Samarth Andhi Book

Deferred Debts & Asset Reconstruction
PROJECT REPORT ON - Title
Bachelor of Commerce (Banking & Insurance)

Semester (V)
(2021-2022)
Submitted By
NAME - _________
ROLL NUMBER - ______
Project Guide
Name of Guide
Mithibai College of Arts, Chauhan Institute of Science &

Amrutben Jivanlal College of Commerce and Economics
Bhaktivedanta Swami Marg, Gulmohar Road,

SuvarnaNagar, Vile Parle (W), Mumbai, Maharashtra
400056
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“Title of Project”

Semester (V)
Submitted
In Partial Fulfillment of the requirements
For the Award of Degree of
By:
Name - _____
Roll No.: ___
Mithibai College of Arts, Chauhan Institute of Science & Amrutben

Jivanlal College of Commerce and Economics
Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile

Parle (W), Mumbai, Maharashtra 400056
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ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so
numerous, and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels
and fresh dimensions in the completion of this project.

I take this opportunity to thank Mithibai College for giving me chance
to do this project.

I would like to thank my I/c Principal, Dr. Krutika Desai for
providing the necessary facilities required for completion of this
project.

I take this opportunity to thank our Head of Department Mr. Mandar
Thakur, for his moral support and guidance.
I would also like to express my sincere gratitude towards my project

guide Asst. Prof. ___________ whose guidance and care made the
project successful.
Lastly, I would like to thank every person who directly or indirectly

helped me in the completion of the project especially my Parents and
Peers who supported me throughout my project.
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DECLARATION
I, ___________ the student of T.Y.B.B.I. Semester V (2021-2022)

hereby declare that I have completed the project on
_______________________________________.
The information submitted is true and original to the best of my

knowledge.

_____________________
(Name)
Roll No.: (__)

Mithibai College of Arts, Chauhan Institute of Science & Amrutben
Jivanlal College of Commerce and Economics
Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile

Parle (W), Mumbai, Maharashtra 400056
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K.C. COLLEGE
CERTIFICATE

This is to certify that _________, Roll No: (___) of Third Year B.B.I.,
Semester V (2021-2022) has successfully completed the project on
Title
Under the guidance of Asst. Prof. ___________

Project Guide/ Internal Examiner I/c Principal

(Asst. Prof. __________) (Dr. Krutika Desai)

External Examiner
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EXECUTIVE SUMMARY
In bankruptcy proceedings, a debt that by statute is not paid until all other debts have been paid in
full, is known as Deferred Debt.
A Non-Performing Asset (NPA) refers to a classification for loans or advances that are in default or
are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as
nonperforming when loan payments have not been made for a period of 90 days. While 90 days of
non-payment is the standard, the amount of elapsed time may be shorter or longer depending on
the terms and conditions of each loan.
Asset Reconstructions Company (ARC) is created to manage and recover Non-Performing Assets
acquired from the banking system. Asset Reconstruction Companies act as a bad bank by isolated
Non-Performing Assets from the balance sheet of banks and Foreign Institutional Investors (FII) and
facilitate them to concentrate on normal banking activities. Banks and financial institutions with a
large proportion of their bad loans or Non-Performing Assets can sell to a separate entity i.e. Asset
Reconstruction Company. Then Asset Reconstruction Companies recover a sum through attachment,
liquidation etc. The objective is to help banks in making clean books by reducing Non-Performing
Assets. Asset Reconstruction Companies are also making profit by buying Non-Performing Assets at a
lower price.
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act,
2002 (also known as the SARFAESI Act) is an Indian law for creation / operation of the Asset
Reconstruction Companies. It allows banks and other financial institution to auction residential or
commercial properties (of Defaulter) to recover loans.
CHAPTER 1 INTRODUCTION
The topic for this project is Deferred Debts and Asset Reconstruction. Since they are two complex
financial activities, there are a number of concepts that need to be understood in the process.
Let us start by understanding the institutions which provide funds to the consumers The basic
two institutions providing funds are:
I. Banks
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II. Non-Banking Financial Corporations (NBFC)
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1.1 BANKS
Meaning of Bank:
A bank (German word) means a joint stock fund. A bank denotes a financial institution dealing in
money. It is an institution that is prepared to accept deposits of money and repay the same on
demand.
A banker (i.e., person or a corporation) deals in credit and money. It accepts deposits from those
who want to commit their wealth to safety and earn interest thereon and lends money to the needy
through cheques and advances and loans of various sorts.
Functions of a Bank:
A bank performs the following functions:
(a) It accepts deposits from the customers, who can take back their money at will. Customers
can leave their cash with the bank as Saving Account, Current Account or a Fixed Deposit Account.
Customers deposit their money in Saving Bank Account to save a part of their current incomes to
meet their future needs and also intend to earn an income from their savings (bank interest). For the
depositor, the number of withdrawals over a period of time and the total amount of one or more
withdrawals on any date, are however limited.
A Current Account on the other hand is running account which may be operated upon any number
of times during a working day. There is no restriction on the number and amount of with-drawls. The
bank does not pay any interest; rather it takes incidental charges from the depositor on such
accounts in some cases.
In a Fixed Deposit Account, the deposits are made for a fixed period (say 36 months) and a higher
rate of interest is paid to the depositor.
(b) Bank lends money to needy people at a certain interest rate. Banks give loan to
agriculturists, industrialists and businessman who invest it in their ventures to their own
profit and to the economic advancement of the country.
(c) A bank issues notes and creates other inexpensive media of exchange-a note or a cheque.
The issue of notes is entrusted to the Reserve Bank of the country.
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Credit instruments such a bank note, bank drafts, cheques and letters of credit are created by Banks.
These things economize the use of metallic money and make the transmission of money over long
distances cheap and convenient.
(d) The deposits may be created by the bank itself by giving loans to its customers, in which case
the borrower is credited with a deposit account with draw able when needed. The money
borrowed from the bank is usually deposited in the same bank by the borrowers either
because the bank insists on it or because of the advantages of current account deposit. Such
deposits are known as Credit Deposits.
(e) Other functions of a bank are:
i. The collection of cheques drawn on other banks. ii. The acceptance
and collection of bills of exchange. iii. Dealing in foreign exchange to assist the
settlement of overseas debts. iv. Stock Exchange trustee and executor
business.
v. Safe deposit facilities.
vi. Making standing order payments.
vii. Supplying change and assisting the Central Bank/Reserve Bank in keeping the
note issue in good condition.
Loan providing function of banks:
Banks keep a small proportion of their deposits as cash with themselves to pay the
depositors who might come to withdraw money from the bank on any given day.
Banks use the major portion of the deposits to extend loans. In this way, banks mediate
between those who have surplus funds (the depositors) those who are in need of these
funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on
deposits. The difference between what is charged from borrowers and what is paid to
depositors is their main source of income.
These loans can be secured or unsecured loans. Unsecured loans are provided without any
collateral. Thus, they are riskier for the banks and are given at a higher rate of interest.
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Secured loans are those which are provided against some collateral.
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Collateral is an asset that a lender accepts as security for a loan. If the borrower defaults on
the loan payments, the lender can seize the collateral and resell it to recoup the losses.
Loans that are secured by collateral are typically available at substantially lower interest
rates than unsecured loans. The borrower has a compelling reason to repay the loan on
time. If the borrower defaults, the lender can seize the property and sell it to recoup some
or all of the losses. A lender's claim to a borrower's collateral is called a lien.
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Types of Banks:
The Indian Banking System
The Indigenous Banking System

The Modern Banking System
➢ The Indigenous Banking System
The indigenous bankers are usually a family concern.
Functions:
(a) To advance loans against ornaments, land etc.
(b) To deal in Hundies.
(c) To receive deposits.
➢ The Modern Banking System
1. Commercial Banks
Most of the banks in India are Commercial banks, e.g., Punjab National Bank,
Allahabad Bank, United Commercial Bank etc. Such banks deal in short-term credit. They
collect the surplus balances of the individuals and finance the temporary needs of
commercial transactions. A commercial bank borrows money from individuals by accepting
deposits on current account, saving account, fixed deposits and miscellaneous deposits and
then it lends money to Industrialists and Traders.
2. State Bank of India

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The Imperial Bank of India established on January 27, 1921 was renamed as the State
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Bank of India on July 1, 1955 after passing of the State Bank of India Act, 1955. The
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State Bank of India has its central office in Bombay and seven local head offices in Calcutta,
Madras, Bombay, Delhi, Hyderabad, Kanpur and Ahmedabad.
The main functions of State Bank of India are:
(a) The bank borrows money from public by accepting deposits.
(b) It lends money to industrialists, farmers and Traders for short periods.
(c) It provides financial assistance to importers and exporters.
(d) It undertakes foreign exchange business.
(e) It collects cheques, drafts, bill of exchange, dividends, interest, salaries and pension on
behalf of customers.
(f) It maintains safe deposit vaults.
3. Exchange Banks
Whereas commercial banks finance the internal trade of the country, the Exchange banks
finance its foreign trade. Exchange banks of our country will have their head office located
outside India.
The functions of Exchange Banks are:
(a) To supply finance for imports and exports.
(b) To purchase and discount bills of exchange drawn by Indian exporters and also collect on
maturity the proceeds of bills drawn on Indian Importers for goods purchased by them.
(c) To act as referees, collecting and supplying information about the foreign customers, etc.
4. Central Bank – Reserve Bank of India

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Central Bank of a country is an apex monetary and banking institution that controls the
supply of currency in that country. Central bank is entrusted with the duty of regulating the
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volume of currency and credit in the country. Central bank controls the banking structure of
country. Central bank controls and regulates the monetary, banking and credit policies of
the country.
Central bank determines the quantum of money which should be circulated in the country.
Central bank performs general banking and agency services for the Government. All the
banks keep reserves with the Central Bank and banking policies in the country are framed by
it. Whereas the object of a commercial bank is to earn profit, a central bank stimulates
growth of the country.
Whereas a commercial bank deals with public directly, a central bank deals with commercial
banks and other institutions and the government of the country. The central bank is the
custodian of the foreign exchange reserves of the country. The central bank controls and
regulates credit and currency with a view to stabilize prices in the country. The central bank
pumps in more money when the market is short of cash and pumps out money when there
is an excess of credit.
Reserve Bank of India was established as the central bank of the country on April 1,
1935, though the idea existed since 1836. As the Central bank of the country, the Reserve
Bank is the banker to the banks also. The Reserve Bank regulates the entire banking system
of the country.
The main functions of RBI are:
(a) Issue of Bank Notes:

The Reserve Bank of India has the sole right to issue currency notes except one rupee notes
which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are
declared unlimited legal tender throughout the country. This concentration of notes issue
function with the Reserve Bank has a number of advantages: (i) it brings uniformity in notes
issue; (ii) it makes possible effective state supervision; (iii) it is easier to control and regulate
credit in accordance with the requirements in the economy; and (iv) it keeps faith of the
public in the paper currency.
(b) Banker to the Government:

As banker to the government the Reserve Bank manages the banking needs of the
government. It has to-maintain and operate the government’s deposit accounts. It collects
receipts of funds and makes payments on behalf of the government. It represents the
Government of India as the member of the IMF and the World Bank.
(c) Custodian of Cash Reserves of Commercial Banks:

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The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the
cash reserves of the commercial banks.
(d) Custodian of Country’s Foreign Currency Reserves:

The Reserve Bank has the custody of the country’s reserves of international currency, and
this enables the Reserve Bank to deal with crisis connected with adverse balance of
payments position.
(e) Lender of Last Resort:

The commercial banks approach the Reserve Bank in times of emergency to tide over
financial difficulties, and the Reserve bank comes to their rescue though it might charge a
higher rate of interest.
(f) Central Clearance and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is
easier to deal with each other and settle the claim of each on the other through book keeping
entries in the books of the Reserve Bank. The clearing of accounts has now become an
essential function of the Reserve Bank.
(g) Controller of Credit:

