NON PERFORMING ASSETS & IRAC norms

“Prudential Guidelines on Income Recognition, Asset Classification & Provisioning”, based on the recommendations
made by the “Committee on Financial Systems” (Chaired by Shri.M.Narasimham), are being implemented by banks
since the financial year 1992-93. RBI is issuing the guidelines to banks in this regard.

Income recognition is based on the record of recovery

Provisioning is based on (i) the period for which the assets remained as Non -Performing Asset (NPA), (ii) availability of
security/realizable value of security.

An asset will become NPA when it ceases to generate income for the bank. The Asset classification to be done based on
objective criteria & uniform and consistent application of the prescribed norms.

A non performing asset (NPA) is a loan or an advance where;

a) interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term
loan,
b) the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit
(OD/CC),
c) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
d) the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops
& the instalment of principal or interest thereon remains overdue for one crop season for long duration crops,
e) the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation
transaction undertaken in terms of the Reserve Bank of India (Securitisation of Standard Assets) Directions,
2021.
f) in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a
derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
g) In case of interest payments, if the interest due and charged during any quarter is not serviced fully within 90
days from the end of the quarter.
h) A working capital borrowal account will become NPA if drawings are permitted in the account against “stock
statement” which is more than 3 month’s old for a continuous period of 90 days, even though the unit may be
working or the borrower's financial position is satisfactory.
i) A working capital borrowal 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.
j) Credit card dues will be treated as NPA, if the minimum due amount is not paid within 90 days from the due
date (minimum due amount overdue for more than 90 days)
k) The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as
a non-performing asset, if these remain unpaid for 90 days
l) Where there are potential threats for recovery on account of non-availability of security, erosion in the value of
security by more than 50% or due to factors like frauds committed by borrowers, the account will be straight
away classified in to NPA doubtful or loss category without going through various stages of asset classification.
If due to erosion of value the realisable value of the security is less than 50 per cent of the value assessed by
the bank/auditors/RBI, the account may be straightaway classified under doubtful category & if the realisable
value of the security is less than 10 per cent of the outstanding in the borrowal accounts, the asset should be
straightaway classified as loss asset
i) Advances against Term Deposits, National Savings Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas
Patras (KVPs) and Life policies may not be classified as NPA if the interest is not paid , provided adequate
margin is available in the account. Gold loan accounts will be classified as NPA as per normal IRAC norms.
ii) Loans & advances guaranteed by Central Government need not be classified as NPA, even if he principal or
interest is overdue for more than 90 days. But, in such cases, the Income will not be recognized. But loans
& advances guaranteed by State Governments will be classified as NPA as per normal IRAC norms.
“Out of Order’ status. A working capital advance will be classified as NPA, If:

i) the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days.
ii) 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
iii) the credits in the account are not enough to cover the interest debited during the period
iv) the stock statement, against which drawing is allowed, is older than 3 months

‘Overdue’

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.

Categories of NPA accounts

i) Substandard Assets: An asset which has remained NPA for a period less than or equal to 12 months will be
classified as Substandard asset. Such asset will have well defined credit weaknesses & there will be distinct
possibility for the bank to sustain some loss, if deficiencies are not corrected.
ii) Doubtful Assets: An asset would be classified as doubtful if it has remained in the substandard category for
a period of 12 months. A doubtful asset will have well defined credit weaknesses & full
liquidation/collection of dues to the bank will be highly questionable and improbable.
iii) Loss Assets: An asset where loss has been identified by the bank/internal or external auditors of the
bank/RBI, but the amount has not been written off wholly. A loss asset is considered uncollectible and of
such little value that its continuance as a bankable asset is not warranted although there may be some
salvage or recovery value for the asset.

General guidelines

Banks should establish appropriate internal systems (including technology enabled processes) for proper and timely
identification of NPAs

- The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose
of treating an advance as NPA or otherwise, except where there is erosion in primary securities charged to the
bank or where fraud has been committed by the borrower.
- The classification of an asset as NPA should be based on the record of recovery & Bank should not classify an
advance account as NPA merely due to the existence of certain temporary deficiencies like non-availability of
adequate drawing power based on last stock statement, balance outstanding exceeding the limit temporarily, non-
submission of stock statements and non-renewal of the limits on the due date. But, if the irregularities continue for
specified period, then the asset will be treated as NPA.

Upgradation of NPA in to performing assets(Standard asset)

- If the borrower pays the arrears of interest and principal classified as NPAs, the account may be upgraded as
‘standard’ asset.
-

Asset classification to be borrower-wise & not facility-wise

- If due to devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance
outstanding in that account also should be treated as NPA, if any other credit facility of the borrower is treated as NPA.
- Bills discounted under LC favouring a borrower may not be classified as a NPA, when any other facility granted to the
borrower is classified as NPA. But, if the documents under LC are not accepted on presentation/the payment under the
LC is not made on the due date by the LC issuing bank /borrower does not immediately make good the amount
disbursed, the outstanding bills discounted amount will be classified as NPA with effect from the date when the other
facilities had been classified as NPA.

