diversion of funds, would be construed to include
any one of the undernoted occurrences:
(a) utilisation of short-term working capital funds
for long-term purposes not in conformity with the
terms of sanction;
(b) deploying borrowed funds for purposes /
activities or creation of assets other than those
for which the loan was sanctioned;
(c) transferring borrowed funds to the subsidiaries
/ Group companies or other corporates by
whatever modalities;
(d) routing of funds through any bank other than
the lender bank or members of consortium
without prior permission of the lender;
(e) investment in other companies by way of
acquiring equities / debt instruments without
approval of lenders;
(f) shortfall in deployment of funds vis--vis the
amounts disbursed / drawn and the difference
not being accounted for.
Siphoning of funds, should be construed to occur
if any funds borrowed from banks / FIs are utilised
for purposes un-related to the operations of the

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January, 2015
borrower, to the detriment of the financial health
of the entity or of the lender. The decision as to
whether a particular instance amounts to
siphoning of funds would have to be a judgement
of the lenders based on objective facts and
circumstances of the case.
The identification of the wilful default should be
made keeping in view the track record of the
borrowers and should not be decided on the basis
of isolated transactions/incidents. The default to
be categorised as wilful must be intentional,
deliberate and calculated.

The penal measures would normally be


attracted by all the borrowers identified as
wilful defaulters or the promoters involved in
diversion / siphoning of funds, keeping in view
the present limit of Rs. 25 lakh fixed by the
Central Vigilance Commission for reporting of
cases of wilful default by the banks/FIs to RBI,
any wilful defaulter with an outstanding
balance of Rs. 25 lakh or more, would attract
the penal measures stipulated below. This limit
of Rs. 25 lakh may also be applied for the
purpose of taking cognisance of the instances of
'siphoning' / 'diversion' of funds.
Penal measures
In order to prevent the access to the capital
markets by the wilful defaulters, a copy of the list
of wilful defaulters (non-suit filed accounts) and
list of wilful defaulters (suit filed accounts) are
forwarded to SEBI by RBI and Credit Information
Bureau (India) Ltd. (CIBIL) respectively.
The following measures should be initiated by the
banks and FIs against the wilful defaulters
identified as per the definition indicated above:
a) No additional facilities should be granted by
any bank / FI to the listed wilful defaulters. In
addition, the entrepreneurs / promoters of
companies where banks / FIs have identified
siphoning / diversion of funds, misrepresentation,
falsification of accounts and fraudulent
transactions should be debarred from institutional
finance from the scheduled commercial banks,
Development Financial Institutions, Government
owned NBFCs, investment institutions etc. for
floating new ventures for a period of 5 years from

the date the name of the wilful defaulter is


published in the list of wilful defaulters by the RBI.
b) The legal process, wherever warranted, against
the borrowers / guarantors and foreclosure of
recovery of dues should be initiated expeditiously.
The lenders may initiate criminal proceedings
against wilful defaulters, wherever necessary.
c) Wherever possible, the banks and FIs should
adopt a proactive approach for a change of
management of the wilfully defaulting borrower
unit.
d) A covenant in the loan agreements with the
companies in which the banks/FIs have significant
stake, should be incorporated by the banks/FIs to
the effect that the borrowing company should not
induct on its board a person whose name appears
in the list of Wilful Defaulters and that in case,
such a person is found to be on its board, it would
take expeditious and effective steps for removal
of the person from its board. It would be
imperative on the part of the banks and FIs to put
in place a transparent mechanism for the entire
process so that the penal provisions are not
misused and the scope of such discretionary
powers are kept to the barest minimum. It should
also be ensured that a solitary or isolated instance
is not made the basis for imposing the penal
action.

SARFAESI Act (2002)


(Securitisation And Reconstruction of Financial
Assets and Enforcement of Security Interest Act)
1) Applicable to NPA only
2) A secured creditor can take possession of the
secured assets and sell the same without recourse
to the courts.
3) If the sale proceeds are not adequate, the bank
can file a suit with DRT for recovery of the
balance.
4) In case of joint loans by banks, creditors
covering at least 75% of the advances should
agree to serve the notice through one of the
banks.
5) The financial assets can be sold to a
securitization company.
6) The authorized officer empowered to issue
notices to the borrowers is SMGS IV or above.
SARFAESI Act are not applicable
a) Lien on any goods.
b) A pledge of movables.