Since credit money forms the most important part of supply of money, and since the supply
of money has important implications for economic stability, the importance of control of
credit becomes obvious. Credit is controlled by the Reserve Bank in accordance with the
economic priorities of the government.
1.2 NON-BANKING FINANCIAL CORPORATIONS (NBFC)
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but
does not include any institution whose principal business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property. A non-banking institution which is a company
and has principal business of receiving deposits under any scheme or arrangement in one lump sum
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or in installments by way of contributions or in any other manner, is also a non-banking financial

company (Residuary non-banking company).
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Financial activity as principal business is when a company’s financial assets constitute more than 50
per cent of the total assets and income from financial assets constitute more than 50 per cent of the
gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term
'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it
so as to ensure that only companies predominantly engaged in financial activity get registered with
it and are regulated and supervised by it. Hence if there are companies engaged in agricultural
operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or
construction of immovable property as their principal business and are doing some financial
business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is
popularly known as 50-50 test and is applied to determine whether or not a company is into
financial business.
NBFCs lend and make investments and hence their activities are akin to that of banks; however
there are a few differences as given below:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn
on itself;
iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available
to depositors of NBFCs, unlike in case of banks.
As per the Asset Based Classification, NBFCs are divided into the following types:
I. Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on
as its principal business the financing of physical assets supporting productive/economic activity,
such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling
equipment, moving on own power and general purpose industrial machines. Principal business for
this purpose is defined as aggregate of financing real/physical assets supporting economic activity
and income arising therefrom is not less than 60% of its total assets and total income respectively.
II. Investment Company (IC): IC means any company which is a financial institution carrying on as
its principal business the acquisition of securities,
III. Loan Company (LC): LC means any company which is a financial institution carrying on as its
principal business the providing of finance whether by making loans or advances or otherwise for
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any activity other than its own but does not include an Asset Finance Company.
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The loan is a type of agreement where the lender temporarily lends property, usually cash to the
borrower with a promise. As per the agreement, the borrower will return the loan along with the
interest while complying with the terms and conditions.
The NBFC loan companies offer different kinds of loans as per the individual’s preferences. For
example, demand loan, term loan, secured loan, unsecured loan, home loan, industrial loan,
commercial loan, personal loan, and agricultural loan.
The NBFC loan companies are generally small partnership firms which accept deposits from the
public at high-interest rates, and further give loans to the retailers, small scale firms, wholesalers,
self-employed persons, etc. at a higher rate of interest
The NBFC-loan company could include any business activity that is performed by either the
equipment leasing company or the hire-purchase company. Although the nature of all these
companies is similar, their business activities can be very different from each other; at the same
time, their funding requirements vary significantly.
1.3 NON-PERFORMING ASSETS (NPA)
Since the last three years if any issue is plaguing the entire banking sector that is the NPA (Non-
performing Asset) issue. Almost all Indian banks whether PSU or private or NBFCs have all been
dealing with severe NPA levels.
A bank’s business involves providing loans to the borrowers. The borrowers could be a company,
individual or any organization. The loans that are issued by the banks are known as bank’s assets
because the banks earn interest on the loans. But there is always a possibility that borrowers may
default on the payment of interest as well as the principal amount. As per guidelines issued by the
RBI, banks classify an account as NPA only if the interest due and charged on that account is not
serviced fully within 90 days from the day it becomes payable. An asset becomes non-performing
when it does not generate any income for the bank. Now, there can be scenarios where the
borrower does not pay the loan amount even after the lapse of 90 days or more then these kinds
then start coming under NPA’s.
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For Example, a loan account of Rs. 1,00,000 @ 10% interest rate p.a. is due for payment on 30 th
September. If the payment is not made within 90 days starting 30 th of September, the account will be
classified as Non-performing Asset.
For precautions and to meet unforeseen losses, banks are required to make provisions as per RBI
guidelines. RBI issues guidelines on Income Recognition, Asset Classification and Provisioning. Banks
have to provide 25% provision for unsecured substandard assets. In case of doubtful assets (NPA for
1 year and more) 100% provision is to be made for the unsecured portion of doubtful assets and 25%
for the secured portion. In case of doubtful assets of more than 1 year but up to 3 years, 100%
provision is to be made for the unsecured portion and 40% for the secured portion. If the asset is
doubtful for more than 3 years, 100% provision is to be made for the entire asset. In case of Loss
Assets, 100% provision is made. After detailed calculations for each and every account, banks arrive
at Gross NPA.
However, sometimes certain factors like ECGC coverage, insurance claims and various subsidy by
government in different loans are admissible. So, from the gross amount, these amounts and
provisions provided are netted to arrive at Net NPA.
The key ratio in analyzing asset quality of the bank is between the total provision balances of the
bank as on a particular date to gross NPAs. It is a measure that indicates the extent to which the
bank has provided for the weaker part of its loan portfolio. A high ratio suggests that further
provisions to be made by the bank in the coming years would be relatively low as the provision
coverage is high (if gross non-performing assets do not rise at a faster rate).
Net Non-Performing Assets = Gross NPAs – Provisions.
Gross NPA Ratio is the ratio of total gross NPA to total advances (loans) of the bank. Net NPA to
Advances (loans) Ratio is the ratio of Net NPA to advances. It is used as a measure of the overall
quality of the bank’s loan book.
Provision Coverage Ratio = Total provisions / Gross NPAs. It indicates the extent of funds a bank has kept
aside to cover loan losses.
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Types of Nonperforming Assets:

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Although the most common NPAs are term loans, there are six other ways loans and advances are
NPAs:
• Overdraft and cash credit (OD/CC) accounts left out-of-order for more than 90 days.
• Agricultural advances whose interest or principal instalment payments remain overdue for
two crop/harvest seasons for short duration crops or overdue one crop season for long
duration crops.
• Bill overdue for more than 90 days for bills purchased and discounted.
• Expected payment is overdue for more than 90 days in respect of other accounts.
• Non-submission of stock statements for 3 consecutive quarters in case of cash-credit facility.
• No activity in the cash credit, overdraft, EPC (Export packing credit), or PCFC (packing credit
in foreign currency) account for more than 91 days.
Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
1. Substandard Assets: Assets which has remained NPA for a period less than or equal to 12
months.
2. Doubtful Assets: An asset would be classified as doubtful if it has remained in the substandard
category for a period of 12 months.
3. Loss Assets: As per RBI, “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.”
While the assets have been classified as described above, in layman’s terms, a standard asset is one
which pays back the principle and the interest in due time, i.e. normal assets; whereas a substandard
asset is one which defaults.
The Reserve Bank of India also keeps changing the standard and substandard classification from time
to time. What was a standard asset today can well become a substandard asset tomorrow. Banks in
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India in the last few quarters have been increasing their provisions, to guard against turning
standard assets into substandard assets. In fact, the asset quality in the banking sector has
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deteriorated to the worst levels, with banks like Bank of Baroda reporting record losses, thanks to
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asset quality taking a turn for the worst. The Reserve Bank of India has also asked banks to make
extra provisions, thus resulting in fresh slippages and standard assets gradually turning into
substandard ones. There are a number of reasons why assets turn substandard. One of the biggest
reasons for the same is the gradual downturn in the economy. In India, the last few years saw huge
NPA slippages resulting into standard assets turning into substandard assets. This is largely because
of the huge defaults in the steel and power sector in India. Banks are hoping that there is a gradual
recovery and non-performing assets over a period of time, get back to normal.
There are a number of reasons why assets turn substandard. One of the biggest reasons for the
same is the gradual downturn in the economy. In India, the last few years saw huge NPA slippages
resulting into standard assets turning into substandard assets. This is largely because of the huge
defaults in the steel and power sector in India. There are steps being taken to now take control of
substandard assets, whether that will fructify remains to be seen.
Reporting of NPAs
1 Banks are required to furnish a Report on NPAs as on 31 st March each year after completion of
audit. The NPAs would relate to the banks’ global portfolio, including the advances at the foreign
branches. The Report should be furnished as per the prescribed format given in the Annexure.
2. While reporting NPA figures to RBI, the amount held in interest suspense account, should be
shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs.
Banks which do not maintain Interest Suspense account for parking interest due on non-performing
advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the
Report.
3. Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced
from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of
NPAs being reported.
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1.4 DEFERRED DEBTS
Deferred payment is an agreement between the lender and borrower allowing the borrower to take
possession of goods immediately and start making payments in the future. The “buy now, pay later”
transactions are typical examples of payment deferral. From the seller’s perspective, a deferred
payment is an accrued revenue, i.e. money not received for goods or services that are already
delivered to the customer.
For example, a 0% credit card is deferred revenue for the bank that collects the monthly payment
without an additional fee interest rate. From the buyer’s perspective, deferred payments are
accrued expenses, i.e. money that the buyer has not paid for the goods he has received. For
example, the interests paid on a bank loan are accrued expenses because the customer gets the loan
before paying the interests on the loan.
• Deferred installment debt is a loan where the payment is postponed until a future date.
Typically, interest does not accrue until payment begins. A student loan is the most common
example of a deferred installment debt.
• Deferred long-term liability charges are liabilities that are not due within the current
accounting period. They are carried as a liability on the balance sheet, alongside other long-
term debt obligations, until they are paid, and reported as a loss on the income statement.
Deferred long-term liability charges usually consist of deferred tax liabilities that are to be
paid a year or more into the future. These temporary differences between taxes owed and
taxes paid tend to balance out over time. Other deferred long-term liabilities include
deferred compensation, deferred pension liabilities, deferred revenues and derivative
liabilities.
Now, that the concept of deferred debt has been discussed, we can now look at the application of
the same. This can be seen in the concept of deferred interest mortgage.
• A deferred interest mortgage is a mortgage that allows for the deferral of some or all of the
interest required on a loan. Deferred interest mortgage terms can be integrated to
customize all types of mortgage loans. In the mortgage market, deferred interest is most
commonly associated with balloon payment loans and payment option adjustable-rate
mortgage (ARM) loans.
• Deferred interest provisions can be complex for both the borrower and the lender since
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they require customization to the payment schedule. Generally, incremental deferred

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interest mortgage loans allow a borrower to make minimum payments that are less than the
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total payment owed. Lenders can vary this provision in different ways but will usually have a
minimum payment that can be allowed for the borrower below the standard payment
amount. If a borrower chooses to exercise their deferred interest rights and pay the lower
balance, then the payment will cover the principal and some interest. The excess interest is
then added to the total balance of the loan.
This increases the amount of interest charged on future payments.
Overall incremental deferred interest is usually synonymous with negative amortization.