- Asset classification of accounts under consortium should be based on the record of recovery of the individual
member banks and other aspects having a bearing on the recoverability of the advances

- 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. But, advances against gold ornaments, government securities
and other securities are not covered by this exemption.

- In the case of bank finance given for industrial projects, agricultural plantations etc. where moratorium is available for
payment of interest, payment of interest becomes 'due' only after the moratorium or gestation period is over.
Therefore, such amounts of interest do not become overdue and hence do not become NPA, with reference to the date
of debit of interest. They become overdue after due date for payment of interest, if uncollected.

- In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of
principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be
classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the
respective due dates.

- conversion or re-schedulement, the term loan as well as fresh short- term loan may be treated as current dues and
need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms
& conditions

Resolution of stressed assets

Early identification of Stress in assets: Special mention Accounts.

Incipient stress in loan accounts shall be recognized by classifying such accounts as Special Mention Account (SMA)

i) SMA -0: Interest/Principal payment wholly/partly overdue for 1 to 30 days

ii) SMA -1: Interest/Principal payment wholly/partly overdue for 31 to 60 days
iii) SMA- 2: Interest/Principal payment wholly/partly overdue for 61 to 90 days

In the case of revolving credits like Cash Credit, SMA-1 & SMA-2 categories only are applicable.

Implementation of Resolution Plan

Banks shall have Board-approved policies for resolution of stressed assets, including
the timelines for resolution. Resolution process to start before the default in payment & in
any case on default by the borrower. Banks to undertake review of account within 30 days
of
Default (Review period), during which period the bank should decide on the resolution
strategy, including initiating legal action for insolvency proceeding/recovery.
In cases where the borrower is enjoying credit facilities from more than 1 bank, all banks
should enter in to a Inter-Creditor Agreement (ICA). Decision taken by 75% of lenders by
value & 60% of lenders by number will be binding on all lenders.

Resolution plan to be implemented within 180 days of the review period.

Resolution Plan may involve action/plan to regularize the account, change in ownership,
restructuring etc.

Conditions for implementation of Resolution Plan (RP).

RPs involving restructuring / change in ownership in respect of accounts where the

aggregate exposure of lenders is ₹100 crore and above, shall require independent credit
evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically
authorized by the Reserve Bank for this purpose. If the aggregate credit exposure is
₹500 crore & above, credit evaluation by 2 CRAs are required. Minimum rating required
on credit opinion is RP4 (Moderate degree of safety with regard to repayment of credit
obligations).
CRAs to be directly engaged by the lender

A RP in respect of borrowers to whom the lenders continue to have credit exposure,

shall be deemed to be ‘implemented’, if the following conditions are met:
a) A RP which does not involve restructuring/change in ownership shall be deemed
to be implemented only if the borrower is not in default with any of the lenders as
on 180th day from the end of the Review Period. Any subsequent default after
the 180 day period shall be treated as a fresh default, triggering a fresh review.
b) A RP which involves restructuring/change in ownership shall be deemed to be
implemented only if all of the following conditions are met:
i) all related documentation, including execution of necessary agreements
between lenders and borrower / creation of security charge / perfection of
securities, are completed by the lenders concerned in consonance with
the RP being implemented;
ii) the new capital structure and/or changes in the terms of conditions of
the existing loans get duly reflected in the books of all the lenders and the
borrower; and,
iii) borrower is not in default with any of the lenders.

c) A RP which involves lenders exiting the exposure by assigning the exposures to

third party or a RP involving recovery action shall be deemed to be implemented
only if the exposure to the borrower is fully extinguished.
Additional provisions required in case a viable RP is not implemented within the time
line:
- Delay of 180 days from the end of the review Period: 20%
- Delay of 365 days from the commencement of the Review Period:15% (20%+15%
=35%)
The additional provisions shall be over and above the provisions already held or the the
provisions required to be made, whichever is higher (Maximum provision = 100% of the
exposure).

The additional provisions may be reversed if the borrower is not in default for a period of
6 months from the date of clearing of the overdues.
If the RP involves restructuring/change in ownership, on implementation of RP.

Restructuring
Restructuring is when, due to the financial difficulty of the borrower, the bank/lender
grants concessions to the borrower. Restructuring may involve modification of terms of
the advances / securities including alteration of payment period / payable amount / the
amount of instalments / rate of interest, roll over of credit facilities; sanction of additional
credit facility/funds, enhancement of existing credit limits, compromise settlements etc.
An account may become NPA due to:

a) Non-compliances of the conditions of sanction, like delay/non-repayment of principal or

interest & non-renewal of sanctioned working capital limit
b) Loss of security

Criteria for classifying an account as NPA

i) Term Loans: Principal or interest is overdue/past due for payment for more than 90 days
ii) Cash Credit/Overdraft: Account remained out of order for more than 90 days.
iii) Bills payable/discounted: Bills remain overdue for payment for more than 90 days
iv) Demand loan etc.: Amount due not paid for more than 90 days
v) Credit card: Minimum due amount not paid for more than 90 days
vi) Farm Credit- Crop loans (where recovery is based crop harvesting season):
a) Short duration crops: If the loan/interest is overdue for 2 crop seasons
b) Long duration crops: If the loan/interest is overdue for 1 crop season
vii) Interest payments: If the interest due for payment is not paid within 90 days from the
close of the quarter, during which interest is charged

