Course: Credit Management (Module III: Credit Management) NIBM, Pune

Module III: Credit Management

Chapter 4: Loan Recovery Measures

Dr V S Kaveri

Structure
1. Introduction
2. Traditional recovery measures
2.1. Sending reminders to a borrower
2.2. Visit to Borrower’s Business Premise/ Residence
2.3. Recovery Camp
2.4. Appointment of Professional Agencies for Recovery
2.5. Appropriation of Subsidy/ Exercising the Right to Sell-off
2.6. Recalling of Advances
2.7. Loan compromise
3. Legal measures
3.1. Recovery through Courts
3.2. Recovery through DRTs
3.3. Recovery under SARFAESI Act
3.4. Recovery through Lokadalat
3.5. Sale of assets to ARCs
4. NPA management initiatives
4.1. Debt restructuring
4.2. Write off
4.3. Rehabilitation of sick units
4.4. Circulation of list of defaulters
4.5. Management of Special Mention Accounts (SMAs)
4.6. Flexible Restructuring of Long Term Project (5/25) Scheme
4.7. Strategic Debt Restructuring (SDR)
4.8. Scheme for Sustainable Structuring of Stressed Assets (S4A)
4.9. Insolvency and Bankruptcy Code (IBC Code), 2016
4.10. Amendments in Debt Recovery Laws
4.11. Banking Regulation ( Amendment) Bill, 2017
5. Conclusion

Page 1 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

1. INTRODUCTION:

Non Performing Loans known as nonperforming assets is a major concern in the

banking industry today. RBI in its Financial Stability Report for half year ended
December 17 observes that “The overall risks to the banking sector remained elevated
due to asset quality concerns. Between March and September 2017, the gross non-
performing advances (GNPA) ratio of scheduled commercial banks (SCBs) increased
from 9.6 per cent to 10.2 per cent and the stressed advances ratio marginally increased
from 12.1 per cent to 12.2 per cent. Public sector banks (PSBs) registered GNPA ratio
at 13.5 per cent and stressed advances ratio at 16.2 per cent in September 2017.
The macro stress test for credit risk indicates that under the baseline macro scenario,
the GNPA ratio may increase to 10.8 per cent by March 2018 and further to 11.1 per
cent by September 2018”

The amount of Gross NPA as on March 17 was Rs 7917 Billion (Gross loans Rs81162
Billion) and net NPA was Rs 4331 Billion1. The following graph gives a view of the
movement of NPA during 16-17.

The increase in NPA is a phenomenon that has been observed since the global debt
crisis (2008) and European Government Bond Crisis (2009). The following graph
gives a picture of the growth of NPA vis a vis the growth of loan portfolio of banks.

1
Hand Book on Statistics of bank in India- MOVEMENT OF NON-PERFORMING ASSETS (NPAs) OF
SCHEDULED COMMERCIAL BANKS: RBI

Page 2 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

The above data and charts show us that

i. Both Gross and Net NPA are currently very high.
ii. Stressed Assets (we learnt in the previous lesson that stressed assets include
loans which are NPA as also overdue beyond 30 days) are at least 2 to 3 %
higher than NPAs
iii. There is a marked decline in the loan portfolio in the recent years. This is
mainly due to increased default by corporate borrowers. RBI in its latest
report on Trends and Progress in the banking system has observed that
“Large borrowers who have an exposure of ₹50 million or more accounted for
about 86.5 per cent of all NPAs, while their share in total advances was 56 per
cent by end-March 2017. All large borrowal loan accounts with any sign of
stress (including special mention account-0 (SMA-0), SMA-1, SMA-2, NPAs and
restructured loans) accounted for about 32 per cent of the total funded amount
outstanding of PSBs as against 17.4 per cent in the case of PVBs. This suggests
persisting stress on the asset quality of the banking system”
iv. The increase in Gross and Net NPA with the banking system has increased by
more that 140% during the year.

Clearly NPA management is the biggest challenge faced by the banks.

Page 3 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

NPA management has become critical because banks have to make provision for
NPA and this impacts the capital adequacy of banks.

It should be noted that nearly 91% of the accounts are regular and collection and
recovery in these cases is happening. Given this there are two broad methods of
collection and NPA management. We would like to discuss them in two broad heads
namely (a)traditional or in due course collection/recovery and (b) recovery once
the account has slipped into stressed asset and/or NPA. Various initiatives been
taken by Reserve Bank of India (RBI) and Government of India (GOI) in introducing
new loan recovery measures to bring down the level of non- performing assets
(NPAs) will form under the second method or approach.. As per the Report on Trend
and Progress of Banking in India 2015-16, the percentage of the amount recovered
from the loan amount outstanding through loan compromise, through Debt
Recovery Tribunals (DRTs) and under SARFAESI Act stood at 5.0 and 10.0 and 19.0
respectively. Though the percentage recovery through loan compromise is just 5.0,
it does help in reducing the large number of small borrowal accounts. RBI has also
issued guidelines on monitoring and follow up of NPA accounts. In this chapter, it is
attempted to make an overview of loan recovery measures.