With incremental deferred interest, a homeowner lets interest accrue, ultimately increasing
the totals cost of the loan. Different from deferred interest credit card debt, deferred
interest loans have a definitive maturity and will require a borrower to make a lump sum
payoff when the loan reaches maturity. There can be some considerations for deferred
interest mortgages that will allow for an extension such as loan modification or forbearance.
• Payment Option Adjustable Rate Mortgages
In the mortgage market, lenders can offer borrowers a payment option adjustable-rate mortgage.
This type of product is one of the most common loans where negative amortization will occur.
In an adjustable-rate mortgage, borrowers pay both a fixed rate and a variable rate of interest.
Payment options will likely start with a low fixed interest rate for a short period of time. Once the
borrower reaches a specified reset date, they will then have several options on the type of payment
they would like to make in the variable rate portion of the loan. The borrower might make the
minimum fixed interest payment. They may also have the option to pay only interest. They can also
pay the standard variable rate that is required, or they may also have other options determined by
the lender. In all scenarios except for the standard loan payment, the borrower will incur deferred
interest since the payment is below the standard amount. The excess balance is then added to the
outstanding balance.
In a payment-option ARM, the borrower has various options at each payment time. They may
choose to make the minimum payment in one month followed by a higher payment in the following
month. Payment option ARMs were designed to help borrowers with volatile income levels since
borrowers can choose from any payment option at each month when the payment is required.
• Balloon Payment Loans
Balloon payment loans are a standard type of deferred interest mortgage. With a balloon payment
loan, the borrower makes no payments on principal or interest throughout the entire life of the loan.
The borrower is required to pay off the loan in a lump sum that includes both principal and interest
at the loan’s maturity date. Generally, in balloon payment loans for longer than one year, lenders
will structure the interest to accrue and defer annually. Lenders have the option to accrue interest
on any schedule they specify in the loan terms.
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• Deferred Interest Bond
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Deferred interest bond is a debt instrument that pays interest in full only upon maturity. Unlike most
bonds, a deferred interest bond does not make periodic coupon payments over its lifetime. Deferred
interest bond is also called deferred coupon bond.
A conventional bond pays interest periodically to investors until the bond matures, at which point,
investors are repaid the principal amount. Certain types of bonds don’t pay interest; instead, the
interest that accrues over the life of the bond is paid out when the bond matures in addition to the
principal. Such bonds are referred to as deferred interest bond.
For example, a one-year deferred interest bond with a par value of $1,000 and an annual yield of 6%
would pay the investor $60 interest + $1,000 initial investment = $1,060 when the year is up.
An example of a deferred interest bonds is a zero-coupon bond, which pays no interest at all but
offers appreciation in bond value through the par value. The difference between the purchase
price and face value repaid at maturity is the interest earned on the bond for the investor.
Because there are no payments prior to maturity, zero-coupons have no reinvestment risk. Zero-
coupon bonds are sold at a discount.
Another type of a deferred interest bond is a toggle note which can be used by issuing firms with
temporary cash flow to raise debt while staying afloat during times of strained cash flow without
defaulting. A toggle note is a loan agreement that allows a borrower to defer an interest payment by
agreeing to pay an increased coupon in the future. Interest will, in effect, be paid for by incurring
additional debt, often at a higher rate of interest.
For example, if a company chooses to defer paying interest until the bond matures, its interest on
the debt may increase from 7.8% to 9.1%.
Another form of deferred interest is one that does not make interest payments until a certain period
has passed. At the end of the deferred-interest period, the bond begins to pay interest on a
periodical basis until maturity date or call date.
For example, a bond with maturity date of 10 years has a provision in its trust indenture that coupon
payments are to start four years after issuance. In this case, this bond has a zerocoupon for the first
four years, and then a fixed coupon for the remaining six years.
A deferred interest bond can be a good choice for those looking to save money while accruing more
interest than they might receive in a bank savings account or a money market fund. Investors
looking for interest income may not find these bonds an attractive investment for their portfolios.
Deferred interest bonds are typically issued at a deep discount to compensate bondholders for the
period of non-interest payments.
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1.5 SECURITIZATION
Now that the concept of NPAs has been cleared, the first thing that can come to one’s mind is the
fact that how can this risk be minimized. Securitization is the process of passing on the risk of risky
investments to the investors who readily take such risks in order to gain more returns.
According to Kenneth Cox, securitization is a process in which pools of individual loans or receivables
or actionable claims are packaged, under written and distributed to investors in the form of
securities. It is a process of liquidizing assets appearing in the balance sheet of a Bank or financial
institution which represent long term receivables by issuing marketable securities there against. It
involves conversion of cash flow from a portfolio of assets in negotiable instruments or assignable
debts which are sold to investors. The name securitization is derived from the fact that the form of
financial instruments used to obtain funds from the investors is securities. All assets can be
securitized so long as they are associated with cash flow. Hence, the securities which are the
outcome of securitization processes are termed asset-backed securities (ABS). From this perspective,
securitization could also be defined as a financial process leading to an issue of an ABS.
Securitization often utilizes a special purpose vehicle (SPV), alternatively known as a special purpose
entity (SPE) or special purpose company (SPC), in order to reduce the risk of Bankruptcy and thereby
obtain lower interest rates from potential lenders. A credit derivative is also generally used to
change the credit quality of the underlying portfolio so that it will be acceptable to the final
investors. Securitization, in its most basic form, is a method of selling assets. Rather than selling
those assets “whole”, the assets are combined into a pool, and then that pool is split into shares.
Those shares are sold to investors who share the risk and reward of the performance of those
assets. It can be viewed as being similar to a corporation selling, or “spinning off”, a profitable
business unit into a separate entity. They trade their ownership of that unit, and all the profit and
loss that might come in the future, for cash right now.
A very basic example would be as follows: X Bank loans 10 people Rs100, 000 apiece, which they will
use to buy homes. X Bank has invested in the success and failure of those 10 home buyers, if the
buyers make their payments and pay off the loans, X Bank makes a profit. Also if we look at it in
another way, X Bank has taken the risk that some borrowers won't repay the loan. In exchange for
taking that risk, the borrowers pay X Bank interest on the money they borrow. From the perspective
of X Bank, those loans are 10 different assets. They have value- one, if the loan fails, X Bank takes
ownership of the house. Two, if the loan succeeds, X Bank gets their money back along with the
interest they charge.
X Bank can do two things with those loans. They can hold them for 20 years and, they would hope,
make a profit on their investment. Or they could sell them to some other investor, and walk away. In
doing this, they would make less profit than if they held onto them long term, but they would
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benefit in that they make some profit while also getting their original investment back. They give up
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some of the profit in exchange for not having face the risk. So X Bank decides they would rather have
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the cash now. They could sell those 10 loans to 10 investors. Each investor would be taking a risk in
buying those loans, because if any loan defaults, that one investor loses
• Interest for investors
➢ Historical performance of these products are always in line with tranche

expectations/ratings
➢ Seeking yields in a context of low rates and ample liquidity
➢ Alignment of interests and initiatives aiming to improve market visibility (PCS quality label)
• Interest for issuers
➢ Diversification of financing tools

➢ Indirect source of liquidity by using it as collateral for central bank liquidity operations or for
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private repo transactions.

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• Interest for financing the economy
➢ Helps finance credit for key sectors (SMEs and consumer credit in particular) by giving non-
banking investors access (insurers, fund managers, etc.)
➢ A tool for deconsolidating banks' balance sheets so they can continue lending to the real
economy
Securitization in India began in the early nineties. It has been of a recent origin. Initially it started as
a device for bilateral acquisitions of portfolios of finance companies. These were forms of quasi-
securitizations, with portfolios moving from the balance sheet of one originator to that of another.
Originally these transactions included provisions that provided recourse to the originator as well as
new loan sales through the direct assignment route, which was structured using the true sale
concept. Through most of the 90s, securitization of auto loans was the mainstay of the Indian
markets. But since 2000, Residential Mortgage Backed Securities (RMBS) have fuelled the growth of
the market.
The need for securitization in India exists in three major areas –
1. Mortgage Backed Securities (MBS),

2. The infrastructure Sector and
3. Other Asset Backed Securities (ABS).
It has been observed that Financial Institutions and Banks have made considerable progress in
financing of projects in the housing and infrastructure sector. It is therefore necessary that
securitisation and other allied systems get developed so that Financial Institutions and Banks can
offload their initial exposure and make room for financing new projects.
With the introduction of financial sector reforms in the early nineties, Financial Institutions and
Banks, particularly the Non-Banking Financial Companies (NBFCs), have entered into the retail
business in a big way, generating large volumes of homogeneous classes of assets such as auto
loans, credit cards receivables, home loans. This has led to attempts being made by a few players to
get into the Asset Backed Securities market as well.
However, still a number of legal, regulatory, psychological and other issues need to be sorted out to
facilitate the growth of securitization. People of India have not yet welcomed this concept. In 2002,
India enacted a law that reads Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interests Act, 2002 (SARFAESI), which will be discussed further in the
project.
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1.6 SPECIAL PURPOSE VEHICLE (SPV)
Special Purpose Vehicles (SPVs) are an integral part of many structured finance transactions,
particularly asset securitizations.
• SPVs can be created through a variety of entities, such as trusts, corporations, limited
partnerships, and limited liability corporations.
• In some cases, it may be desirable to remove assets and their corresponding liabilities from
the balance sheet of the company, and a sale of the assets to an SPV will accomplish this.
• The SPV usually is created so that it is “bankruptcy remote,” which means that the assets
sold to the SPV are not at risk if the SPV or the company whose assets are being securitized
become insolvent.
• A special purpose vehicle (SPV) is created to carry out a specific business purpose or activity.
SPVs are frequently used in structured finance transactions, such as in asset securitizations,
joint ventures, or to isolate certain company assets or operations. SPVs can be created
through a variety of entities, such as trusts, corporations, limited partnerships, and limited
liability corporations.
• SPVs are used by many companies for an array of financing purposes. They are, and continue
to be, an integral part of most structured finance transactions. An explanation of how SPVs
are used in asset securitizations can clarify some of the issues involved.
• The SPV pays for the assets by issuing securities to investors in the capital markets. The
securities can bear interest at fixed or variable rates and are typically highly rated
investment grade securities that can attract a broad base of investors. The interest and
principal due under the securities are paid from the income stream of the assets purchased
by the SPV.
The SPV usually is created in such a way that it is “bankruptcy remote,” which means that
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the assets sold to the SPV are not at risk if either the SPV or the company whose assets are
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being securitized become insolvent. Also, if the SPV has no indebtedness other than the
asset-secured loans or trade payables, the SPV is unlikely to become insolvent as a result of
its own activities.
1.7 ASSET RECONSTRUCTION AND ASSET RECONSTRUCTION COMPANIES (ARCs)
As observed, securitization is a process of transferring risks. However, in the case the asset defaults,
and the risk has not been transferred, the process of asset reconstruction comes into picture.
“Asset Reconstruction Company”, means a company registered with Reserve Bank under section 3 of
SARFAESI Act for the purposes of carrying on the business of asset reconstruction or securitization,
or both. The problem of non-performing loans created due to systematic banking crisis world over
has become acute. Focused measures to help the banking systems to realize its NPAs has resulted
into creation of specialized bodies called Asset Management Companies which in India have been
named Asset Reconstruction
Companies (ARCs). The buying of impaired assets from banks or financial institutions by ARCs will
make their balance sheets cleaner and they will be able to use their time, energy and funds for
development of their business. ARCs may be able to mix up their assets, both good and bad, in such
a manner to make them saleable. The main objective of an asset reconstruction company is to act as
agent for any bank or financial institution for the purpose of recovering their dues from the
borrowers on payment of fees or charges, to act as manager of the borrowers’ asset taken over by
banks, or financial institution, to act as the receiver of properties of any bank or financial institution
and to carry on such ancillary or incidental business with the prior approval of Reserve Bank
wherever necessary. If an ARC carries on any business other than the business of asset
reconstruction or securitization or the business mentioned above, it shall cease to carry on any such
business within one year of doing such other business.
It is the acquisition of any right or interest of any bank or financial institution in loans, advances
granted, debentures, bonds, guarantees or any other credit facility extended by banks for the
purpose of its realization. Such loans, advances, bonds, guarantees and other credit facilities are
together known by a term – ‘Financial Assistance’.
The main intention of acquiring debts / NPAs is to ultimately realize the debts owed by them.
However the process is not a simple one. The ARCs have the following options in this regard:
• Change or takeover of the management of the business of the borrower

• Sale or lease of such business
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• Rescheduling the payment of debts – offering alternative schemes, arrangements for the
payment of the same.
• Enforcing the security interest offered in accordance with the law.
• Taking possession of the assets offered as security.
• Converting a portion of the debt into shares.
The ARC can take over only secured debts which have been classified as a non-performing asset
(NPA). In case debentures / bonds remain unpaid, the beneficiary of the securities is required to give
a notice of 90 days before it qualifies to be taken over.
An asset reconstruction company is a special type of financial institution that buys the debtors of the
bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.
The asset reconstruction companies are registered under the RBI and regulated under the
Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act,
2002 (SARFAESI Act, 2002). The ARCs take over a portion of the debts of the bank that qualify to be
recognized as Non-Performing Assets.
Thus ARCs are engaged in the business of asset reconstruction or securitization or both. All the rights
that were held by the lender (the bank) in respect of the debt would be transferred to the ARC. The
required funds to purchase such debts can be raised from Qualified Buyers.
Qualified Buyers include Financial Institutions, Insurance companies, Banks, State Financial
Corporations, State Industrial Development Corporations, trustee or ARCs registered under
SARFAESI and Asset Management Companies registered under SEBI that invest on behalf of mutual
funds, pension funds, FIIs, etc. The Qualified Buyers (QBs) are the only persons from whom the ARC
can raise funds.
The working of the ARC can be summarized by the following diagram:
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The diagram given above can be elaborated as:
1) ARC will take over the NPA's from banks for fixed cost which is less than the NPA amount.
2) NPA is transferred to ARC along with any security which is pledged while taking loan.
3) Now ARC will issue security receipts for fixed interest rate and will raise money. (This raised
money can be invested in qualified institutional buyer)
"Security Receipt" means a receipt or other security, issued by a securitization company or
reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the
purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial
asset involved in securitization;
"Qualified Institutional Buyer" means a financial institution, insurance company, bank, state financial
corporation, state industrial development corporation, trustee or securitization company or
reconstruction company which has been granted a certificate of registration under sub-section (4) of
section 3 or any asset management company making investment on behalf of mutual fund or
pension fund or a foreign institutional investor registered under the Securities and Exchange Board
of India Act, 1992 (15 of 1992) or regulations made thereunder, or any other body corporate as may
be specified by the Board.
4) Now ARC will start legal procedure to sell the pledged security in the market. Which will take
many years depending on the complications involved. Meanwhile money raised by issuing
security receipts are used for meeting expenses of the company, ARC has to pay timely interest
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on security receipts to the buyers (qualified institutional buyers)