Out of order (in CC/OD accounts

a) Where the balance in the CC/OD account exceeds the sanctioned credit limit or drawing
power, the account will become out of order.
b) If the stock statement, against which drawing is allowed is older than 3 months, the account
will become out of order
c) If there is no credit in the account or the credit is not sufficient to cover the interest charged,
the account will become out of order.
d) If the credit limit is not reviewed/renewed for 90 days

Crop Duration (Vyas Committee recommendations)

i) Long duration crops are those crops, where the crops season is more than 12 months
ii) Short duration crops are those where the crop season is up to 12 months.

The classification of crops as long duration or short duration will be done by the respective State
level Banker’s Committee (SLBC)

Loan against Liquid Securities

In case of loan against liquid securities in the form of Bank deposit, NSC/KVP & LIC, the account will
remain standard, even if the interest is not paid, if the value of the security is more than the balance
in the account.

Consortium Loans

Classification of the loan will be based on the conduct of the respective banks, irrespective of the
classification of the accounts with other banks in the consortium.

Central Government guaranteed Accounts

Accounts to be classified as Standard & no additional provisions to be made. But, interest not to be
recognised unless recovered. If GOI repudiates the guarantee, NPA norms will apply.

State Government guaranteed Accounts.

No relaxation in rules. All the normal provisions of NPA guidelines will apply.

Recovery in NPA Accounts (other than restructured accounts)

If the entire due amount is recovered, account will be upgraded to Standard category, immediately

Recovery in Restructured NPA Accounts

Account will be upgraded one year after the commencement of the due date for commencement of
the repayment, as per the terms of the restructuring.

Impact on other accounts of the same borrower.

If one account of the borrower in a bank becomes NPA, all his accounts with the bank will classified
as NPAs.

But, this rule is not applicable in case of loan against deposits, LIC, NSC/KVP/IVP, bills discounted
under LC.

Once the account is treated as NPA, bank has to follow the system of “cash system” of accounting in
interest collection, instead of accrual system. Interest can be recognised only if it is recovered.

Any interest or other charges, debited to the account but not recovered, has to be de-recognised
(reversed).

Classification of Assets

Assets are classified into 4 categories

i) Standard Assets
ii) Sub-standard Assets
iii) Doubtful Assets
iv) Loss Assets

Only standard asset is performing asset. Sub-standard, doubtful & loss assets are Non-Performing
Assets (NPA)

Special Mention Accounts (SMA)

If the payment of principal/interest is overdue/past due for payment or overdue in standard assets,
these accounts will be treated as Special mention Accounts, based on period of delay, as under:

SMA – 0, if delay is 1 to 30 days

SMA-1, if delay is 31 to 60 days

SMA-2, if delay is 61 to 90 days

For revolving/running accounts like cash credit/overdraft, SMA-0 is not applicable.

SUB-STANDARD ASSETS

If the account is overdue/irregular or out of order for more than 90 days, the account will be
classified as Sub-standard asset. An NPA asset will remain in in sub-standard asset category for a
maximum period of 12 months, after which the asset will further slip to doubtful category.

Based on the availability of security at the time of sanction of the loan, a sub-standard asset may be
classified as secured sub-standard asset (if the security coverage is more than 10%) or unsecured
sub-standard asset (if the security coverage is only up to 10%).

DOUBTFUL ASSETS

If the NPA account remained in sub-standard category for more than 12 months, the account will be
classified as Doubtful Asset.

If the loss to the security is above 50% but less than 90%, the account will be classified as doubtful
asset.

Under doubtful assets, there are 3 sub-categories

- Doubtful Asset- 1 (DA-1): Those accounts which stayed in doubtful asset category for a
period of up to 1 years
- Doubtful Asset-2 (DA-2): Those accounts which stayed in doubtful asset category for a period
of more than 1 year & up to 3 years
- Doubtful Asset-3(DA-3): Those accounts which stayed in doubtful asset category for a period
of more than 3 years.

The NPA accounts will remain in DA-3 category till it is upgraded, transferred to Loss Asset category,
closed or written off.
LOSS ASSETS

An asset will be classified as loss asset, mainly on account of the loss of security.

An account can be identified as loss asset by the bank, its internal or external auditors or by the RBI.

If the loss of the security is 90% or more, the account will be directly classified as loss asset, without
any waiting period.

Even in cases where the repayment is regular, if there is no security or the security is negligible (up
to 10%), the account will be classified as loss asset.

Security includes primary security, collateral security & guarantee from CGTMSE, DICGC, ECGC &
Government.