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January, 2015
c) Any conditional sale, hire-purchase or lease or
any other contract in which no security interest
has been created.
d) Any security interest for securing repayment of
any financial asset up to Rs. 1 lac.
e) Any security interest created on agricultural
land.
f) Any case in which the amount due is less than
20% of the principal amount and interest thereon.
Time frame for different activities under
SARFAESI Act :
1. Time to be allowed to the borrower /
guarantor in demand notice to repay the
dues - 60 days from the date of notice.
2. Time within which the borrower can
submit representation / objection to the
above notice - 60 days from the date of
notice.
3. Time within which the Bank has to convey
its
decision
against
the
above
representation / objection - 15 days from
the date of receipt of the representation /
objection .
4. Minimum Time Bank has to permit for
the borrower to repay the debt, while
issuing the sale Notice - 30 days from the
date of notice.
5. Time within which Borrower can file a
petition in the DRT against Bank for
having taken possession of property Within 45 days from the date of action of
the Bank.
6. Maximum time within which DRT has to
pass the order for the above - Within 4
months from the date of application in
the DRT.
7. Time within which the Bank / Borrower
can file appeal with the Appellate Tribunal
against the order of the DRT - Within 30
days from the date of receipt of the order
of the DRT.

LOK ADALAT
1) Set up under the Legal Services Authority Act,
1987
2) Dues up to Rs. 20 lac can be settled.
3) The Bank can insist on down payment of 25% at
the time of compromise and grant time between
6 months to 12 months to pay the balances dues.
4) No concession on the principal amount. Future
interest may be 6% simple on AGL loans and 10%18% on commercial advances from the date of
decree till the date of realization.
DEBT RECOVERY TRIBUNAL (DRT)
1) Established on the recommendation of
Narasimham Committee.
2) The bank has to file cases for recovery of debts
of Rs. 10 lac and above.
3) The tribunal has to dispose of the cases within
6 months.
4) An appeal to the Appellate Tribunal has to be
filed within 45 days. 75% of the debt due
should be deposited with the Appellate
Tribunal.
ASSET RECONSTRUCTION COMPANIES (ARC)
1) As per recommendation of Narasimham
Committee
2) It will be a Public Financial Institution with a
minimum capital of Rs. 2 crore.
3) A bank can approach an ARC to take over the
doubtful assets. ARC will issue 7 to 10 year
bonds to the bank.

REVISED COMPROMISE SETTLEMENT POLICY


Compromise settlement refers to a negotiated
settlement where a borrower offers to pay and
the Bank agrees to accept in full and final
settlement of its dues an amount less than the
total amount due to the Bank under the relative
loan account. Thus, the settlement invariably
involves certain sacrifice by the Bank by way of
write off and/or waiver of a portion of its dues.
Recovery of advances through compromise
settlement is accepted as an effective method of
recovery by the Bank in cases where it is
appropriate to adopt this option.
It is not possible, at the same time, to lay down
precise guidelines which can be followed
uniformly in all compromise cases, as each offer is

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January, 2015
unique in the context of the circumstances
necessitating its consideration as a recovery
option. However, certain basic principles and
guidelines to be kept in view by the branches and
their controllers, while processing compromise
proposals, are detailed in the subsequent
paragraphs.
1. Basic principles for Compromise Settlement
proposals
i. Banks Approach: The compromise will be a
negotiated settlement under which the Bank will
endeavour to recover its dues to the maximum
extent possible with minimum sacrifice and this
process will be initiated after the Bank has
exercised its right to set off or lien against any
deposits of the borrower/guarantor lying with the
Bank.
ii. Realisable Value of Securities, and NPV of
compromise amount & Securities: The realisable
value of security charged to the Bank as also the
Banks ability to dispose the security will be the
basic factors which would decide the compromise
amount. While assessing the realisable value of
security, proper weightage would have to be
given to its location, condition and marketability.
For this purpose, services of approved valuers
may be engaged and it should be ensured that the
valuation reports are not more than six months
old. In case of loans above Rs. 1 cr , two valuation
reports from Banks approved valuers have to be
obtained and the higher value has to be taken
into account for deciding the compromise
amount. The Net Present Value (NPV) of
settlement amount should generally not be less
than NPV of the realizable value of the available
securities. In case of lower value, the same has to
be justified with valid and sufficient reasons.
For calculation of NPV, the rate of discount should
be taken as the prevailing Base Rate with annual
rests and the maximum estimated time to realize
the securities may be taken as 5 years from the
date of notice under section 13(2) in case of
SARFAESI action and 7 years from the date of
filing suits in case of DRT / Court cases.
iii. Influence of Group Companies: In case the
borrower has other group companies, influence of
these companies or the parent company may be
used for a better settlement.
iv. Initial Deposit : Normally along with the
compromise offer letter, an initial deposit of