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5) After selling the asset by clearing all litigations, ARC will redeem (take back) the security receipts
which are issued earlier for agreed price.
Profit of ARC = Sale Price of Security + Interest on Investment - Purchase Cost of NPA - Interest on
Security Receipts - Expenses.
In accordance with the SARFAESI Act and Reserve Bank of India, guidelines:
• The Asset Reconstruction Company can acquire the financial assets of non-performing asset
companies on their own balance sheet or through the trust structure by floatation of Schemes
for raising resources through issuance of Security receipts (SRs) to Qualified Institutional
buyers.
• The Asset Reconstruction Companies may issue debenture or bonds or any other security in
the nature of the debenture towards acquisition of financial assets of Bank/ FIs.
• Empowering Asset Reconstruction Companies to raise funds by issue of Security receipt (SRs)
to Qualified Institution buyers.
• Facilitating ‘Asset Reconstruction’ by exercising powers of enforcement of securities or change

of management or other powers which are proposed to be conferred to the Bank/ FIs.
• Empowering bank / FIs to take possession of security given for financial assistance and sell or
lease the same or take over the management in the event of default.
• The country’s banking system, with a huge pile of stressed assets, has provided a huge
business opportunity for Asset Reconstruction Companies (ARCs) in India.
Some conclusions:
➢ The primary reasons for spurt in stressed assets include aggressive lending practices, wilful
default, loan frauds, corruption in some cases, and economic slowdown.
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➢ Private Banks have been the most aggressive on asset sales. Public sector banks lagged in
asset sales, mainly owing to large haircuts and various management issues.
➢ During 2019-20, the acquisition cost of ARCs as a proportion to the book value of assets
increased, indicating better realizations by banks on sale of stressed assets.
➢ On the positive side, some PSBs have strengthened in-house expertise for recovery of non-
performing assets, spurred by the need for faster resolution.
How does the transaction happen for a sale to ARC?
• Banks sell assets either via an auction or though bilateral arrangements. Typically, PSBs sell via
auction while private banks usually prefer the bilateral transaction route. Transactions can be in
the form of only cash or cash and security receipts.
• Earlier, banks viewed ARCs as the last resort to recover dues and most of the written-off accounts
were presented to them. However, this has changed and banks now view ARCs as partners in the
recovery process.
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• In an auction process, initial details about the asset/pool of assets (including the reserve price)
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are sent to ARCs. Once the ARCs confirm their initial interest in the transaction, banks display
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these assets (paper work, verifying the underlying assets, etc.)—which are accessible for 15 days
—to the interested ARCs. The interested ARCs then put up a bid for the assets (consideration
details, cash/SR proportion, etc.). The concerned bank/consortium then decides the best bid and
accordingly the assets are sold.
• The bank then transfers the assets to a trust and receives cash and / SR consideration based on
the deal structure. For instance, in a 15/85 structure, the trust issues 15% SRs to the ARC in cash
(which in turn will be paid to the bank) and the balance in SRs; for e.g. in the gross loan value of
INR100 sold to ARC at INR60, bank will receive INR9 (15% of INR60, which was funded by ARC in
the trust) in cash and INR51 (balance) in the form of SRs.
• Assuming that recovery happens in the fifth year, the trust expenses and management fees are
paid first and then SRs are redeemed. In case of excess recovery, usually ~20% of the upside is
shared by the ARC (note: upside arrangement varies from transaction to transaction).
Benefits of Asset Reconstruction:
• Asset Reconstruction Companies acquire and aggregate the Non-Performing Assets from various
lenders in order to quicken the process of corporate restructuring.
• The major objective is to acquire and rapidly liquidate Non-Performing Assets.
• Clean books of accounts by reducing Non-Performing Assets.
• Less to deals with Non Performing clients.
• Special legislative powers to fewer Asset Reconstruction Companies rather than to each bank.
• The following article dated 5th September, 2019 of Financial Express showcases the importance of
asset reconstruction:
“In order to clean the balance sheet and reduce the burden of provisioning, Indian banks have
been rigorously selling off default loans and other bad assets to the asset reconstruction
companies (ARCs). Banks have sold stressed assets worth Rs. 3.79 lakh crore to the ARCs till 2018-
19, says the RBI report. Heavy provisions for stressed assets have been eating away the operating
profits of the banks. The prudential framework enables the sale of stressed standard assets,
which are in default, as part of the resolution process. Sale of such assets has grown by over 18
per cent since 2015-16.
The asset reconstruction companies buy stressed assets from banks and other financial
institutions to help the latter to clean up their balance sheets. Meanwhile, the ARCs also have
around Rs 1 lakh crore security receipts outstanding with banks. Edelweiss Asset Reconstruction
Company Ltd has the highest outstanding security receipts of Rs 46.42 thousand crore, followed
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by JM Financial Asset Reconstruction Company Ltd and Asset Reconstruction Company (India) Ltd
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having outstanding security receipts between Rs 1015 thousand crore.
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The stressed assets of the Indian banks have increased after more bad assets are realized over
time. The banks have been struggling for liquidity with non-performing assets (NPAs) clocking at
around Rs 9 lakh crore. Amid this scenario, a task force, chaired by Canara bank chairman T N
Manoharan, has recommended making a secondary market for corporate loans which is aimed to
provide banks with the principal benefits such as capital optimization, liquidity management and
risk management.
The RBI report also suggests that the result would, in turn, lead to additional credit creation at
the economy-wide level. The task force believes that the development of a secondary loan
market will enable enhanced return opportunities for smaller banks, NBFCs, insurance
companies, pension funds and hedge funds.”
Current Scenario of Asset Reconstruction Companies:
The following article dated December 22 nd, 2020 by Shritama Bose of Financial Express give insights
about the current situation of the Asset Reconstruction companies is India.
“The distressed asset market, which had gone into a deep freeze after the outbreak of Covid19, has
started to recover in Q3. Large banks have lined up a string of legacy non-performing assets (NPAs)
for sale to asset reconstruction companies (ARCs). The deterioration of household incomes has also
led banks to consider the ARC route for retail assets and the activity in this segment is now 30-40%
higher than pre-pandemic levels.
On Monday, State Bank of India (SBI) and ICICI Bank put out notices for the sale of their exposures
to Action Ispat & Power (Rs 540 crore) and Gammon India, respectively. A consortium of lenders
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to Jindal India Thermal Power (JITPL), led by Punjab National Bank (PNB), has also sought bids for
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the project. Earlier, Bank of Baroda (BoB), Axis Bank and IDBI Bank have also run processes for
NPA sales, according to sources.
Some of the sales happening now would have been closed in the initial months of FY21, had the
pandemic not halted due-diligence processes. For instance, a foreign bank with a significant interest
in the stressed asset space had earlier bid for three power projects — Coastal Energen, GVK
Goindwal Sahib and JITPL. After the pandemic outbreak, it withdrew the bids.
In fact, latency is one of the key factors driving the series of deals right now. Aswini Sahoo, executive
vice-president and chief investment officer at Asset Reconstruction Company
(India) (ARCIL), said, “There are deals that should have happened in the early part of this year which
have now got bundled together in the last few months. We will see some more large names in the
power sector, which could get closed in the next quarter.” The deal closures in the next quarter can
be put into two buckets, Sahoo added. One bucket is that of the corporate cases and the other is
that of small and medium enterprises (SME) and retail. Deals up to Rs 5,000 crore could be seen in
the next quarter, with Rs. 2,000 crore in the retail and SME segment and the rest in the corporate
segment.
Another feature of some of the asset sales happening now is the presence of a promoter willing to
settle the account. The JITPL auction is being held under a Swiss challenge process after the
consortium received a binding proposal of settlement from the company. Action Ispat is understood
to have attracted bids from an ARC and there too, a Swiss challenge is being run.
A top executive with another ARC said that bigger deals are likely to pick up from here on and there
are mainly three categories of deals being made. “The deals by stressed asset funds through ARCs
had also frozen up because investors were not able to take a view amid the pandemic. The second
type is where you have a small amount which is being settled by the promoter through the ARC
route,” he said, adding, “The third type of deal, which we expect will now pick up, is in the retail
space.” These portfolios being offered by banks range between `300-2,000 crore and there is a mix
of secured and unsecured loans.
The end of the moratorium and the restructuring window could also open up space for NPA sales in
2021, said Sanjay Tibrewala, chief executive officer, Phoenix ARC. He observed that earlier, retail
sales were more sporadic and in the last few months, there has been a 30-40% increase in action on
retail sales by banks. “We could see a lot more deals happening next year because the moratorium
has come to an end and there are not too many cases of restructuring. So there will be only two
options — either these accounts will be sold to ARCs or banks will start recovery actions themselves,
whether through IBC or SARFAESI.” While recovery action can be carried out in parallel, asset sales
could be a viable option for banks, he added.
Asset pricing, too, could improve in 2021, according to some executives. Jyoti Prakash
Gadia, managing director, Resurgent India, said, “In the next year, the market is expected to
stabilise, which will help in arriving at a proper pricing for the assets.” This, he added, will lead to
more transactions happening, particularly in relation to those projects which are generating
revenues and are indicating reasonable viability, including those in the infrastructure sector.
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Formation of Asset Reconstruction Companies:
Capital needs for ARCs:
As per amendment made in 2016in SARFAESI Act, an ARC should have a minimum net owned fund of
₹ 2 crore. The RBI plans to raise this amount to ₹ 100 crore by the end of March 2019. Similarly, the
ARCs have to maintain a capital adequacy ratio of 15% of its risk weighted assets.
Conditions for Registration of ARCs:
A Company shall fulfil the following conditions to be eligible to apply for registration as an Asset
Reconstruction Company with the RBI:
➲ No losses should be incurred in any of the three preceding financial years
➲ For the realisation of the financial assets acquired there should be an adequate arrangement, for
the purpose of securitisation or asset reconstruction.
➲ ARC shall be able to pay periodical returns and redeem on respective due dates on the
investments made in the company by the qualified buyers or other persons;
➲ Directors of such company must have adequate experience in matters related to finance, financial
management, securitisation and reconstruction management;
➲ No directors of such a company should be convicted of any offence involving moral turpitude;
➲ Sponsor of such company should be a fit and proper person in accordance with the criteria as may
be specified in the guidelines issued by the Reserve Bank for such persons;
➲ Company has complied with or is prepared and capable to comply with prudential norms
specified by the Reserve Bank;
➲ The Reserve Bank of India has issued specified guidelines and conditions which a company has to
comply with in order to get registered as an ARC.
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Procedure for Registration of ARCs:

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STEP 1: Prepare the application for registration of ARC in such form and manner as may be specified
under the applicable provisions.
STEP 2: Preparation of the requisite drafts and attachments to be filed along with the application for
registration of ARC.
STEP 3: In order to grant the certificate of registration to an Asset Reconstruction Company the
Reserve Bank India may conduct an inspection of the records, assets and book of Reconstruction
Company to ensure that the conditions for registration are fulfilled.
STEP 4: After being satisfied that the conditions specified are fulfilled, The Reserve Bank of India may
grant the certificate of registration to the asset reconstruction company to commence or carry on the
business of asset reconstruction or securitisation and may impose such conditions as it deems fit.
Documents required for Registration of ARCs:
➲ Certified copy of latest MOA & AOA of the company.
➲ Certified copy of the certificate of incorporation.
➲ Board resolution stating that the company has not accepted any deposit.
➲ Detailed information about the sponsor, their profiles, holdings etc.
➲ Detailed information about the management, their profiles, their duties, holdings etc.
➲ A certified copy of auditor certificate.
➲ Audited Balance Sheet of the last 3 years along with director and auditor report.
➲ Statement of owned funds.
➲ Information about related party transactions.