Stock Audit in NPA Accounts

As per RBI directions, in all working capital loan NPA accounts with balance of Rs.5 crore & above,
stock audit by external agencies had to be conducted annually, to enhance the reliability of stock
valuation.

Provisioning

Provisioning is to create separate funds, by debiting the profit & loss account of the bank, to meet
the impact of future loan losses.

Provisioning is done on the basis of the asset classification of the account.

In standard assets, provisioning is made based on the category of accounts held by the bank

In NPA accounts, provisioning is made based on the period of NPA, availability of securities etc.

Provision is included in “other liabilities” in schedule-5 f the balance sheet of the bank

For Capital Adequacy purpose, the provisions will be included in Tier-2 capital

Rates of provisioning

Standard Assets

- Micro & small enterprises : 0.25%

- Farm credit in agriculture : 0.25%
- Home loans (where LTV ratio is as per RBI guidelines : 0.25%
- Teaser Home loans : 0.25%
- Commercial Real estate : 1%
- Other standard loans : 0.4%
- Restructured loans : 5%
Sub-standard Assets- Provisioning

- Secured sub-standard assets : 15%

- Unsecured sub-standard asset : 25%

(Unsecured substandard assets are those where the security coverage is up to 10%, at time of
sanction of the loan)

Availability of DICGC/CGTMSE/ECGC guarantee etc. will not be taken in to account to consider the
secured/unsecured portion in sub-standard assets.

a) If the balance in the account is Rs.20 lakh & the unsecured portion is Rs.4 lakh (20%), the
provision will be:
: Rs.20 lakh *15% = Rs.3.00 lakh
(Since the account is a secured substandard asset)
b) If the balance in the account is Rs.20 lakh & the secured portion is Rs.1 lakh
: Rs.20 lakh *25% = Rs.5 lakh (Since the account is unsecured as the secured portion
is less than 10%)

Doubtful Assets – Provisioning

- The balance outstanding in the loan account has to be bifurcated in to secured portion &
unsecured portion
- Security includes primary security, collateral security & guarantee from CGTMSE, ECGC,
Government etc.
- Guarantee from third parties (guarantor) not to be included

For secured portion:

- DA -1 : 25%
- DA-2 : 40%
- DA-3 :100%

For unsecured portion : 100%

If the balance is Rs.20 lakh & the unsecured portion is Rs.4 lakh, then the provision will be:

DA-1: 25% on Rs.16 lakh : Rs.4 lakh

100% on Rs.4 lakh : Rs. 4 lakh

Total : Rs.8 lakh

DA-2: 40 % on Rs.16 lakh : Rs.6.40 lakh

100% on Rs.4 lakh : Rs. 4 lakh

Total : Rs.10.40 lakh

DA-3: 100% on Rs.16 lakh : Rs.16 lakh

100% on Rs.4 lakh : Rs. 4 lakh

 Total : Rs.20 lakh

Calculation of provision in doubtful account with CGTMSE guarantee cover

Balance in the account Rs.20 lakh, security value Rs.8 lakh & guarantee coverage is 75%

DA-1

Balance in the account Rs.20 lakh, security Rs.8 lakh, CGTMSE coverage 75% (20-8=12*75%=9 lakh)

Unsecured portion+ 20-8-9=3 lakh

- On secured portion@25% : 8*25%=Rs.2 lakh

- On CGTMSE covered portion@0% : 9*0% = 0
- On unsecured portion@100% : 3*100%= Rs.3 lakh
Total provisions: Rs.2 lakh+ Rs.3 lakh = Rs.5 lakh

DA-2

Balance in the account Rs.20 lakh, security Rs.8 lakh, CGTMSE coverage 75% (20-8=12*75%=9 lakh)

Unsecured portion+ 20-8-9=3 lakh

- On secured portion@40% : 8*40%=Rs.3.20 lakh

- On CGTMSE covered portion@0% : 9*0% = 0
- On unsecured portion@100% : 3*100%= Rs.3 lakh
Total provisions: Rs.3.20 lakh+ Rs.3 lakh = Rs.6.20 lakh

DA-3

Balance in the account Rs.20 lakh, security Rs.8 lakh, CGTMSE coverage 75% (20-8=12*75%=9 lakh)

Unsecured portion+ 20-8-9=3 lakh

- On secured portion@100% : 8*100%=Rs8 lakh

- On CGTMSE covered portion@0% : 9*0% = 0
- On unsecured portion@100% : 3*100%= Rs.3 lakh
Total provisions: Rs.8 lakh+ Rs.3 lakh = Rs.11 lakh

Provision Coverage Ratio

As per RBI directions, banks will have to main minimum provision coverage ratio of 70% on ongoing
basis.