at least 5% of the offer amount may be taken


from the borrower under no lien account as an
evidence of the borrower's bonafide intention to
pursue the compromise settlement with the Bank.
v. Terms of Payment : Time Period for Payment
& Charging of Interest on Compromise
Settlement amount : It will be the endeavour of
the Bank to get the entire compromise amount
paid up in lump sum. In cases where the amount
is agreed to be recovered in instalments, normally
at least 15% of the approved settlement amount
(inclusive of initial deposit) would be payable
upfront with the balance instalments spread over
a maximum period of 12 months. To incentivise
early payment, no interest is to be charged on the
compromise amount paid within three months
from the date of approval of compromise
conveyed to the borrower even in cases of
compromise settlement on installment basis. If
the entire compromise amount is not paid within
three months, interest at minimum Base Rate for
compromise amount up to Rs.50 crs and below,
and interest at minimum Base Rate+2% for
compromise amount of above Rs.50crs on the
balance amount paid after three months shall be
charged from 15th day from the date of letter
conveying approval of the compromise to the
borrower. Repayments exceeding 12 months
should not be considered unless the repayment
source is assured to the satisfaction of the Bank.
Efforts should be made in such cases to tie up the
payment directly to the Bank. The sources from
which the borrowers and/or guarantors will raise
funds to pay the compromise amount will be
identified and recorded, particularly in those
cases where the payment is proposed to be made
in instalments. In case, the compromise amount is
not paid as per terms of sanction, the Bank will be
entitled to treat the compromise settlement as
cancelled.
vi. Cases of wilful defaulters: In the matter of
settling compromise amount, distinction will need
to be made between wilful defaulters and the
borrowers defaulting for reasons beyond their
control. In case of the former, a tough stand has
to be taken and the proposal should be put up
after obtaining in-principle approval of the GM
(NW/MCG/CAG/SAMG) based on a review of such
cases. Further, in case of wilful defaulters, initial
deposit under no lien account will be 10% of offer
amount and on approval of the compromise,

Quick Success Series: NPA Management


January, 2015
upfront payment including initial deposit will be
25% of the approved compromise amount. If the
compromise amount is payable in instalments, no
interest is to be charged on the compromise
amount paid within three months from the date
of approval of compromise conveyed to the
borrower and interest is to be charged on balance
amount paid after 3 months from 15th day of the
date of letter conveying approval of compromise
to the borrower at a minimum of Base Rate + 2%.
vii. Default Clause: Compromise settlement will
be arrived at with borrowers / guarantors subject
to the condition that in the event of any failure to
honour any of the terms of the compromise
settlement, the Bank will be entitled to exercise
against the borrowers / guarantors all the rights
and remedies available prior to the compromise
settlement. This will include collection from the
borrowers/guarantors of the entire amount due
prior to the compromise settlement, together
with interest thereon at the applicable rates.
Suitable clauses in this regard are to be included
in the letter conveying approval for compromise.
viii. Consent Decree: An application for obtaining
Consent Decree from the appropriate Court/DRT
should be filed immediately on sanction of the
compromise proposal incorporating therein a
clause that in the event, the borrowers /
guarantors fail to adhere to the terms of
compromise, the compromise settlement shall
stand automatically cancelled and the Bank will be
entitled to recover the entire outstanding amount
together with interest at the contractual rate. A
consent decree/recovery certificate should be
obtained from the competent court/DRT
recording the settlement. In case the borrowers /
guarantors do not adhere to the settlement
terms, the Bank can proceed with the execution
of the decree/recovery certificate.
ix. Position of other recovery action: The
sanctioning authority must satisfy itself that all
possible steps to recover the dues have been
explored and that compromise settlement is in
the larger interest of the Bank.
x. Opportunity cost analysis : While arriving at a
negotiated settlement, the advantage available to
the Bank from prompt recycling of funds should
be considered in comparison to the likely recovery
by following legal or other protracted course of
action i.e. opportunity cost analysis to be made.