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Resolution strategies which ARCs can follow while restructuring the assets
The SARFAESI Act stipulates various measures for the reconstruction of assets that can be taken by
ARCs. Including:
a. To take over or change the management of the borrower's business;
b. Sale or lease of borrower’s company
c. To join settlements and
d. Restructuring or debt rescheduling.
e. Strengthening security interests
f. The last step of 'security interest enforcement' means ARCs will take possession/sell/lease the
sponsored asset such as ground, building etc.
Asset Reconstruction Companies in India:
1. Reliance Asset Reconstruction Co Ltd
Reliance Asset Reconstruction Company Limited (Reliance ARC) is a topmost asset reconstruction
company. Reliance ARC is sponsored by the Reliance Group. Other shareholders in Reliance ARC
include Corporation Bank, Indian Bank, General Insurance Corporation of India, Dacecroft and Blue
Ridge. Reliance ARC has adopted a buyer driven model for acquisition of Non-Performing Assets on
the individual as well as portfolio cases in cash.
2. JM Financial Asset Reconstruction Co Pvt Ltd
JM Financial Asset Reconstruction Company Limited ranks among the topmost ARCs in
India. It is a securitization and reconstruction company, registered with the Reserve Bank of
India (RBI), under the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002. JM ARC is in the business of acquiring non-performing
financial assets from banks and financial institutions and resolving them to satisfaction of all parties.
3. Edelweiss Asset Reconstruction Co Ltd

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Edelweiss Asset Reconstruction Company (ARC) comes in the list of topmost ARCs of India. This
company is sponsored by Edelweiss, one of the leading and diversified financial services
conglomerate. Edelweiss ARC acquires Non-Performing Assets from banks and financial institutions
and resolves them through appropriate resolution strategies that find mention in the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act 2002.
4. Indiabulls Asset Reconstruction Pvt Ltd
Indiabulls Asset Reconstruction Company (IARCL) is sponsored by Indiabulls Ventures

Limited (IVL) - a leading Non-Banking Financial Company in India. IARCL holds the Certificate of
Registration by the Reserve Bank of India to act as a securitization and asset reconstruction
company. It is playing a leading role since inception in 2017. Indiabulls ARC focuses on stressed
assets and Non-Performing Assets in the real estate sector of India.
5. International Asset Reconstruction Co Pvt Ltd
India Asset Reconstruction Co Pvt Ltd is another top ARC in this country. IARC is backed by some of
the biggest players in the international and domestic financial sector, says the company website.
Stakes in IARC are held by large Indian and foreign companies. Majority shareholding is by
Blackstone India and ARC SG FDI Holding (N.Q) Co. Pte Ltd of Singapore. Other stakeholders include
topmost Private Bank HDFC Bank and Tata Capital Financial Services Ltd. Sponsor shareholders are
ICICI Bank and private investors.
6. IndiaRF
IndiaRF is a joint venture between Piramal Enterprises Ltd and Bain Capital Credit. The company’s
objective is to invest capital in the form of debt and equity in distressed assets and special situations
in India, creating positive turnarounds with benefits for all stakeholders. Piramal Group is a
diversified business conglomerate that operates in more than 30 countries and has a strong
presence in over 100 markets worldwide. Bain Capital Credit is an American company. It is a leading
global credit specialist with nearly US$ 37 billion in Assets under Management.
7. CFM Asset Reconstruction Pvt Ltd
CFM Asset Reconstruction Pvt Ltd is an ARC-sponsored by Chartered Finance Management Limited
(CFML). It is the first ARC in India to function from Gujarat CFM ARC businesses includes acquiring
assets across India. However, the company focuses on asset reconstruction of companies in
Maharashtra, Gujarat, Rajasthan and Madhya since they contribute over 30 percent of India’s Gross
Domestic Product. CFM looks at asset reconstruction for small and medium enterprises. It also takes
Non-Performing Assets from smaller banks and cooperative banks in Maharashtra.
8. India SME Asset Reconstruction Co Ltd

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India SME Asset Reconstruction Co Ltd is jointly owned by Small Industries Development Bank of
India (SIDBI), SIDBI Venture Capital Ltd and two state-owned lenders-United Bank of India and Bank
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of Baroda. Its focus is to provide asset reconstruction services to banks that have Non-Performing
Assets (NPAs) in micro, small and medium enterprises in the country. ISRAC uses innovative methods
under the SARFAESI Act 2002 to resolve NPAs and provide asset restructuring to MSMEs.
9. ARCIL
Asset Reconstruction Company (India) Limited (Arcil) is India’s first and top asset reconstruction
companies in the country. It was established in 2002. The company has resolved over Rs.780 billion
worth of Non-Performing Assets (NPAs) held by Indian banks and other Non- Banking Financial
companies. Arcil is sponsored by the Leading Nationalized Banks of India, State Bank of India (SBI),
IDBI Bank, ICICI Bank and Punjab National Bank
(PNB). Arcil is based in Mumbai. This company is an associate member of the Indian Banks
Association. Arcil ranks among the first ARCs to capitalize upon rising NPAs in retail and SME
segments. Resolution of retail assets is done through its subsidiary, Arms, that operates at 17
locations across the country.
10. Pegasus Asset Reconstruction Pvt Ltd
Pegasus Asset Reconstruction Pvt Ltd is a topmost ARC in India from the private sector. The company
has acquired dues of over Rs.75 billion of distressed loans and Non-Performing Assets (NPAs) from
more than 50 Banks and financial institutions during the financial year 2017-2018.The company has
developed strong relationships with some of the leading national and international NPA investors
over the past 12 years, says its website.
1.8 CREDIT RATING AGENCIES (CRAs)
Credit Rating agencies are an integral part of financial functions today. They are used by all the
different parties to a transaction. This can be better understood by an example: Suppose, Mr. Anand
wants to deposit money as investment in a bank. He would compare the various interest rates
offered by banks to select the one that best suits his requirements. Further, he would check the
ratings of the banks given by a trustworthy CRA in order to determine the credibility of the bank
chosen by him. This money invested then becomes available for loans which are given out by banks.
Suppose Mr. Bal approaches the bank with a need of a deferred loan. The bank will then do a
credibility check on him, take collaterals, before giving out the loan. Now, the bank has two options,
either they can wait out till the loan expires or bring an SPV into the picture to securitize the loan. In
the latter case, the SPV will check the credibility of the bank and only then enter into a transaction
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with them. In the former case, in the case of default, an asset reconstruction company might be
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brought into the picture to regain the losses. The asset reconstruction company too, will check the
credibility of the bank, and the bank will also choose the best ARC on the basis of ratings.
To summarize, no financial institution wants to make losses and Credit Rating Agencies make the
work easier for them by researching about the activities of various financial institutions and
intermediaries and rate them on a particular scale.
A Credit Rating Agency is an independent company that evaluates the financial condition of issuers
of debt instruments and then assigns a rating that reflects its assessment of the issuer's ability to
make the debt payments. Potential investors, customers, employees and business partners rely
upon the data and objective analysis of credit rating agencies in determining the overall strength and
stability of a company.
Rating agencies assess the credit risk of specific debt securities and the borrowing entities. In the
bond market, a rating agency provides an independent evaluation of the creditworthiness of debt
securities issued by governments and corporations. Large bond issuers receive ratings from one or
two of the big three rating agencies. In the United States, the agencies are held responsible for
losses resulting from inaccurate and false ratings.
The ratings are used in structured financial transactions such as asset-backed securities, mortgage-
backed securities, and collateralized debt obligations. Rating agencies focus on the type of pool
underlying the security and the proposed capital structure to rate structured financial products. The
issuers of the structured products pay rating agencies to not only rate them, but also to advise them
on how to structure the tranches.
Rating agencies also give ratings to sovereign borrowers, who are the largest borrowers in most
financial markets. Sovereign borrowers include national governments, state governments,
municipalities, and other sovereign-supported institutions. The sovereign ratings given by a rating
agency shows a sovereign’s ability to repay its debt.
The ratings help governments from emerging and developing countries to issue bonds to domestic
and international investors. Governments sell bonds to obtain financing from other governments
and Bretton Woods institutions such as the World Bank and the International Monetary Fund.
As of now, there are 6 Credit Rating Agencies under SEBI, namely- CRISIL, CARE, ICRA, SMERA,
ONICRA, FITCH India.
Benefits of Rating Agencies
➢ At the consumer level, the agency’s ratings are used by banks to determine the risk premium
to be charged on loans and bonds. A poor credit rating shows that the loan has a higher risk
premium, and this prompts an increase in the interest charged to individuals and entities with
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a low credit rating. A good credit rating allows borrowers to easily borrow money from the
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➢ At the corporate level, companies planning to issue a security must find a rating agency to rate
their debt. Rating agencies such as Moody’s, Standards and Poor’s, and Fitch perform the
rating service for a fee. Investors rely on the ratings to decide on whether to buy or not to buy
a company’s securities.
Although investors can also rely on the ratings given by financial intermediaries and
underwriters, ratings provided by international agencies are considered more reliable and
accurate since they can access lots of information that is not publicly available.
➢ At the country level, investors rely on the ratings given by the credit rating agencies to make
investment decisions. Many countries sell their securities in the international market, and a
good credit rating can help them access high-value investors. A favorable rating may also
attract other forms of investments like foreign direct investments to a country.
➢ In addition, a low credit rating or relegation of a country from a high rating to a low rating can
discourage investors from purchasing the bonds or making direct investments in the country.
For example, the downgrading of Greece, Portugal, and Ireland by S&P in 2010 worsened the
European sovereign debt crisis.
➢ Credit ratings also help in the development of financial markets. Rating agencies provide risk
measures for various entities, and this allows investors to understand the credit risk of various
borrowers. Institutions and government entities can access credit facilities without having to
go through lengthy evaluations by each lender. The ratings provided by rating agencies also
serve as a benchmark for financial market regulations. Some laws now require certain public
institutions to hold investment grade bonds, which have a rating of BBB or higher.
1.1 SARFAESI ACT
While the importance of the securitization and asset reconstruction process has been now
identified, there was a need for an Act to protect the interest of secured creditors.
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Statement of Object and Reasons of SARFAESI Act

It is necessary at the outset, to reiterate the statement of objects and reasons for the SARFAESI Act,
which reads as under:
The financial sector has been one of the key drivers in India’s efforts to achieve success in rapidly
developing its economy. While the banking industry in India is progressively complying with the
international prudential norms and accounting practices, there are certain areas in which the
banking and financial sector do not have a level playing field as compared to other participants in
the financial markets in the world.
There is no legal provision for facilitating securitisation of financial assets of banks and financial
institutions. Further, unlike international banks, the banks and financial institutions in India do not
have power to take possession of securities and sell them. Our existing legal framework relating to
commercial transactions has not kept pace with the changing commercial practices and financial
sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of
non-performing assets of banks and financial institutions.
Narasimham Committee I and II and Andhyarujina Committee constituted by the Central

Government for the purpose of examining banking sector reforms have considered the need for
changes in the level system in respect of these areas. These Committees, inter alia, have suggested
enactment of a new legislation for securitisation and empowering banks and financial institutions to
take possession of the securities and sell them without the intervention of the court.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisation and
reconstruction of financial assets and enforcement of security interest and for matters connected
therewith or incidental thereto. The provisions of the Ordinance of liquidity, asset liability
mismatches and improves recovery by exercising powers to take possession of securities, sell them
and reduce non-performing assets by adopting measures for recovery or reconstruction.”
The main purpose of the SARFAESI Act is to enable and empower the secured creditors to take
possession of their securities and to deal with them without the intervention of the court and also
alternatively to authorise any securitisation or reconstruction company to acquire financial assets of
any bank or financial institution.
The SARFAESI Act, 2002 has empowered the Banks and Financial Institutions with vast power to
enforce the securities charged to them. The Banks can now issue notices to the defaulters to pay up
the dues and if they fail to do so within 60 days of the date of the notice, the banks can take over the
possession of assets like factory, land and building, plant and machinery etc. charged to them
including the right to transfer by way of lease, assignment or sale and realize the secured assets. In
case the borrower refuses peaceful handing over of the secured assets, the bank can also file an
application before the relevant Magistrate for taking possession of assets. The Banks can also take
over the management of business of the borrower. The bank in addition can appoint any person to
manage the secured assets the possession of which has been taken over by the bank. Banks can
package and sell loans via “Securitisation” and the same can be traded in the market like bonds and
shares.
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Acquisition of Rights or Interest in Financial Assets