Provision Coverage Ratio = NPA provision/Gross NPA*100

PCR to be disclosed in the balance sheet

Excess provisioning (above 70%) can be kept as “Counter Cyclical Provision Buffer” (CCPB)

Gross NPA & Net NPA

Gross NPA = Balance outstanding in NPA accounts

Net NPA = Gross NPA less provisions/other allowed deductions

Gross NPA Ratio =Gross NPA/Gross Advances

Net NPA Ratio= Net NPA/Net Advances*100

Debt Recovery Tribunal

- Head of DRT: Presiding officer. Should be eligible to be posted as District Judge. Appointed
for a period of 4 years. Eligible for re-appointment. Maximum age 65 years
- DRT will have Registrar(for filing of suit) & recovery Officer (for recovery based on recovery
certificate issued by DRT)
- Head of DRAT: Chairperson. Should be eligible for posting as High Court Judge. Appointed for
a period of 4 years. Eligible for re-appointment. Maximum age 70 years
- DRT/DRAT created under Recovery of Debt Due to Banks & Financial Institutions Act (RDDB
Act) 1993
- Objective: To expedite recovery in big loan accounts
- Minimum amount for filing: Minimum Rs.20 lakh (GOI can make changes)
- Filing to be made to DRT & appeal to DRAT
- Loan recovery issues by Recovery Officer of DRT to be appealed to DRT
- Procedure: DRT issues summons to defendant. Defendant to submit written statement in 30
days(extendable by 15 days)
- Time limit to DRT to decide the case: In 2 hearings
- Time limit for DRAT to decide the case appeal preferred: 180 days
- Place where suit can be filed: At the DRT having jurisdiction of the place where the
defendant resides/does business or where cause of action arose.
- Appeal against the order of DRT: Bank or borrower can file appeal within 30 days of receipt
of order of DRT
- If appealed by borrower: Have to deposit 50% of the amount of decree, which can be
reduced up to 25% by DRAT
- Fee for filing at DRT: Minimum Rs.12,000/- maximum Rs.1.50 lakh
- Fee for filing at DRAT: Minimum Rs.12,000/- maximum Rs.30,000/-

LOK ADALAT

- Established as per Legal Services Authority Act 1987

- Can be organised by Taluk authorities, District authorities, State authorities, High Court or
Supreme Court
- Decree is arrived after arriving at consensus by both the parties
- Where compromise is not possible, case will be referred back
- No court fee is charged
- Award of Lok Adalat deemed to be Decree of a Civil Court
- No appeal against the decree (since it is based on consent of both parties)
- Monetary Ceiling: Civil liability up to Rs.20 lakh
- (If the case is handled by Lok Adalat organised by DRT, cases of amount above Rs.20 lakh
also can be taken up)

RBI guidelines regarding cases to be referred to Lok Adalat

 - Banks to use the forum of Lok Adalat for settlement of accounts under Doubtful & Loss
category.
- Preference for one-time upfront payment. Instalments up to 3 year may be agreed.

SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS & ENFORCEMENT OF SECURITY

INTEREST ACT 2002.

(Supreme Court has upheld the Constitutional validity of the Act in Mardia Chemicals Vs Union of
India)

Courts having jurisdiction: DRT & DRAT established under RDDB Act 1993

i) Creation of Asset Reconstruction Company

ii) Setting up of Central Registry (CERSAI-Central Registry of Securitisation Asset
Reconstruction & Security Interest)
iii) Enforcement of Security Interest

Asset Reconstruction Company for securitisation & Reconstruction created under SARFAESI Act.

Activities: Purchasing stressed assets from Banks/FIs & recovery through

i) Securitization
ii) Reconstruction
iii) Sale of available securities
iv) Change of management etc.

Security Receipts: Instruments issued by ARCs to QIBs (Qualified Institutional Buyers) on purchase of
joint right in financial assets

Recovery period: 5 years, which can be extended by another 3 years by the Board of Director of the
ARC

Registration of ARCs: With RBI. To commence business within 6 months of registration

Minimum Net owned Fund: rs.100 crores

Net Worth: Minimum 15% of NPAs acquired, on ongoing basis

Capital Adequacy Ratio: Minimum 15%

Securitization of loans: In case of securitization of assets, ARC’s minimum investment in in each time
should be minimum 15% of such security receipts

CERSAI

Established on 31.03.2011

Objective: To prevent loan frauds relating to multiple mortgage of same property to different
banks/FIs.

Charges that can be registered: Mortgage, Hypothecation, Assignment etc.

Time limit for registration: To be registered without any delay to get priority (Earlier time limit of 30
days removed vide notification dated 26.12.2019)

Fees for registration: Rs.50/- for loan up to Rs.5 lakh & Rs.100 for loan above Rs.5 lakh

If not registered, secured creditor cannot initiate provisions under SARFAESI Act for possession of
the secured assets.

GOI, State Governments, Local bodies, Tax authorities etc. can also register their charges.

Priority of the creditors is based on the time of registration. The charges registered earlier will get
priority over subsequent charges.