Recovery should be thought of at the time of appraisal itself. If the cash flow of the
borrower is known and can be tied up recovery will be smooth. For example
i. in case of employees tie up with employers to recover from the salary,
ii. in case of farmers tie up with
(a) sugar factory which accepts sugar cane, or
(b) warehouses, market yards which accept grain for sale or
(c) dairy plant which accepts milk grain mandi,
iii. in case of MSME tie up
(a) with buyers of goods and services,
(b) merchant banks s who settle their POS payments,
(c) mother units if sme is an ancillary unit

Most business will have current account with the financing bank/branch and
recovery will be effected in those accounts. Normally this should work well. But if
the repayment is not regular then recovery measures come into play.

Recovery measures under traditional and new categories are listed as under:

Page 4 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

2. TRADITIONAL RECOVERY MEASURES:

2.1 Sending a Reminder:

Borrowers are expected to remember the amount to be paid and the due dates. Yet
sending reminders to borrowers when the amount is due, when the amount of
interest is charged to the account etc., could help in maintaining the account in
regular status. Banks should send a reminder to a borrower on monthly/quarterly
basis and as and when interest is charged and due. This will remind him/her or the
firm to pay interest/installment timely. As the facility of sending SMS is available
sending a reminder through that mode a day or two before the due date will prove
effective.

A borrower who is not able to pay on account of of genuine difficulties, may be

asked to approach the bank with a request to grant further time to pay the
interest/installment. This gives an opportunity to the bank to evaluate the financial
and stress and take appropriate decision.

When there is no response to the initial reminders, the bank must send letters
pointing out that bank may be constrained to initiate a stern action in case
interest/installment is not paid immediately. This exercise of sending reminders the
borrower will continue till all bank dues are recovered. The cost associated with the
reminder may be collected from a borrower. This task of sending the reminder
could be outsourced but enough care is needed to keep a check on the outsourcing
agency. It is important to note that this is the cheapest and most rewarding mode of
recovery particularly from the honest borrowers. Hence, banks depend on this
recovery measure very heavily.

2.2 Visit to Borrower’s Business Premise / Residence;

If Reminder through mail, sms and phone calls sod not succeed it is necessary to
follow up in person by visiting borrower’s business premise or residence. Branches
should maintain a record of the visits made and the amount collected every month.
During the monthly staff meeting, the branch manager should review visits made.
Frequent visits are called for in the case of borrowers defaulting for a long time.
These visits help not only in loan recovery but also in knowing about the overall
functioning of the business unit. It is possible that at the time of visit the firm is not
functioning or that stock is not moving or employees are less in number etc. These
are signs of stress in the business. Creditors not being paid, debtors being less than
normal volume etc., also point out stress. In these cases the loan officer or the
branch manager should discuss with the borrower, assess the situation and take

Page 5 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

action such as rephasement of installment, sanctioning additional credit etc. If the

stress is severe and could impact the security as well bank may like to call back the
loan. Similarly if the business is doing well and there is no stress but the borrower
has defaulted bank may decide to recall the loan.

2.3 Recovery Camps:

In respect of agricultural advances, large amount of small loans in a area visiting

every defaulter personally could be difficult. In these cases a meet with all the
borrowers or recovery camps will be useful. In case of agriculture loans such meets
should be organized immediately after harvest . These recovery camps need to be
properly planned and executed. It is advisable to take the help of local institutions
in the Government, Non-Government Organizations (NGOs) , It also calls for a
professional approach to give a wide publicity of the recovery camp to contact as
many farmers as possible and to motivate the staff to get involved earnestly in the
recovery drive. These recovery camps should be held along with routine banking
business..

2.4 Recovery through Agents.

Banks can use recovery agents for collecting dues. This is particularly useful in retail
loans like home loans, vehicle loans etc. This is not used in case of commercial
credit, project finance, MSME loans and agriculture loans. Retail loans are spread
across the city and it is difficult for the banker to visit all the defaulters personally.
Recovery agent is given a specific mandate. While this system is effective there are
attendant risks like using force for recovery, diverting recovered funds, postponing
recovery beyond 90 days so that higher recovery commission can be earned etc. It is
for this purpose RBI and IBA has mandated that recovery agent should undergo a
certification process with IIBF. Banks can work with agencies whose services shall
be utilized to ascertain the whereabouts of the borrowers, collect dues and take the
possession of assets charged to the bank upon serving a legal notice to the defaulter.
In rural areas, agents may be engaged also to contact the borrowers to remind them
to pay loan installments and collect cash recovery. Many banks employ recovery
agencies successfully. This of course increases the cost of credit delivery and gets
loaded on to honest borrowers as risk cost.

2.5 Appropriation of Subsidy / Exercising the Right to Sell-off:

In some of the sponsored schemes, the amount of subsidy is kept in deposit
accounts to be appropriated after a specified lock-in-period. In such cases, where
subsidy is available, and the account is likely to become NPA, the subsidy amount
could be appropriated (keeping in view the requirements of lock-in-period) in the

Page 6 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

loan account and necessary action should be initiated for recovery / write-off of the
balance amount. Keeping subsidy in deposit may not be a correct approach when
subsidy is intended to replace borrower’s capital and subsidy amount ensures the
viability of the borrowal account.

Where readily encashable securities such as Fixed Deposits, Life Insurance policies.
Government Securities, etc. of the borrowers are available with the bank and if
borrowers are not responding to the request for regularization of accounts, such
securities could be encashed after giving due notice to the borrower and guarantor,
if any.