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(1) Notwithstanding anything contained in any agreement or any other law for the time being in
force, any asset reconstruction company may acquire financial assets of any bank or financial
institution –
(a) by issuing a debenture or bond or any other security in the nature of debenture, for
consideration agreed upon between such company and the bank or financial institution,
incorporating therein such terms and conditions as may be agreed upon between them; or
(b) by entering into an agreement with such bank or financial institution for the transfer of such
financial assets to such company on such terms and conditions as may be agreed upon between
them. Any document executed by any bank or financial institution in favour of the asset
reconstruction company acquiring financial assets for the purposes of asset reconstruction or
securitisation shall be exempted from stamp duty. Provided that the provisions of this sub-section
shall not apply where the acquisition of the financial assets by the asset reconstruction company is
for the purposes other than asset reconstruction or securitisation.
(2) If the bank or financial institution is a lender in relation to any financial assets acquired by the
asset reconstruction company, such asset reconstruction company shall, on such acquisition, be
deemed to be the lender and all the rights of such bank or financial institution shall vest in such
company in relation to such financial assets. If the bank or financial institution is holding any right,
title or interest upon any tangible asset or intangible asset to secure payment of any unpaid portion
of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable
the borrower to acquire the tangible asset or assignment or licence of intangible asset, such right,
title or interest shall vest in the asset reconstruction company on acquisition of such assets.
(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers
of attorney, grants of legal representation, permissions, approvals, consents or noobjections under
any law or otherwise and other instruments of whatever nature which relate to the said financial
asset and which are subsisting or having effect immediately before the acquisition of financial asset
and to which the concerned bank or financial institution is a party or which are in favour of such
bank or financial institution shall, after the acquisition of the financial assets, be of as full force and
effect against or in favour of the asset reconstruction company, as the case may be, and may be
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enforced or acted upon as fully and effectually as if, in the place of the said bank or financial
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institution, asset reconstruction company, as the case may be, had been a party thereto or as if they
had been issued in favour of asset reconstruction company, as the case may be.
(4) If, on the date of acquisition of financial asset, any suit, appeal or other proceeding of whatever
nature relating to the said financial asset is pending by or against the bank or financial institution,
the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of
the acquisition of financial asset by the asset reconstruction company, as the case may be, but the
suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the asset
reconstruction company, as the case may be.
(5) On acquisition of financial assets, the asset reconstruction company, may with the consent of
the originator, file an application before the Debts Recovery Tribunal or the Appellate Tribunal or
any court or other Authority for the purpose of substitution of its name in any pending suit, appeal
or other proceedings and on receipt of such application, such Debts Recovery Tribunal or the
Appellate Tribunal or court or Authority shall pass orders for the substitution of the asset
reconstruction company in such pending suit, appeal or other proceedings.
Measures for Asset Reconstruction
Section 9 deals with the measures for Asset Reconstruction.
(1) Without prejudice to the provisions contained in any other law for the time being in force, an
asset reconstruction company may, for the purposes of asset reconstruction, provide for any one or
more of the following measures, namely: –
(a) the proper management of the business of the borrower, by change in, or takeover of, the
management of the business of the borrower;
(b) the sale or lease of a part or whole of the business of the borrower;
(c) rescheduling of payment of debts payable by the borrower;
(d) enforcement of security interest in accordance with the provisions of this Act;
(e) settlement of dues payable by the borrower;

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(f) taking possession of secured assets in accordance with the provisions of this Act; (g) conversion
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of any portion of debt into shares of a borrower company:
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Provided that conversion of any part of debt into shares of a borrower company shall be deemed
always to have been valid, as if the provisions of this clause were in force at all material times.
(2) The Reserve Bank shall determine the policy and issue necessary directions including the
direction for regulation of management of the business of the borrower and fees to be charged.
(3) The asset reconstruction company shall take measures in accordance with policies and directions
of the Reserve Bank.
Other functions of Asset Reconstruction Company
Section 10 deals with the other functions of asset reconstruction Company.
(1) Any asset reconstruction company registered under may –
(a) act as an agent for any bank or financial institution for the purpose of recovering their dues from
the borrower on payment of such fee or charges as may be mutually agreed upon between the
parties;
(b) act as a manager referred to in clause (c) of sub-section (4) of section 13 on such fee as may be
mutually agreed upon between the parties;
(c) act as receiver if appointed by any court or tribunal: Provided that no asset reconstruction
company shall act as a manager if acting as such gives rise to any pecuniary liability.
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CHAPTER 2 REVIEW OF LITERATURE
1. V.K. Sudhakar (1998): Bank of Baroda had submitted dissertation on the subject of “Policies and
Perspectives of NPA Reduction in Public Sector Banks” to The Indian Banks Association, Mumbai,
1997-98.This study attempted to examine the issue relating to policies and practices prevailing in
the area of NPA reduction. This study also indicated that though the top management of Public
Sector Banks (PSBs) were enlightened and concerned about the dimensions of NPAs in their bank,
the same is not shared by the staff at operational level. NPA reduction as organizational goals not
translated into action in true spirit. The methods and system followed by most PSBs can at best be
categories as conventional and crude.
2. Kishor Bhoir (2000): A study was conducted on deals with the various aspects of NPA in public
sector banks. Study highlighted the main reason which turns the performing advances to non
performing ones. The author recommends remedial measures taken by the public sector banks and
compromise settlement as one of the solutions to the problem faced by the public sector banks.
The author analysed internal and external Industrial sickness. According to the researchers NPA has
a multiple effects on the total working of Indian banking system and the banks looses further
opportunity of investment. The study also emphasized different categories of borrowers.
3. Pankaj B.Trivedi (2000): brings about the causes and factors responsible for lower profitability
and impact of inflation and changes in price level. It very clearly implies that there is correlation
between efficiency and profitability. The author has made an attempt to suggest business strategies
that PSBs will have to adopt to come out of adverse effect. The research explains the changes that
are necessary in the present set up of PSBs and their business policies to raise their operational
efficiency and profitability. The author correlates two factors namely efficiency and profitability.
The author suggested that week bank should constantly monitored by Financial Restructuring
Authority and RBI. Such reform will enable to increase the profitability of Public Sector Banks.
4. Balasubramaniam C.S. (2001): Highlighted the level of NPAs is high with all banks currently and
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the banks would be expected to bring down their NPA. This can be achieved by good credit
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appraisal procedures, effective internal control systems along with their efforts to improve asset
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quality in their balance sheets. The different aspects of literature related to Non-Performing Assets
of researchers over the years have been collected and used for this study, but there is a huge time
gap existing for the comprehensive research on quality aspects of Non-Performing Assets. Most of
the research and studies are being done on causes, impact and management aspects of NPAs
5. Rajesh Kumar (2016): Explores the legal provisions in SARFAESI Act for ARCs and its functions
specified by the act. The study also lists out the various ARCs in India. The author calls for more
functional changes taking the risk factors faced by the ARCs in the market.
6. Naidu and Nair (2003): Analysed the technical efficiency of commercial banks in pre reform as
well as post reform period. They concluded that technical efficiency level among bank groups has
declined in the past reform period indicating the enhanced competition among banks.
7. Gopalakrishnan, T.V. (2004): Projected annual growth rate of NPAs as percentage of gross
advances of 5 per cent. The NPA as percentage of gross advances would be 9.9 percent in March
2012 as against 12.4 per cent in March 2001. It was recognized that in this period the gross
advances would certainly be increasing in absolute terms considerably (almost double) making the
need for reduction in NPAs even more significance.
8. Rajesh Chakrabharti and Gaurav Chawla (2004): Authors suggested increasingly popular
methodology of Data Envelopment Analysis to evaluate the relative efficiency of Indian Banks in
comparison with Foreign Banks. The result of the study suggests on a value basis, the foreign banks,
as a group, have been considerably more efficient than all other bank groups, followed by the
Indian Private Banks. From the quantitative performance aspect private banks supersedes the other
bank group. The study emitted their views on regulatory mechanism is a cause for poor
performance aspects like poor quality of goods is a cause of NPA and emphasizing the level of
profitability and in performance.
9. Sanjeev Dhawan (2016): Highlights the impact of NPA in the Indian Banking System and the
various modes available with the bank to recover them. The study concludes saying that the
government and the RBI is taking necessary steps to encourage more ARCs.
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10. Uday S Bose (2005): The growing NPA and its implications on the banking system need no
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emphasis. While there have been several schemes in the past to facilitate the recovery from NPAs,
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the success of such efforts in terms of NPA reduction has been far from satisfactory. SARFAESI Act
greatly helps bank in their effort to reduce recovers money from NPAs. Attempts to provide a
glimpse of the Act against this backdrop. The author has cited certain limitation on the Act and also
put certain light of the Supreme Court landmark Judgement in ordinance 2004.
11. Abhinna Mohan Nanda (2006): Fraudster availed finance by creating mortgages on fictitious title
deed to the property or properties and also mortgage fake title deeds to the non-existent property
since no registration of mortgage is done in bank’s favour in the office of Sub registrar. The author
suggested in his articles a harmonious blend of equitable and registered mortgage with a very
nominal additional cost with all attendant benefits of both. Bank’s charge under the suggested
method will be reflected in the Encumbrance Certificate serving as due notice to the public at large
and other banks/ financial institution which will help in preventing fraud and supplementary recitals
to be recorded at the branch of the bank.
12. Dr.Sukhdev Singh (2006): The author conducted the study on the performance of banks against
benchmark and ratio analyses. He suggested the alternative measures for improvement in the
banking industry. The study evaluated the performance by implementing statistical tools ratio
analysis. The analysis of the NPA observed the decline in post liberalization period .The study
insisted that the ideal level benchmark is less than 1 percent, the segments curtail the growth rate
of NPAs and followed certain policy like counterparts who had not only arrested the NPA but
reduced them.
13. S.Khasnobis (2006): A large part of the banking sector growth, has been on the back of financing
consumptions, as reflected in the growth of retail banking. Growth driver would involve financing
the emerging Small and Medium Enterprise sector of the economy.
The evaluation of the NPA has been blended by the author by the asset companies which
specialise in certain segment of the financial sector. The author highlighted preliberalization
and post liberalization effect through these articles.
14. Report of the Fourth International Conference (2006): The study deals with the NPAs in
commercial banks of Ethiopia. Banks play a very important role in economic development of every
nation. Banks are the main stimulus of the economic progress of a country. Essentially deals with
the provision for doubtful debts are one among the most important cause for reducing the
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profitability of the bank. And also highlights NPA is a double-edged weapon, which affects bank
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profitability due to interest income not being recognized on NPA accounts and loan loss previously
to be created from profit earned.
15. Tondon (2006): in his article, studied the impact of globalization on Indian banking. The
management of financial sector has been oriented towards gradual balancing between efficiency
and stability and the changing shares of public and private ownership. The development of financial
market has been by and large healthy. The author highlighted the challenges in the banking sector
and the roadmap ahead. The banking sector in India is getting redefined - it is faced with challenges
and opportunities, especially beyond 2009 when they would be fully exposed to competition. The
major challenges to which Indian banking sector are bracing themselves to be ready through
adoption of newer technology, strengthening their capital base to become Basel-II compliant,
reducing their NPA, bringing down operating costs, enhancing corporate governance, undertaking
organization restructuring, and sharpening their customer-centric initiatives... The author also
made comparisons of Indian banking system with China and rest of the world. He compared the
Bank of China with their Indian counterpart and rest of the world in terms of Size, Return on Assets
and Non-Performing Assets (NPAs). The author believed that the structure of Indian banking system
is expected to undergo a transformation, led by consolidation, convergence and technology. Indian
banking sector is moving from large number of small banks to small number of large banks and
committed toward enhancing banking competence and efficiency and getting integrated with global
banking.
16. Dr Milind (2007): The objective of the paper is to measure the productive efficiency of banks in
developing country. The measurement of efficiency in this paper is done using Data Envelopment
Analysis. The study shows the mean efficiency score of Indian banks compares well with the world
mean efficiency score and the efficiency of private sector commercial banks as a group is,
paradoxically lower than that of public sector banks and foreign banks in India and brings an insight
to the existing policy of reducing non-performing assets.
17. Henry James (2007): deals with the problems on rising volume of overdue of the loan of the
banking system both credit cooperative credit societies and of commercial banks, but also other
regulating agencies like RBI,NABARD and other policy makers at national level. It also gave a
solution that high overdue payment leads to the bank in inconvenient position at the time of
availing refinance facilities from the external sources. The author in his research has preferred
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drought prone areas since the trend recovery of loan has been worsening. The demand for the
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recovery was higher than actual recovery.
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18. Jain Vibha (2007): examined that the problem of NPA is a serious concern for the banking Industry
of India. The research has been conducted to understand the movement of NPA during 1997-2003.
The root cause of the problem is inadequate credit appraisal mechanism. Early recognition may
reduce the problem of bad loan up to certain extent, alertness of the bank in invariably related with
the profitability.
19. Sankar Thappa (2007): has dealt with the Securitization process at the time of lending and
borrowing money from the banks and financial institution. Globalization has resulted into rapid
transformation of the financial system all over the world. As a result capital market, money market
and debt market are getting widened and deepened. The study has involved the process of
securitization and five stages involved in securitization of the assets.
The author has also revealed the future for securitization in India.
20. Arora and Kaur (2008): made an attempt to review the performance of banking sector in India
during the post-reforms period. Banking sector being an integral part of Indian financial system has
undergone dramatic changes reflecting the ongoing economic and financial sector reforms. The
main objective of these reforms has been to strengthen the banking system amongst international
best practices and standards, which will have lasting effect on the entire fabric of Indian financial
system. These financial sector reforms have stimulated greater competition convergence and
consolidation in Indian banking sector. For
the purpose of analysis, banks have been broadly categorized into four categories, i.e., private
sector, foreign banks, nationalized banks, and SBI and its associates. They made a comparative
appraisal of banks on the basis of seven key performance measures such as returns on assets (ROA),
capital asset, risk weighted ratio, NPA to net advances, business per employee, net profitability
ratio, NPA level and off-balance-sheet operations of commercial banks. The researchers deliberated
the latest trends and developments in the banking sector. The analysis reveals that there is
phenomenal development in the banking sector particularly in PSBs. Their performance is
comparable with banks in other sectors, yet they are lagging behind in thrust areas, such as asset
quality, business per employee, capital and profitability. The study concluded with some
suggestions for improvement in performance of PSB like operating cost, rationalization of staff cost,
HRD, NPA reduction, deployment of funds in quality assets, technology up gradation, risk
management techniques, market-driven approach, instance relationship management and credit
delivery mechanism etc.
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21. G.C. Goel (2008): The Indian banks need to manage their advances portfolio in such a manner that
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risk factor should be minimized at the early stage of their bearing capacity. The author has resorted
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to Alternate Dispute Resolution (ADR) which can entail a fair deal to all concerned without unlawful
means and pro-court bias. The articles has made an effort to bring awareness to banks and
customers for settlement of NPA dues promptly and also settle various other banking disputes in
the best interest of both the parties
22. Karunakar (2008): A study conducted on Non - Performing Assets Gloomy or Greedy from Indian
Perspective. The study has highlighted problem of losses and lower profitability of Non- Performing
Assets (NPA) and liability mismatch in Banks and financial sector depend on how various risks are
managed in their business. The lasting solution to the problem of NPAs can be achieved only with
proper credit assessment and risk management mechanism
23. Amit Singh Sisodiya and Ramana Pemmaraju (2009): The study covers Indian banking sector’s
performance. The analysis of the study shows, the domestic banking sector has done remarkably
well on parameters like returns, maintaining profitable growth, and risk management, 45 though
there warning signal and underlines the fact that banks have successfully waded through a tough
liquidity scenario without hampering the credit growth. The present study is based on the CAMEL
methodology which evaluates component that is prime importance from the functioning of the
bank’s perspective. The model examines the efficiency of banks among parameter like Capital
Adequacy, Asset Quality, Management, Earnings Quality and liquidity
24. Jessy George (2017): Studies the performance of 15 ARCs in India with the use of secondary data
released by RB. The author observed that the time involved in the entire process of securitization
should be reduced in order to yield maximum benefit from the ARCs.
25. Satish Chander Gupta (2009): A study conducted on an effective management of NPA in Private
sector banks. The study revealed that healthy competition among the banks contributes to the
growth of the economy. India resorted to liberalization and deregulation of the banking sector to
keep pace with the global changes and to cope with ongoing reforms in real sector. The paper
blended various factors such as effective management of NPA, compliance of Basel II norms, Proper
implementation of risk management, etc. The author considered certain parameters such as
productivity, efficiency, profitability, return on capital, net interest margin and return on assets for
assessing the level of NPA.
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26. Prasad and Veena (2011): The Indian banking system is facing a major issue of NPA. The size of
NPA is nearly higher public sector banks. To enhance the effectiveness and gainfulness of banks the
NPA should be lessened and controlled.
27. Debarsh and Sukanya (2012): Emphasized that NPA is most important parameter to evaluate the
financial performance of banking sector. Problem of bad loan is affecting badly the profitability of
PSU banks. Authors suggested that for effective management of NPA accounts Public Sector Banks
must strictly follow asset classification norms, recovery procedures and use to technological
platform at its optimum level.
28. Pradhan (2012): find out that the amount of NPA constrained the banks to charge higher PLR and
PLR related loan costs. This will draw in high risk borrowers which, thus, may bring about more
elevated amount of nonperforming progresses in future. Huge borrowers are observed to be the
foremost defaulters. Mismanagement of the fund is also considered as one of the main cause of
NPA. The study focused with business banks in Orissa state covering six driving banks, for example,
SBI, Bank of India, Punjab National Bank, ICICI Bank, Andhra Bank and Bank of India.
29. Kumar (2013): A study carried on „A Comparative study of NPA of Old Private
Sector Banks and Foreign Banks‟. He found that Non-performing Assets (NPAs) have become a
nuisance and headache for the Indian banking sector for the past several years. One of the major
issues challenging the performance of commercial banks in the late 90s adversely affecting was the
accumulation of huge non-performing assets (NPAs).
30. Selvarajan & Vadivalagan (2013): A Study on Management of Non-Performing Assets in Priority
find that the growth of Indian Bank’s lending to Priority sector is more than that of the Public Sector
Banks as a whole. Indian Bank has slippages in controlling of NPAs in the early years of the decade.
They suggested that Banks are required to have adequate preventive measures in fixing pre-
sanctioning appraisal responsibility and an effective post disbursement supervision. Banks should
continuously monitor loans to identify accounts that have potential to become non- performing.
Each bank should have its own independence credit rating agency which should evaluate the
financial capacity of the borrower before credit facility and credit rating agencies should regularly
evaluate the financial condition of the clients.
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K.C. COLLEGE
31. Ibrahim and Thangavelu (2014): In this paper, concentrates more to investigate the idea of NPAs,
factors of credit resources the business banks in India with particular reference to public sector,
private sector and foreign banks. The clients and the public would not keep trust on the banks any
more if the banks have higher rate of NPAs. In this way, the issue of NPAs must be dealt with in
such a way, to the point that would not destroy the money related positions and influence the
picture of the banks.
CHAPTER 3
RESEARCH METHODOLOGY
Definition:-
“Research is an organised inquiry designed and carried out to provide information for solving
problems.”
- Fred Kerlinger
“Research is careful inquiry or examination to discover new information or relationships and to