Secured creditor will get priority over other creditors

Sale of Security rules under SARFAESI Act

Secured creditors can take possession & sell the securities without the intervention of court

In case of consortium accounts, proceedings under SARFAESI Act can be initiated if consented by
banks/FIs holding minimum 60% share in value of the total loan amount

Sale of security in case of accounts pending at DRT can be sold with the consent of DRT (as per
Supreme Court judgement in Transcore Vs Union of India)

Authorised Officer for taking action under SARFAESI Act:

i) An officer in Scale IV or above or

ii) Any officer authorised by the Board of the respective bank

Loan accounts that are not eligible under SARFAESI Act

a) Where due amount is up to Rs.1 lakh

b) Where due amount is less than 20% of the principle amount & interest thereon
c) Limitation expired cases
d) The security interest is created through pledge or lien
e) Security interest not created
f) Security not charged with CERSAI
g) Agricultural Land
h) Standard Assets
i) Charge on Vessel & Aircraft
j) Hire purchase or lease.

Possession of security

- 13-2: 60 days’ notice to be issued by authorised officer

- 13-3(A): Borrower (including guarantor) objection/clarification to be replied in 15 days
- 13-(4): Possession can be taken by the bank
- 17-1Borrower can file against Bank’s action in DRT within 45 days
- 18-1: Appeal against the order of DRT to DRAT by bank/Borrower, within 30 days of receipt
of order of DRT
- If appealed by Borrower, 50% of the amount as per DRT order to be deposited to consider
the appeal (which can be reduced up to 25% by DRAT)
 - 14: Bank can take the assistance of Chief Judicial Magistrate/District Magistrate to take
possession of the secured asset. CJM/DM to complete the process in 30 days (maximum
extendable up to 60 days for reasons beyond control)
- Public notice of taking possession to be published in 2 newspapers, out of which 1 should be
in local language, within 7 days
- 30 days’ notice to borrower/owner before sale of the secured asset.
- Reserve price fixed based on valuation of the secured asset
- Minimum sale price will be the reserve price.
- Sale below the reserve price only with the consent of the borrower
- Bank can bid & purchase the property (Section 9 of BR Act will apply on holding the IP so
purchased)
- Sale can be through public auction or through private sale
- The highest bidder, above reserve price, has to remit 25% of the bid amount immediately
- Balance amount to be paid within 15 days, failing which the amount already paid may be
forfeited.

Insolvency & Bankruptcy Code 2016

- Comprehensive insolvency proceedings for Companies, firms etc.

- Minimum amount for filing is Rs.1 crore
- 4 pillars of IBC infrastructure
- a) Insolvency & Bankruptcy Board of India: 10 members including chairman. Regulates
Insolvency Professional Agencies, Information Utilities etc.
- b) NCLT/DRT: Adjudicate the insolvency resolution. Cases to be taken up after their approval.
NCLAT/DRAT are the appealing authority
- c) Insolvency Professionals: Who run the Insolvency Resolution. Manage/run the Company in
the interim period. Accountable to the Committee of Creditors
- d) Information Utilities: Collect, collate, store & disseminate information to facilitate the
Insolvency Resolution
- Insolvency Professional Agencies are specialised bodies / agencies that will be entrusted
with the task of registering and governing the Insolvency Professionals.
- The process can be initiated by (a) financial creditors, (b) operational creditors; or (c) the
corporate itself.
 - Time Limit for Resolution: 180 days, which can be extended by another 90 days by the
adjudicating authority (Maximum 270 days)
- For Small Companies (90 days +45 days = 135 days)

- As per IBC, the National Company Law Tribunal (NCLT) is the adjudicating authority for the
insolvency matters concerning corporates & LLPs

- The Debt Recovery Tribunal (DRT) is the adjudicating authority for the bankruptcy of
partnerships, firms and individuals.

- Appeals are to be made to NCLAT (National Company Law Appellate Tribunal) & DRAT (Debt
recovery Appellate tribunal, respectively

- Appeals against order of the appellate tribunals can be filed in the Supreme Court.

Insolvency Resolution can be through Resolution or Liquidation

- Resolution: Financial Creditors will assess the viability & act accordingly
- Liquidation Process: Majority of the Creditors’ Committee (60%) should consent for
liquidation: Debtor can approach NCLT. NCLT to take decision in 14 days. If NCLT accepts the
plan the Company Board will be suspended. NCLT will appoint Insolvency Professionals to
take over the interim management. Will constitute Creditors Committee. Insolvency
Professionals will be accountable to the Committee of Creditors. Insolvency Professional will
collect information from the Information Utilities relating to the lenders, borrower, terms &
conditions of sanction, securities available etc. Insolvency Professional should submit the
insolvency resolution plan to the Creditors Committee with in 180/270 days. Total time for
insolvency resolution is 330 days.