2.6 Recalling of Advances

When rigorous follow-up of advances and close supervision efforts do not yield any
fruitful results in loan recovery from defaulters and, if the circumstances so warrant
that their loan amount is to be realized at once and/or facility to be terminated in
the interest of the bank, a final recall notice has to be served asking the party to
regularize the irregularity in the account/ pay unpaid loan installments
immediately. Wherever necessary, the borrower should also to be informed about
the bank’s intention to terminate the facility after a specified time limit. As far as
possible, number of legal notice should be restricted. . Especially in in case of small
advances, recall notice through advocate may be avoided unless the circumstances
require such a course of action. The Recall notice should be sent circumstances such
as the (i) borrower being a willful defaulter, (ii) bank dues being significantly
uncovered, (iii)death of the borrower, (iv) dissolution of a partnership firm, (v)
suspected siphoning of bank funds, (vi) borrower refusing to renew the credit limit,
etc. Before legal action, normal recovery efforts should be made to pursue the
borrower and the guarantor to repay the dues, which may include personal
contacts, persuasion, serving a demand notice, bringing local influence upon the
borrower to repay etc.

Proposal for legal action should be submitted to the appropriate sanctioning

authority at least six months before the expiry of limitation period. As per the
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) ,
requirement of a recall notice to the borrower/ guarantor should be issued
providing therein a 30 days’ time for adjustment of the account. On getting the
approval of the higher authorities and after serving the recall notice, the account
should be transferred to a recalled-category to exercise utmost care for effecting
recovery, and to have special control over accounts.

Page 7 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

2.7 Loan Compromise:

Compromise in bank loan means - agreeing to a borrower’s request of accepting a

part of the outstanding dues in its books as full and final payment or allowing for the
non-compliance of certain terms of the loan after analyzing the alternative courses
of action, genuineness and capacity of the borrower to repay. It is also called as
voluntary debt reduction or scaling down of dues, mainly interest amount and bank
charges. In a situation, where the borrower’s ability/capacity to repay the bank’s
dues and the bank’s ability to recover the same by other means are limited, a
compromise proposal will l work well. Compromise proposals can be entertained at
a) pre-litigation stage, and b) post-litigation/decree stage. At the pre-litigation
stage, concessions are offered in the form of re schedulement / rephasement of
unpaid loan installments, debt restructuring, rehabilitation, etc. which would allow
some breathing period for loan repayment. This would in turn build/strengthen the
repayment capacity of the borrower. However, when such measures do not yield
any fruitful results and the borrower incurs heavy cash losses, bank may consider
compromise or scaling down the dues. Similarly, in other cases, where business loss
has crept in due to one or other genuine reasons and the borrower is not a willful
defaulter and requests for one or more concessions such as waiver of penal interest,
concession in interest rates, loan repayment in suitable installments etc. the request
may be accepted for compromise.

Compromise at post-litigation/decree stage, could also be considered so that the

borrower’s business activity is uninterrupted. In order to avoid cost, labour and
time involved in litigation matters and to have a better image in the market,
borrowers may offer to pay a lump-sum amount and request the bank to withdraw
the suits against them. At times, it becomes necessary to have settlement outside
the court through an amicable agreement as the antecedents of the defendants are
such that the court could take a sympathetic view and award a lenient decree
against them. Sometimes, after obtaining a decree, if a third party comes forward to
purchase the assets, the bank may consider the option of compromise. It is also
possible that the bank may go in for compromise when the decreed asset would not
fetch more than the claimed amount. In all cases, where suits have already been
filed, whatever compromise is to be made, must be sorted out through the court in
the form of a consent decree, so that it will be binding on all defendants.

Compromise has to be decided on the basis of merit of each case. Further, lot of
analysis has to be done by the bank before negotiating with the borrower. It is
necessary to carry out cost-benefit analysis to estimate the loss which may arise in
case compromise is accepted as against the benefit which may accrue if the money

Page 8 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

so recovered is invested profitably. Before negotiation, valuation of the assets and

collection of information about borrower and his personal assets should be
collected from the market. Branch manager should prepare a process note for loan
compromise in the light of the broad guidelines issued by the bank. The note should
contain, among other things, the amount covering the outstanding amount and
other charges, efforts already made for recovery, means or capacity of the party to
repay etc. The proposal recommended should be referred to the sanctioning
authority which would examine several factors such as fulfillment of terms and
conditions of loan compromise, post-disbursement supervision of the account, any
laxity in conduct, any act of commission or omission on the part of staff leading to
the debt proving irrecoverable, staff accountability, valuation of securities, interest
to be charged in respect of settlement through installments, etc., before arriving
finalizing the compromise terms Loan compromise should be considered as a last
resort of non- legal recovery measure. RBI has given autonomy to banks to come
forward with a Board approved compromise policy for different types of borrowers.
Decisions on compromise proposals should be taken by adopting a committee
approach. In this regard, banks have been advised to set up a Settlement Advisory
Committee which is given certain powers by the Board.

3 Legal Measures

3.1 Recovery through Courts:

Before taking a decision to file a suit, the branch manager should ensure that there
are sufficient securities available in the account and the borrowers or guarantors
are having adequate attachable personal assets to satisfy the decree against them.
The solution of obtaining a decree from the court serves the purpose only when it is
capable of being executed.