existing knowledge.”
- Francis Rammel
3.1 Objective of study:-

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• The main aim of doing a survey was to understand the perception of the investors on a
number of topics.
• These topics will help us understand the need of investors, their awareness about certain
concepts such as the NPA situation of India.
• To find out their willingness to invest in securitized products and then form an analysis based
on their responses.
• This analysis will help us form a conclusion with regards to the projection of future trend of
such investors.
• While deferred debts and asset reconstruction is mainly carried on by the big players in the
markets, this survey shows the actual mind-set of the investors.
3.2 Research design:-
Research design is the plan for collecting the information related to the study. Research design
explains the methods that are used for collecting the information. The research design will focus
attention on the different methods that are used for collection of the data. Also it will help to solve
the problem. Different forms of collecting data will be tested in the research design.
In this case, survey method is used to collect the necessary data. In the survey method,
questionnaires were circulated to collect information from the respondents and their response were
recorded and analysed. Detailed information is collected related to the study by conducting a few
personal interviews as well. The questionnaire mainly focuses on the investors and the borrowers.
3.3 Data collection:-
This study basically depends on:

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1. Primary Data
K.C. COLLEGE
2. Secondary Data
Primary Data: Primary data consists of information collected for a specific purpose. For the purpose
of collecting primary data, survey research was used and various investors and borrowers were
contacted for the same.
Secondary Data: The secondary data consists of information that already exist somewhere. Having
been collected for another purpose. Any researcher begins the research work by first going through
the secondary data. Secondary data includes the information available with the company. It may be
the finding of the research done previously in the field. Secondary data can also be collected from
magazines, newspapers, other surveys conducted by known research agencies etc.
3.4 Limitations of the study:-
• As the time spent in the present study is only two months, it is not possible to go in-depth
study.
• There may be some biases due to ignorance on the part of respondents as they may not be
aware of the topic.
• Due to small sample and biased opinions the result derived may not be accurate.
3.5 Hypothesis:-
H0: Investors are not risk averse.

H1: Investors are risk averse.
H0: People are not aware of the concept of Non-Performing Assets.

H1: People are aware of the concept of Non-Performing Assets.
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H0: Investors are not willing to invest in securitized financial products.

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H1: Investors are willing to invest in securitized financial products.
K.C. COLLEGE
H0: Borrowers are not aware of the concept of deferred debts.

H1: Borrowers are aware of the concept of deferred debts.
CHAPTER 4
DATA ANALYSIS AND INTERPRETATION
Using the data collected in the survey I have carried out the following analysis and projected my
interpretations on certain topics.
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Interpretation:
• Out of a total of 110 respondents, 59.1 % of investors are in the age group of 18-25.
This will help to show the recent and upcoming trends in investment.
• This was followed by 15.5% of investors above the 55 years age group.
This will help in showing the trends among the experienced investors as they would have
seen the way various markets have flourished and the reasons that might have led to their
decline.
These set of investors will base their decision on their past experience which forms an
integral part of the dataset.
• 13.6%, 9.1% and 2.7% represents the age groups of 26-35, 46-55 and 36-45 respectively.
These set of investors would be more experienced than the 18-25 age group but lesser than
55 and above.
• As opposed to these two groups their aim of investment should be a mixture of security and
new ventures.
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Interpretation:
• The dataset depicts the investor trend of the sample set.