Resolution plan may include Restructuring of the loan, Conversion of loan in to equity, change of
management & sale of assets

Priority in Liquidation: Liquidation cost, Dues of secured creditors/workmen dues for 24 months,
Government dues, remaining dues of workmen other employees, unsecured financial creditors

SALE/PURCHASE OF NPAs/INVESTMENTs

- Sale/purchase of NPA/Investment between Banks/FIs/NBFCs Permitted by RBI, subject to

conditions. Sale can be made to ARCs also.
 Conditions for the seller bank

- NPA (irrespective age) can be sold

- Sale only on without Recourse basis
- Sale on cash basis
- Seller bank cannot repurchase the accounts, subsequently
- Banks to prepare the list of accounts to be sold once in a year
- Prospective purchaser to be given 2 weeks’ time for Due Diligence
- Valuation to be made by 2 independent valuers if the value of the Immovable property is
above rs.50 crore.

Conditions for the buyer bank

- Recovery plan for the NPAs purchased:

- Recovery to be made in 3 years
- Minimum 10% of the total amount to be recovered in first year & minimum 5% to be
recovered in each of the quarters in second & third year.
- Asset Classification: For first 90 days – Standard Category. Subsequently based on the record
of recovery
- Risk weight for CAR:100%
- Re-sale of the accounts by the buyer bank: Only after 12 months of purchase.

Wilful Defaulter

Wilful defaulter means a person/entity who has defaulted in repayment of the loans & has done
any of the following:

a) Has capacity to repay the loan obligations

b) Loan not used for specific purpose for which the loan was sanctioned (DIVERSION of funds)
c) Loan funds used for activities un-related to the business & are not available in the business
(SIPHONED OFF)
d) Sold the securities charged to the bank, unauthorised

Declaration of wilful default

- Committee headed by ED will declare a borrower as wilful defaulter, after giving the
opportunity to the borrower (borrower has to respond within 15 days)
- The decision of the Committee to be reviewed by the committee headed by CMD, which
may confirm the decision

RBI guidelines on wilful defaulter

- Cut-off amount for reporting is Rs.25 lakh

- Legal action to be initiated, wherever warranted
- Information of wilful defaulter to be made to the Credit Information Companies on a
monthly basis.
- No bank to give loan to the wilful defaulter. The borrower will remain in the wilful defaulters
list till closure of the loan account.
 - In case of new projects by the wilful defaulter, banks should not lend for 5 years from date
of listing of the person/entity as wilful defaulter by RBI.
- Similar actions to be taken against the guarantors also, if they are wilful defaulters.

Non-Cooperative Borrower

A Non-Cooperative Borrower is one who does not engage constructively with his lender by
defaulting in timely repayment of dues while having ability to pay & thwarting/stone walling lenders’
efforts for recovery of their dues

Coverage for Non- Cooperative Borrower is as follows:

- Company including its promoters and directors (excluding independent directors &
Government/lender’s nominees).
- Business enterprises (other than companies) would include persons who are in- charge and
responsible for the management of the affairs of the business enterprise.

The cut off limit for classifying borrowers as non-cooperative - where aggregate fund- based and
non-fund based facilities of Rs.5 crores and above from the bank.

Procedure for identification of non-cooperative borrower is similar to that of identification of wilful

defaulters.

List of borrowers identified as non-cooperative borrowers need to be reported to RBI in quarterly

CRILC (Central Registry of Information on Large Credits) Main report within 21 days from the close of
the relevant quarter.

Publication of photograph

A lending institution can consider publication of the photographs of only those borrowers, including
proprietors/ partners /directors / guarantors of borrower firms/ companies, who have been
declared as wilful defaulters by committee. This shall not apply to the non-whole time directors who
are exempted from being considered as wilful defaulters unless the special conditions, in accordance
with these instructions, are satisfied.

- The lending institutions shall formulate a policy with the approval of their Board of Directors
which clearly sets out the criteria based on which the decision to publish the photographs

- The lending institutions shall not publish photographs of any other defaulting borrowers.

 
Red Flagged Accounts

- Red Flagged Account is where suspicion of doubt has been indicated through Early Warning
Signals
- Cut-off amount for monitoring/reporting is Rs.50 crore
- For accounts classified as Red Flagged Account, 100% provision to be made, which may be
done over a period of 4 quarters.
- Reporting to be made to the Central Fraud Monitoring Cell of RBI, within 1 month. Reporting
to be made to CRILIC also.

Resolution of Stressed Assets (RBI directions dated 07.06.2019)

Objective: To provide framework for early recognition, reporting & for time-bound resolution of
stressed assets.