Enough care has to be taken at all stages of recovery through the court which in
chronological order include serving summons, submission of a written statement
recording the evidences, arguments, framing of issues, judgement and court order.
Regarding bank procedures, the branch has to first seek the permission from the
controlling office to file the suit. Thereafter, the approved advocate should be
contacted by the branch manager to file the suit. Before filing the suit, bank should
ensure that the documents are live, securities are properly charged to the bank,
fresh financial report on borrower/ guarantor is obtained, and a list of witnesses is
prepared. Before filing the suit, the branch manager should exercise the right to set-
off / appropriation, if available. The plaint prepared by the advocate should be
checked thoroughly as to the correctness of facts and figures. All parties and
guarantors are to be included in the suit. Names, addresses and securities should be

Page 9 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

stated properly and, suit should be filed in the court of the specified jurisdiction. A
notice of demand to the borrower and the guarantor should be issued before
commencing any legal action. In particular, the branch manager should contact the
advocate time and again to impress upon him to complete court formalities relating
to submission of statement, hearing, etc. The branch manager should brief the
advocate with regard to banking aspects.

After the decree is awarded, the details of the same should be read carefully. There
can be different kinds of decree, such as: (a) simple mortgage decree which is for the
realization of money charged on immovable property by sale (b) for recovery of
possession of land (c) for recovery of any property other than land or money (d) for
ordering to do some act other than payment of money or to stop from doing some
other acts, i.e. under this may be classified decrees for specific performance of
contracts, execution of documents, injunction etc. If it is a conditional decree, the
same must be fulfilled before execution. It must not be barred by limitation.
Execution of decree shall be in different forms such as delivery of property,
appointing a receiver or in such other manner as the nature of relief granted,
attachment and sale, or by arresting of Judgement Debtor (JD). Execution by arrest
is not available as a matter of right and arrest or detention cannot be ordered unless
it is proved to the satisfaction of the court that the borrower is unwilling to pay
despite having adequate means to pay. The burden of proving this is on the decree
holder. The court may refuse simultaneous execution against the person and
property of the debtor.

As soon as the accounts are decreed, it should be ensured whether the decree holder
is in conformity with the claims made by banks in the plaint. In case of any
discrepancy from bank’s normal claim, steps should be taken for revision/appeal
within a reasonable time, say one month from the date of decree. Execution petition
should be filed within three months of the date on which certified copies are made
available to the bank branch. In decreed accounts where certain agricultural land is
to be attached, the branch manager may participate in the auction for which
necessary permission from the competent authorities within the bank is needed. In
case securities are attached before judgement and/or after execution of decree and
kept in the bank’s custody, due care should be taken as to keep them intact. When a
case is decided partly or wholly against the bank, desirability of filling an appeal or
otherwise should be considered. The JD, who does not pay in terms of the decree,
alternative steps for execution, by attachment and sale of the properties and/or by
arrest of the JD as may be deemed for, should be taken promptly. Insolvency law
enables a creditor, who has obtained a decree to realize his debt by serving
insolvency notice of not less than a month. If the debtor fails to comply with the

Page 10 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

notice within the specified period, the bank can proceed against him for
adjudicating the same as an insolvent. If the property to be attached is situated
outside the jurisdiction of the court which has passed the decree, it should be got
transferred to the other concerned court in whose jurisdiction the property is
located. Quite often, banks have to proceed against their borrowers in the court of
law where no security is available. It takes a long time to obtain a decree like in
other cases, and then proceed for execution of the decree so obtained. In such case,
a quick remedy known as summary procedure suit is available which the bank can
use. Banks experience substantial delay in getting the decree and its execution.

3.2. Recovery through Debt Recovery Tribunals (DRTs)

There was considerable delays in the disposal of cases by the courts which
warranted exclusive courts for bank cases. DRTs are set-up under the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993. Under the Act, two
Tribunals are set-up, i.e. Debt Recovery Tribunal (DRT) and Debt Recovery
Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain cases
referred to them, by the banks and FIs for recovery of debts due to them. Each DRT
consists of a Presiding officer and DRAT is headed by a Chairperson. The order
passed by the DRT shall be appealable to the Appellate Tribunal but no appeal shall
be entertained by the DART unless the applicant deposits 75 per cent (now reduced
to 50 percent) of the amount due from him/it as determined by it. However, the
Appellate Tribunal may, for reasons to be received in writing, waive or reduce the
amount of such deposit. Any case involving debt exceeding Rs.10 lakhs can be
referred to Tribunal. Tribunal and the Appellate Tribunal shall not be bound by the
procedures laid down under Civil Procedures Code (CPC), 1908. But they will be
guided by the principles of ‘natural justice’. They make their own procedures,
including the places at which they shall have their sittings. An important power
conferred on the Tribunal is that of making an interim order (whether by way of
injunction or stay) against the defendant to debar him from transferring, alienating
or otherwise dealing with or disposing of any property and asset belonging to him
without prior permission of the Tribunal. This order can be passed even while the
claim is pending. After the claim is upheld by the Tribunal, it issues a Recovery
Certificate to the Recovery Officer who has powers for execution including
attachment, sale, arrest, appropriation as Receiver in the Court and power to
require the defendant (debtor) to remit the money to the Recovery Officer. The Act
provides the Tribunal and Appellate Tribunal the powers of a Civil Court in several
matters. These include summoning of witnesses, discovery and production of
documents, receiving evidence on affidavits and issuing commissions. The Act also
requires both tribunals to dispose of the applications or appeals within a period of 6
months