• There is almost an equal number of people who wish to invest for long term returns and
short term.
• This showcases an increase in the trend of investors to invest short term to gain profits as
opposed to the traditional view of keeping investments for long term.
• It can thus be inferred that there is an increase in the awareness among the investors which
allows them to invest in appropriate products for quicker returns.
• Similarly, the long-term investment percentage seems lower than the normal view among
Indian markets, which could either be linked to lesser trust in the markets or simply better
investment techniques which allows the investors to reach their aim in a short span.
• Either way it could affect the capital formation.
Investment options
110 responses
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6%
K.C. COLLEGE 2%
3%
9%
26%
Stock Mutual Funds MarketDerivatives & Commodities

Govt. Securities BondsReal Estate
Interpretation:
• There is maximum awareness among the investors regarding the equity markets.
• This was followed by mutual funds and insurance investments.
• Very few investors knew of a number of options including derivatives, ETFs, SIPs, gold, government
securities, commodities, real estate, etc.
• The awareness regarding the debt instruments was limited to fixed deposits and very little about
bonds.
• This rightly shows that majority of investors tend to not look deeper for various investment products
available, and if they are interested, they tend to rather go for mutual funds.
• There was also not a lot of knowledge about investment options for institutions.
Q.1
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Interpretation:
• While as it was observed that the awareness among the sample set regarding the debt
instruments is less, it is also important to know the reason for them investing in debt in the
first place.
• Majority of the respondents believed that debt ensured cash flow safety for investors, which
basically means a fixed return amount, as compared to volatility in other markets.
This security is the main reason for people investing in debt.
• A similar number of people also stated that debt gave better returns than other markets.
• While this is not always true, it can be inferred that debt requires lower on hand assistance
and monitoring as opposed to other markets, and thus the investors managed to get better
returns.
Q.2
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Interpretation:
• We now come to the concept of taking debt, or raising funds through debt.
• While debt is a popular means of raising funds for individuals, the concept of deferred debts,
though prevalent is not exactly understood by many borrowers.
• Only 48.2% of people were aware of the concept of deferred debts among the sample.
Q.3
Interpretation:
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• After explaining the concept of deferred debts, there was a considerable optimism among
Page
the sample towards undertaking a deferred loan over a normal loan.
K.C. COLLEGE
• The respondents felt that it was much more beneficial to undertake a deferred loan since
the interest accrual starts after a breathing period.
• This benefits the loan payers to accumulate funds in the breathing period before the
instalment payments line up as well.
• While this shows more awareness about the debt options, it also goes to show that the
borrowers wish to take as much liberty they can when it comes to raising funds.
This attitude could work for or against the economy.
• Such options would help more individuals undertake loans for their various needs which
leads to the development of the economy.
• At the same time, if proper care isn’t taken and regulations aren’t followed then it could lead
to another debacle similar to 2008 crisis.
• Saying this, it should also be observed that 35.5% still would prefer a normal loan which
could again indicate lack of openness to different options of raising debt.
• In conclusion, deferred loans are a good option for genuine individuals, and if utilized
effectively, it can work positively for the economy.
Non-Performing Assets Q.4
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Interpretation:
K.C. COLLEGE
• In the current Indian economy, where the finance sector is in a kind of a debacle due to the
defaults of a number of banks and NBFCs it is important to know the sentiment of the public
towards this situation.
• One major root question that comes to mind while talking about NPAs is why the people
who can’t repay given such loans are, thus the respondents were asked for their opinion on
this topic.
• 57.3% of people felt that the increase in NPAs would lead into more stringent reforms and
rules and regulations when it comes to taking loans now.
• Though a staggering 42.7% people felt that it has become easier to get loans now than it was
previously.
• They felt that the main reason of the increase in NPAs is because of lack of credit checks
before giving out loans or lack of corporate governance.
• This market sentiment should be changed to create more trust in the economy which can be
aided with the help of more efforts to contain and further diminish the NPAs.
Credit Rating Agencies
Q.5
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Interpretation:
K.C. COLLEGE
• Increase in NPAs, ease of getting loans, increase in options of deferred debts can possibly lead
the economy into a situation similar to that of the 2008 crisis.
• Research suggested that there is a divided view among the market regarding the same.
Q.6
Interpretation:
• CRAs were also responsible for the formation of housing loans bubble in 2008, and now the
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investors are much more aware about the potential threats of a bad credit rating.
Page
K.C. COLLEGE
• The trust on such agencies has gone down considerably due to instances of bribery,
corporate governance flaws, delayed ratings, etc.
• 53.6% do not trust the ratings of CRAs which diminishes their purpose by a large percentage.
• It can thus be inferred that if such practices are carried on further, CRAs could cease to exist
due to lack of confidence among investors.
• While 51.8% agree to this theory, 48.2% are still confident in the economy and believe that it
will not be pushed into a similar situation again.
Investor Protection Q.7
Interpretation:
• Investor protection and education is one of the major factors affecting the investments in an
economy.
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K.C. COLLEGE
• Considerable efforts have been taken in India to make investors feel more secured and
informed at all times, although 76.4% of the respondents still feel that these efforts are not
enough. This rightly proves that the economy still has a long way to go.
• Since only 23.6% people are satisfied with the investor education, it isn’t right to blame the
investors for not investing in more complicated or sophisticated products.
• It is only when people are made more aware about the availability of various products, and
for that matter the debt options, that there would be a deeper economy.
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•
Talking about securitized products, people would be willing to take the risks in investing in
such products when they are confident of protection of their investments.
• Talking about deferred loans, it is only when people know about such
options available that they will choose to explore them.
• Thus, there is a direct relationship between increased efforts for protection
and education, and participation of people.
Securitization and Asset Reconstruction
Q.8
Interpretation:
• Securitisation and asset reconstruction, though a popular means, is not considered to be

popular among the individual non-high net worth individuals.
• However the research proved otherwise as considerable amount of people were aware
about the process (63.6%).
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K.C. COLLEGE
•
This goes on to say that there is potential to increase investments through the means of
such products if greater efforts are taken to create more awareness and individual centric
schemes.
• This would also further help to convert 36.4% into potential investors for this field.
Q.9
Interpretation:
• There is considerable willingness among the people to invest in securitized products which
goes on to prove the change in investment trend as they are willing to take on riskier
investments now.
• If the 70% of the willing investors are tapped properly, there would be a drastic increase in
the liquidity of such instruments.
• 30% of the people showed unwillingness due to the fact that these products form the group
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of riskier investments.
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K.C. COLLEGE
•
These were the people who were mainly a part of the higher age group and had seen the
effect of the 2008 crisis.
• This goes on to prove the effect of past experience on investment products in spite of greater
protection measures.
Student Loan Bubble
Q.10
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K.C. COLLEGE
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K.C. COLLEGE
•
Interpretation:
• The research suggests that 39.1% people have taken or would take a student loan in future,
this is a high percentage considering the fact that out of 79% of students going for graduate
education, and only 11.8 % of people go for pursuit of a post-graduation degree.
• Out of the 39.1% of people approximately 60% wish to take these loans for studying
overseas.
• This further indicates a possible brain drain at the cost of the economy, in the case of lack of
employment opportunities for the concerned individuals or any such restrictions.
• This divide between the surge of student loans and employment opportunities leads to
default on the side of the students, which increases their debt, leading to NPAs.
Q.11
If you were in the finance ministry of the Government, what would be your suggestion to tackle the
problem of NPAs in India?
Following are some of the suggestions that came across in the research when this question was
posed to the respondents:
• Strict vigilance for distribution. Secured way of payback. To stop political

interference and waiver of loans of any kind.
• Criminal charges against those who have cheated banks and also against bank
employees involved
• Strict check on the Asset Quality and periodic review of adequacy of
collateral, give incentives such that loans are not disbursed without proper
collateral for the sake of achieving targets.
• 1. Recover as much as possible.
2. Privatization
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3. Reform the regulations to make it quick and prevent excessive time consumption.
Page
K.C. COLLEGE
•
• Strict KYC norms Due diligence, of the company applying for loan, to be done.
Strict audit norms
• Periodic evaluation of the books of accounts of all banks especially the
cooperative banks and passing a law to cover the cooperative banks under
the RBI Act.
• Revamp credit rating system and create a common data repository of past
defaults by the company, related entities and each director related to the
company (something similar to CIBIL score which can be used by all banks)
• Encourage banks to invest in asset-light business models and fund-raising
should be encouraged in equity format rather than debts
• Make a separate govt. bank. Get all NPAs together & tackle the issue at a
National level rather that fragmented efforts. Only remote regulation is not
enough.
• Setting up strong ARCs to help mitigate the risk of huge NPAs
• Due diligence before disbursement, strict recovery and meticulous
documentation at every point to time.
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CHAPTER 5
CONCLUSION & SUGGESTIONS
5.1 Conclusion
➢ From the suggestions given above, it can thus be inferred that almost everyone feels the
need for improved due diligence and stricter norms for Non-Performing Assets
➢ The research proves that everyone feels that wilful default is the main issue concerning
NPAs and the Government is not successful in creating regulations to keep the defaulters
from defaulting.
➢ Privatization is seen as one of the novel suggestions which could definitely help in making
the process more professional, however it also goes on to speak about the reduced trust in
the Government.
➢ There is an awareness among the respondent about the dire state of credit rating agencies
and how an improvement is needed in the same.
➢ Further there were a few suggestions to increase the income of the government in order to
pay off the current NPAs.
➢ To maintain this strong positive momentum, the asset reconstruction companies must
become more agile, given an environment of uncertain interest rates coupled with the
rapidly changing industry and strong pressure on fees and cost.
➢ Given the current level of uncertainty, asset managers need to be agile and wisely think of
the new opportunities expected to drive the future growth.
➢ Loss on sale to ARCs should be written off over a 2-3 year period. This will allow more banks
to clean up their books.
➢ ARCs should be allowed to hold majority shares post conversion of debt to equity and to
invoke pledged shares.
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K.C. COLLEGE
5.2 Suggestions
➢ In the near term, few large ARCs should moderate their growth levels and rejig their
business models as earnings come under pressure due to change in fee structure and
income on bulk of the capital deployed remains back-ended (will take 3-5 years before
meaningful recovery is seen).
➢ Participation from QIBs should remain limited unless banks sell assets at significant discount
to net book value. The is because initial pay-out is adjusted toward recovery of principal and
only then any proceeds can be diverted toward any fixed coupon payments and capital
gains.
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BIBLIOGRAPHY
K.C. COLLEGE
• rbi.org
• en.wikipedia.org
• ibbi.gov.in
• mhrd.gov.in
• icmrindia.org
• Bloomberg Quint
• Business Dictionary
• Business Line
• Economic Times
• Business Standard
• ICSI modules
• investopedia.com
• The Times of India
• wallstreetmojo.com
• Stockedge
• Indian Law Journal
• Wilmington Trust
• Financial Express
• motilalostwal.com
• indiankanoon.org
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Deferred Debts & Asset Reconstruction

PROJECT REPORT ON - Title

Bachelor of Commerce (Banking & Insurance)

Mithibai College of Arts, Chauhan Institute of Science &

Bhaktivedanta Swami Marg, Gulmohar Road,

Bachelor of Commerce (Banking & Insurance)

Mithibai College of Arts, Chauhan Institute of Science & Amrutben

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile

I would also like to express my sincere gratitude towards my project

Lastly, I would like to thank every person who directly or indirectly

I, ___________ the student of T.Y.B.B.I. Semester V (2021-2022)

The information submitted is true and original to the best of my

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile

Under the guidance of Asst. Prof. ___________

Project Guide/ Internal Examiner I/c Principal

II. Non-Banking Financial Corporations (NBFC)

(e) Other functions of a bank are:

i. The collection of cheques drawn on other banks. ii. The acceptance

settlement of overseas debts. iv. Stock Exchange trustee and executor

v. Safe deposit facilities.

vi. Making standing order payments.

Loan providing function of banks:

The Indian Banking System

The Indigenous Banking System

➢ The Indigenous Banking System

The indigenous bankers are usually a family concern.

(b) To deal in Hundies.

(c) To receive deposits.

➢ The Modern Banking System

2. State Bank of India

The main functions of State Bank of India are:

(a) The bank borrows money from public by accepting deposits.

(c) It provides financial assistance to importers and exporters.

(d) It undertakes foreign exchange business.

(f) It maintains safe deposit vaults.

The functions of Exchange Banks are:

(a) To supply finance for imports and exports.

4. Central Bank – Reserve Bank of India

The main functions of RBI are:

(a) Issue of Bank Notes:

(b) Banker to the Government:

(c) Custodian of Cash Reserves of Commercial Banks:

(d) Custodian of Country’s Foreign Currency Reserves:

(e) Lender of Last Resort:

(f) Central Clearance and Accounts Settlement:

(g) Controller of Credit:

1.2 NON-BANKING FINANCIAL CORPORATIONS (NBFC)

or in installments by way of contributions or in any other manner, is also a non-banking financial

i. NBFC cannot accept demand deposits;

1.3 NON-PERFORMING ASSETS (NPA)

Net Non-Performing Assets = Gross NPAs – Provisions.

quality of the bank’s loan book.

Types of Nonperforming Assets:

1.4 DEFERRED DEBTS

they require customization to the payment schedule. Generally, incremental deferred

Overall incremental deferred interest is usually synonymous with negative amortization.

• Payment Option Adjustable Rate Mortgages

• Balloon Payment Loans

• Deferred Interest Bond

• Interest for investors

➢ Historical performance of these products are always in line with tranche

• Interest for issuers

➢ Diversification of financing tools