Early identification of stressed assets

- Banks to classify accounts based on overdue/past due period as

- SMA-0, in case the overdue period is 1 to 30 days
- SMA-1, in case the overdue period is 31 to 60 days
- SMA-2, in case the overdue period is 61 to 90 days
- In case of revolving loan accounts like Cash Credit & Overdrafts, the SMA classification to be
based on the period the account is out of order, as:
- SMA-1, in case the out of order period is 31 to 60 days
- SMA-2, in case the out of order period is 61 to 90 days
- In case of default on payment, the lender should initiate the process of Resolution Plan (RP)
by reviewing the account within 30 days of default
- In case of Consortium accounts, the Resolution Plan to be entered if consented by the
majority of lenders (75% by amount & 60% by number)
- Resolution plan to be implemented within 180 days of the review period.
- If the Resolution process involves Restructuring or ownership change, Independent Credit
Evaluation (ICE) to be taken from RBI approved Credit Rating Agency, if the exposure is
Rs.100 crore & above. If the exposure is Rs.500 crore & above, ICE has to be taken from 2
CRAs
- The Rating by the CRA should be minimum RP4
- If the borrower is not in default on the 180 th day & if all the documentation has been
executed & in case of ownership changes the new promoters have brought in capital, the
Resolution Plan will be treated as implemented.
 - In case of delay in implementation additional provision of 20% to be made from 180 days of
end of the review period, which will be enhanced to 35% provision from 365 days from the
review period.
- The additional provision can be reversed in case of upgradation of the account or if
borrower is not in default for 6 months from clearing of the dues as per the Resolution Plan

Restructuring is the act where the lender grant concessions to the borrowers due to legal or
economic reasons, which the lender would not have provided in normal circumstances

Restructuring includes modification of terms & conditions of sanction, securities, repayment,

interest, roll over of loans, sanction of additional loans etc.

Prudent Classification norms in case of Restructuring: Standard Assets to be classified as NPA.

NPA accounts, classification will continue.

Upgradation to Standard Assets

- If a/c shows satisfactory performance (if 10% of dues is paid from the date of RP
implementation)
- Account cannot be upgraded before 1 year from the commencement of first payment of
interest or principal (whichever is later) on the loan with the longest moratorium period.
- Further, in case of loan with exposure of Rs.100 crore & above, loan should be rated as
“investment grade (minimum BBB-) by the CRA before upgradation

If borrower fails to show satisfactory performance, fresh Resolution plan applicable.

Additional loan sanctioned: To be classified as standard asset during the monitoring period. In case
RP does not end in satisfactory performance of the account, additional loan also to be classified in
the same category of the restructured loan.

Income recognition

- In restructured accounts classified as standard assets, interest can be recognised on accrual

basis. But, if the restructured loan is in NPA category, interest to be recognised on cash
basis.

Upgradation of account to standard category in case of change of ownership: After the new
promoters have acquired minimum 26% of the paid up capital & voting rights.

- Only after the new promoters have paid

Revival & Rehabilitation of MSME Accounts

- Eligible Accounts: Having fund based/NFB exposure of up to Rs.25 crore from banking
system
- Incipient sickness to be identified based on Early Warning Signal (SMA status)
- Corrective Action Plan: i) Rectification ii) Restructuring iii) Recovery
- For SMA-2 accounts up to Rs.10 lakh, CAP by branch level committee. In case of recovery
option, concurrence of RO/CO/ZO committee required.
 - For stressed accounts above Rs.10 lakh: Branch to forward details to the standing committee
at RO/CO/ZO committee within 5 days for suitable corrective action plan.
- Borrower can also apply for rehabilitation process, in identified sick accounts. In such cases,
committee to convene a meeting within 5 working days

In case of SMA-2 accounts with exposure of above Rs.10 lakh & reference made by bank.

- Committee shall notify the borrower within 5 working days.

- Committee to obtain details about statutory creditors within 15 days
- Within 30 days of first meeting, Committee shall decide the option & inform the borrower
within 5 days.
- If restructuring is envisaged, Committee shall take Techno Economic Viability study & finalise
the restructuring terms within 20-30 working days.
- If the Corrective Action Plan (CAP) involves rectification, it has to be implemented within 30
days & in case of restructuring, within 90 days.
- Decision by committee is based on majority. In case of consortium/multiple banking,
majority is 75% by value & 50% by number of banks.
- If committee decides recovery, borrower can make review application within 10 days.

RBI guidelines on One-time Restructuring of MSME accounts without downgrading of the asset
classification

- Aggregate exposure not to exceed Rs.25 crore

- The account is in default but is a ‘standard asset’
- The borrowing entity is GST-registered on the date of implementation of the restructuring.
(the condition will not apply to MSMEs that are exempt from GST-registration)
- The restructuring of the borrower account is implemented on or before March 31, 2021

. Restructuring would be treated as implemented if;

. All related documentations are completed by all lenders; and

. The new capital structure and / or changes in the terms and conditions of the existing

Loans get duly reflected in the books of all the lenders and the borrower.

- Additional provision of 5% shall be made. The provisions can be reversed at the end of the
specified period, in case of satisfactory performance.

- . Post-restructuring, NPA classification of these accounts shall be as per the extant IRAC norms.

- Lenders shall make appropriate disclosures, under notes on accounts, in their financial
statements.

- There should be board approved policy

 Reporting to CRILIC (Central Repository of Information on Large Credits)
- Information on large borrowers, having exposure of Rs.5 crore & above, to be reported to
CRILIC on monthly basis, including information on SMA-2
- Weekly report of instances of default by large borrowers to be submitted on weekly basis on
every Friday (if Friday is a holiday, then on the previous day)