Page 11 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

Procedures to be followed under the Act are simple. To start with, the concerned
bank or FI is expected to make an application to the Tribunal within the specified
geographical limits. The application should be accompanied by such statements or
evidences and by the prescribed fees. On receipt of the application, the Tribunal
shall issue summons requiring the defendants should cause within 30 days of the
service of the summons or to stay the relief prayed for should not be granted. The
Tribunal after giving the applicant an opportunity of being heard passes such orders
on application as it thinks fit to meet ends of justice. The Tribunal may make an
interim order whether by injunction or stay debarring the defendant from sale or
transfer of assets. Thereafter, the Tribunal issues a recovery certificate and passes
on to the Recovery Officer for recovery of the amount of debts as specified therein.
The Recovery Officer sends a notice in writing and requiring the defendant or his
related parties to pay the amount within the specified period. On receipt of money, a
formal receipt will be issued. If the defendant fails to make the payment, the
Recovery Officer will then seize the property and arrange for its sale. He can even
arrest the defendant if the circumstances so warrant. The aggrieved party may make
an appeal within 45 days (now reduced to 30 days) from the date of the order to the
Appellate Tribunal which will then pass an order, confirming, modifying or
cancelling the order, appealed against. While DRTs are helping banks and FIs in
recovery of dues to the considerable extent, they are few in number (33 at present,
proposed to set up another six tribunals) in terms of steep rise in the number of
cases referred. In general, it is observed that the defendants approach the High
Court challenging the verdict of the Appellate Tribunal which leads to further delays
in recovery. There is shortage of the required number of recovery officers. Though
there are many initiatives taken to make stronger by assuring the required
infrastructure. setting targets to dispose of cases in a year, organizing Lokadalats to
dispose of small cases etc., banks continue to experience delays in loan recovery
through DRTs.

3.3. Recovery under SARFAESI Act,

Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act provides for enforcement of security by banks/FIs without
the intervention of court/tribunal. For this, the borrowal accounts should have been
classified as NPA. Banks/FIs should issue a notice to the borrower asking to repay
the liabilities in full within 60 days from the date of receipt of the notice. (U/S 13/2).
Banks /FIs have to appoint an Authorized Officer (AO) to be appointed who should
not less than a Chief Manager in public sector banks/ FIs. The consent of 75 per cent
creditors in loan consortium is a must. (now, reduced to 60 per cent) for the
purposes of this Act. Advances should be secured advances and documents should
be valid for enforcement of security interest. The notice should be served properly -

Page 12 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

by a registered post with A.D., affixing the notice on the door, and publishing the
same in the local newspapers. If borrower is not available at the given address, the
notice should be pasted on the last known address, simultaneously publishing in the
local and national newspapers. Notice should be sent to all, if the number is more
than one. Banks /FIS have to inform the Court/DRT/Co-op Department, if the case is
pending before them and send a copy of the notice to them. Simultaneous action
may be taken against guarantors since the advance is recalled. If the full payment is
made during the notice period, no further action is called for. If the part payment is
made, the bank retains the right to seize the asset to claim the balance amount. Bank
can consider the case for compromise even during the notice period. If the borrower
makes payment with certain conditions, the concerned bank/s may accept or refuse
to accept. The bank is obliged to reply to any letter received from a borrower
seeking clarifications within fifteen days. But no stay shall be granted by DRT/ Court
just because; the borrower is not satisfied with the clarifications provided by the
bank.

On the expiry of the notice period, the secured creditor may take the following
actions [u/s 13(4)]. On default of repayment of bank dues as per the notice, the
Authorized Officer initiates certain steps in respect of moveable properties which
include:

(a) To take possession of movable properties in presence of two witnesses with

Panchanama drawn. Inform the Police personnel to take care of law-and-order, if a
need arises. On possession of assets / appointment of a manager, the matter should
be published in newspapers. Possession shall be physical or token i.e. merely
affixing a copy of the Panchanama on the asset.

(b) To prepare an Inventory of properties - one copy of the same shall be passed on
to the borrower. Since the bank holds the possession of the property as a deemed
owner, the AO should take sufficient care including insurance cover. The perishable
commodities should be arranged for sale on priority basis.

(c) To get valuation of the property in possession through the bank approved
valuer.

(d) Bank may try to sell the asset after serving a notice period of 30 days to the
borrower. he sale may be through public auction after publishing in the
local/national newspapers indicating the terms of sale, etc.

(e)If excess money is received over and above the banker's claim, the same should
be passed on to the borrower. If there are preferred creditors (workers' dues,

Page 13 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

statutory dues etc.) the payments should be paid to them first before the settlement
of bank dues. The asset should be sold above the minimum price as per the valuer's
certificate; otherwise the borrower's consent is a must. If the borrower agrees to
bring in a potential buyer who agrees to offer still a better price, preference should
be given to the borrower's choice. Sale of goods under pledge is similar to the
mortgaged asset.

(f) Certificate of Sale should be issued to the purchaser on receipt of full payment as
per the terms of sale. This shall be registered by the Banks. In this context, the
Government has set up Central Registry (CR) for registrations of transactions
relating securitization and reconstruction. The Registry is kept open for inspection
by anybody on payment of fees.