xi. Uncharged assets of the borrowers /


guarantors: Before entering into any compromise
settlement, details of uncharged assets of the
borrowers and guarantors should be collected by
either engaging the services of investigative
agencies or otherwise.
xii. Compromise settlement proposals from
Guarantors: Compromise Settlement proposals
from guarantors should be treated on par with
proposals from borrowers.
Guidelines on Publication of Photographs of
Defaulter Borrowers/Guarantors
Background
i) The publication of details including photographs
of defaulters in newspapers is useful in cautioning
the public in general and the fellow banks in
particular in respect of dealings with such persons
or their assets. Such publication is of great help in
dealing with the defaulters who avoid/evade the
notices of the Bank or not responding to the
correspondence from the Bank seeking the
repayments of their dues. It is also helpful in
gathering valuable feedback about the networth
or other hidden financial dealings of the
defaulters.
ii) Publication of details as above is also helpful in
stopping further lending to such defaulters and
also to prevent the fraudulent/dishonest
alienation of securities and assets by the
defaulters. Dissemination of information of the
cases of frauds, misfeasance and wilful defaults is
also in the interest of public at large and to
maintain the proper financial health of banks and
financial institutions who are the custodians of
public money.
iii) In view of the past experience in the matter, it
has been decided to put in place the following
Guidelines in the matter of publication of
photographs of defaulter borrowers/guarantors.
Guidelines:
1. Publication of the names and addresses of the
defaulter Borrowers/Guarantors with their
photographs shall not be resorted to as a matter
of routine. Utmost care is to be exercised in this
matter.

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January, 2015
2. The Branches/CPCs may resort to publication of
photographs of defaulter borrowers/guarantors in
cases where the accounts have been classified as
Non-Performing Assets as per RBI guidelines and
the account falls in any of the following
categories:
i. Loan Accounts where the borrower or guarantor
has committed any acts or omissions which
tantamount to wilful default. The expression
willful default would cover the following: Default in an account where the borrower/
guarantor fails to repay the dues despite having
the capacity to do so;
b. Default in an account where the
borrower/guarantor has diverted or siphoned off
the proceeds of loan/ credit facility availed from
the Bank for any purpose other than the purpose
for which such loan/ facility is sanctioned (i.e.
other than a legitimate business purpose);
c. Default in an account where the borrower/
guarantor who has wrongfully disposed of any of
the assets/property charged to the Bank or other
properties so as to delay or hamper the recovery
of dues by the Bank.
ii. Loan Accounts where the borrower or
guarantor has indulged in any act or omission
which in the opinion of the Bank amounts to
misfeasance, fraud, nonfeasance or malfeasance,
adversely affecting the interest of the Bank;
iii. Loan Accounts where the borrower/guarantor
is not traceable/absconding and/or the demand
notice/letter sent by the Bank has been returned
undelivered/ refused.
3. In case of loans under any segment where
SARFAESI Act is not applicable, the Branches
/CPCs may resort to publication of photographs of
defaulter Borrowers/Guarantors, if the account
satisfies any of the conditions stipulated in
paragraph 2(i) to (iii) above.
4. In the case of Loan Accounts with outstanding
below Rs.25 lacs, publication of photographs of
the defaulter Borrowers/Guarantors shall not be
resorted to.
5. In respect of educational loans, under no
circumstances, the photographs of students will
be published.
6. In all cases, an advance notice of not less than
15 days shall be issued without fail to the
defaulter borrowers/guarantors, advising them of
the Banks intent to publish their names and
addresses with photographs in the newspapers,

before publishing the same in the newspapers.


The advance notice must briefly set out the
allegations against the borrower/guarantor.
7. In case any objection is raised by the
borrower/guarantor to such notice issued by the
Bank, the same shall be considered carefully on
merit and a suitable reply should be given before
proceeding further in the matter.
8. The publication of the names and addresses of
the defaulter borrowers/guarantors with their
photographs shall be approved in each case by
the Chief General Manager of the concerned
Circle/CAG/MCG/SAMG on a case to case basis
after prior vetting of each case by the Law
Department at the Module/LHO/Corporate
Centre, as the case may be.
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