Procedures for sale of immovable secured assets are as per the usual practices.
Accordingly, the purchaser should pay a deposit of 25% of the amount of sale price
and the balance to be paid within the next 15 days of confirmation of sale. On default
of the payment by the purchaser within the specified period, the deposit paid earlier
should be forfeited and the property should be resold. Where the property is subject
to any encumbrances, the purchaser should deposit extra amount of discharge of
encumbrances. Board of Directors of banks may appoint a Manager in consultation
with the borrower to manage secured assets in their possession whose
salary/commission should be paid by the borrower. DRTs may be approached for
recovery of shortfall, if any, on sale of the secured assets by payment of the
prescribed fees. Any aggrieved borrower may approach DRT for which no fees have
to be paid. But he appeals to the Debt Recovery Appellate Authority (DRAT) within
30 days from the receipt of the order from DRT, fees are applicable. If DRT/DRAT is
in agreement with the borrower's charges of wrongful seizure etc., the secured
creditor is asked to restore the assets.

Regarding the eligibility criterions for enforcement of security interest debt should
be of Rs.1 lakh and above and overdue is more than 20% of principal amount and
interest thereof. Assets which will not be considered include agricultural and tools
of artisans, unsecured assets/clean loans/ un-drawn limits, unpaid stock, salary &
wages, lien on any goods, pledge of movables , sale or hire purchase/lease in which
security interest is not created etc. Wrongful seizure of assets should be avoided.
There are penalties for the same. There is no suit or prosecution against the secured
creditor for any action done in good faith . As per the recent amendment in the
SARFAESI Act, banks are now allowed to accept immoveable properties in full or
partial settlement of claims against defaulting borrowers., if no bidder comes to bid
or banks are not able to find a buyer for such assets. While recovery under the Act is

Page 14 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

good, there are several difficulties experienced by banks. In particular, DRTs are
found to be granting stay on the actions of the banks more frequently which
prevents banks in taking possessions of assets.

3.4. Recovery through Lokadalat:

The concept of Lokadalat was introduced in 1982 for providing quick and
convenient legal aid. Since then, a large number of Lokadalats have been organized
in different parts of the country from time to time and have got recognition and
patronage from every segment of the society. Based on the experiences of several
states, a Central Act, known as Legal Services Authorities Act, 1987 was passed for
providing legal basis for the Lokadalats and legal authority to the compromise
arrived at between the parties through such Lokadalats.
Today, Lokadalats are known for effecting mediation and counseling between the
parties i.e. bank and borrower and to reduce burden on the court, especially with
regard to small loans. Several aggrieved individuals and various social organizations
are also approaching Lokadalats. Lokadalats are generally presided over by two or
three senior persons including retired senior civil servants, defense personnel and
judicial officers. They take-up cases which are suitable for settlement of debt for
certain consideration. Parties are given a patient hearing while they explain their
legal position. They are then advised to reach to some settlement due to social
pressure of senior bureaucrats or judicial officers or social workers. If the
compromise is arrived at, the parties to the litigation sign a statement in presence of
authorities of the Lokadalat which is expected to be filed in the court to obtain a
consent decree. Normally, such settlements contain a clause - if the compromise is
not adhered to by the parties, the suits pending in the court will proceed in
accordance with the law and the bank will have the right to get a decree from the
court if the decision is in its favor.

In this context, certain guidelines have been formulated by banks in consultation

with the Indian Banks Association (IBA). Accordingly, bank-suits involving claims up
to Rs.20 lakhs may be brought before the Lokadalat. There should be a decree for
the interest claimed before suit. In respect of cases considered by Lokadalats, given
the small size of loan and other issues and to facilitate a reasonable compromise
with the party, banks may provide remission of interest. Now-a-days, even non-suit
filed cases in the doubtful and loss categories can be considered for settlement. Debt
Recovery Tribunals also organize Lokadalats. Thus, banks have taken maximum
benefit of Lokadalats and recovered the loan amount particularly from small
borrowers through settlements.

Page 15 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

3.5 Sale of Assets to ARCs

Under the SARFAESI Act, Asset Reconstruction Companies (ARCs) are permitted to
carry on securitization and reconstruction business as specified therein. Upon the
acquiring financial assets of a bank by an ARC, the same has to issue a notice to the
borrower to pay the dues to the ARC which is considered as a deemed lender to
enforce security interest. Any suit pending against the bank, the same shall be
continued in the name of ARC. ARC might also apply to one or more DRTs to transfer
the case filed by the bank against the borrower to the DRT of its jurisdiction. It might
continue to execute the Recovery Certificate issued to the bank. ARC issues Security
Receipts (SRs) to qualified Institutional Investors against financial assets acquired
which are held in the nature of a trust. SRs shall not require compulsory registration.
ARC is expected to bring in at least 5 percent of SRs (now, raised to 15 percent) and
the rest to be contributed by the qualified Institutional Investors Thus, ARCs are
regulated to protect the interest of all the concerned parties. Currently, 15 ARCs are
in operation. The problem is that ARCs have found it difficult to recover much from
the debtors. Hence, they have only been able to offer lower price to banks to accept.
It is disheartening to note that just half of the Security Receipts (SRs) issued were
redeemed completely by ARCs indicating their liquidity problems on account
mismatch in cash flows due to slow loan recovery.

RBI publishes information on the effectiveness of these methods in the Trends and
Progress of Banking Report. The following is produced from the report of 2017:

Rcent years have witnessed a sharp pick-up in the sale of stressed assets to SCs/RCs by PVBs and
FBs, however, sale of NPAs by PSBs remains lukewarm..

Table V.18: NPAs of SCBs Recovered through Various Channels

(Amount in ₹ billion)
2015-16 2016-17
Col. Col.
Recovery No. of (4) as No. of (8) as
Amount Amount Amount Amount
Channel Cases % of Cases % of
Involved Recovered* Involved Recovered*
Referred Col. Referred Col.
(3) (7)
1 2 3 4 5 6 7 8 9
i) Lok
4,456,634 720 32 4.4 2,152,895 1,058 38 3.6
Adalats
ii) DRTs 24,537 693 64 9.2 28,902 671 164 24.4
iii)
SARFAESI 173,582 801 132 16.5 80,076 1,131 78 6.9
Act
Total 4,654,753 2,214 228 10.3 2,261,873 2,860 280 9.8
Notes: 1. *: Refers to amount recovered during the given year, which could be with reference to
cases referred during the given year as well as during the earlier years.
2. DRTs – Debt Recovery Tribunals.

Page 16 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

Seller banks subscribed to more than 80 per cent of the total security receipts (SRs) issued (Table
V.19).
Table V.19: Details of Financial Assets Securitized by SCs / RCs
(Amount in ₹ billion)
Jun- Jun- Jun- Jun-
Item
14 15 16 17
1. Book Value of Assets Acquired 1598 1750 2377 2627
2. Security Receipts Issued by SCs / RCs 520 536 790 940
3. Security Receipts Subscribed to by
(a) Banks 429 441 651 777
(b) SCs / RCs 74 73 114 142
(c) FIIs 1 1 3 3
(d) Others (Qualified Institutional Buyers) 16 21 22 18
4. Amount of Security Receipts Completely
107 123 149 156
Redeemed
Source: Quarterly statement submitted by SCs / RCs.

Considering the amount of stressed assets the recovery these methods is not
impressive. If the ARC fails to pay the dues on security receipts it will become an NPA
which has been the reason for some big banks reporting higher provisions in the
recent years.

4. NPA Management Measures

4.1. Debt Restructuring:

Often it is seen that the borrower under stress and is in no position to repay dues
though business is running, and recall may add stress and result in closure of
business. There could be temporary volatility in business cash flows. For example a

Page 17 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

business could have met with a major fire accident, fire claim is not sufficient to
recoup all losses etc. In such cases Debt Restructuring could be pursued as a method
of managing stressed assets or NPAs.. As of now, there are two types of debt
restructuring: (i) Corporate Debt Restructuring (CDR), handled by a separate agency
or group of bankers established for this purpose and (ii) Debt Restructuring for
MSMEs which is done within the bank and not involving any outside agency.

Debt restructuring aims at making a project or finance , despite default , viable in the
near future provided the business is otherwise technically, commercially and
managerially viable and the borrower continues to be honest and cooperative. In
such cases of the terms of credit are reworked in the form of reduction in the rate of
interest, rephasement of unpaid loan installments, additional finance to be provided
though it is non-performing asset (NPA), conversion of debt into equity, lower
promoter’s contribution, financing of cash losses until the project breaks even etc.
To give effect to these changes/concessions to be offered as part of debt
restructuring, certain changes need to be made in the original loan agreement.
Hence, fresh loan agreements are entered into. There exists elaborate guidelines on
Debt restructuring issued by the RBI from time to time with reference to assessment
of viability restructuring period, promoter’s contribution, terms and conditions of
debt restructuring, loan agreements to be entered into, bank sacrifice etc.

Restructuring will help the customer but the bank will have to show the account s
NPA. Despite debt restructuring. Further additional provision of 100 per cent of
bank sacrifice has to be made. Bank sacrifice is determined as difference between
the present value of estimated cash receipts to the bank (interest, installments etc.,)
during the restructuring period in terms of original agreement and the present
value of estimated cash receipts to the bank (interest, installments etc.,) during the
restructuring period in terms of fresh agreement as under the debt restructuring. It
is mandatory to execute two agreements: Debtor- Creditors Agreement (DCA) and
Inter Creditors Agreement (ICA). Banks have agreed for many CDR but not all have
worked out well. Strangely corporates who got concessions during stress time did
not compensate the bank when they came out of stress. These corporates got the
best rating and best interest when they first took the loan. Ironically they also got
the benefit of concessions when they went into stress.

i. Corporate debt restructuring

In 2001, there was a slowdown in Indian economy. Many big corporates,
particularly steel plants, became NPA and, banks were not ready to provide further
finance to them. Therefore, RBI issued guidelines on Corporate Debt Restructuring

Page 18 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

(CDR) and asked banks to undertake debt restructuring for corporates. But there
was some hesitancy on the part of banks to implement the RBI guidelines on
corporate debt restructuring due to high credit risk. Hence, RBI decided to create a
separate agency, popularly known as CDR, to coordinate the corporate debt-
restructuring programme. The agency was promoted by IDBI Bank, State Bank of
India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), Bank of India (BOI)
and ICICI Bank.

CDR is a three tier body consisting of Forum (Chiefs of banks, FIs and IBA),
Empowered Group ( Executive Director Level executives of banks/FIs participating
in debt restructuring of the concerned corporate and standing committee members
from IDBI Bank, SBI and ICICI Bank ) and CDR Cell (consisting of officers from
promoter banks on deputation). To assist the Forum in organizing the meeting etc.,
there is a Core Group consisting of one of the Chairmen of promoter banks.

While the Forum evolves broad policy-guidelines, the Empowered Group takes
decisions on the proposals recommended by the Cell. Initially, the borrower
approaches the Lead Bank with a request to restructure debt, which issues a written
consent. Alternatively, the borrower may approach the CDR Cell directly with the
written consent of at least two banks with minimum stake of 20 percent of total
bank dues. The borrower submits the proposal with the support of banks to the Cell.
The CDR covers only multiple banking corporates enjoying credit facilities
exceeding Rs.10 crores. Cases which come under Debt Recovery Tribunal (DRT),
and willful defaults are outside the purview of the CDR. Similarly, Board for
Industrial Finance and Reconstruction (BIFR) cases shall be considered if there is no
objection from it. The Cell considers all types of loan assets except Loss assets. But
in respect of Doubtful cases, CDR does not take the responsibility to arrange for
fresh loans. Decisions of the Group are based on the `super majority’ principle. i.e.
75 per cent of the secured creditors and 60 per cent of creditors in number should
agree for debt restructuring.

Immediately after receiving the proposal from a corporate, a flash report is

prepared by the CDR Cell which then obtains ‘in- principle sanction’ from the
Empowered Group to prepare debt restructuring package. Thereafter, CDR Cell
formulates the draft package in consultation with the stake holders. Draft package,
when gets ready, is submitted to the Empowered Group for sanction. After seeking
sanction, a Monitoring Committee is formed consisting of representatives from
Corporate, Cell and representatives of Creditors. This is responsible for
implementation of the package and monitoring the progress.

Page 19 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

The CDR is a voluntary system based on Debtor-Creditors Agreement (DCA) and

Inter-Creditors’ Agreement. (ICA). No banker/borrower can take a recourse to any
legal action during the `stand-still’ period of 90 or 180 days. There is a prescribed
time limit set for completing necessary formalities relating to initial scrutiny for
flash report (30 days), approval of the package (60-90 days), approval by creditors
(45 days) and implementation of the package (120 days). Nowadays, an ‘exit route’
is also available for any bank from CDR provided its share is taken by the other
members of loan consortium or by any new member is inducted to the Loan
Consortium. It is also possible to drop any case from the CDR in certain events such
as non-fulfillment of terms and conditions, package becoming unviable due to
sudden changes in the environment, merger with a strong company etc.

Initially CDR was found considered as a success story in terms of its success in
converting non-performing NPA corporates into Performing corporates due to
timely debt restructuring. Almost all banks in India availed of benefits of debt
restructuring of corporates in various industries. But during the recent past, there
are hardly any cases being referred to CDR because, the revival of CDR cases is
becoming difficult due to slow down in few industries such steel, cement, power,
mining, real estate etc., besides stricter RBI debt restructuring norms. In addition,
concessions which were provided to banks till recently by RBI are now being
withdrawn. Hence, banks now prefer to go in for debt restructuring of corporates
outside the CDR agency.

i. Debt restructuring for MSMEs:

In September 2005, RBI issued guidelines on Debt Restructuring for MSMEs. Based
on this each bank is expected to develop a debt restructuring policy duly approved
by the Board. MSME Debt restructuring policy refers to three types: (A) All MSMEs-
(Registered as under MSMED Act) – all bank dues to be considered for debt
restructuring (B) Corporate MSMEs (Registered under the Companies Act) – dealing
with a single bank - all bank dues to be considered for debt restructuring, and (C)
Corporate MSMEs- dealing with multiple banks – bank dues up to Rs.10 crores.
Further for taking up CDR – after CDR the project should become viable within a
period of 7 years. No debt restructuring is permitted beyond a period of 10 years.
Debt restructuring refers to only those loans and advances which are secured except
collateral free lending made in respect of small borrowers. Banks have to write off
any sacrifice made by them as part of debt restructuring on yearly basis. The
borrower is expected to submit a proposal for debt restructuring to the bank which
works out suitable internal procedures including the time limit, not exceeding 60
days to formulate debt restructuring package and approve. In case of multiple

Page 20 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

banks, the leader of the group/consortium is expected to complete all formalities

relating to debt restructuring. Review of the progress made in debt restructuring
should be made once in a year at the Board level and the relevant data should be
disclosed in the annual report.

CDR is a measure to nurse the stressed account back to health. It has tough
covenants and if the bank is not able to implement and make the borrower abide by
the covenants CDR will have no impact.

4.2. Loan Write-off:

If it is going to be non-remunerative either to file suit and/or continuing the account
in the bank’s books, it is advisable for the bank to waive off legal action and go in for
write-off outstanding dues. By waiver of legal action, banks may take a decision not
to pursue recovery through the court of law.

Such waiver of legal action is suggested when: (i) the means of the borrower are
negligible, (ii) borrowers are below the poverty- line, (iii) cost of recovery is higher,
(iv) the beneficiary is absconding, (v) it is difficult to obtain periodic balance
confirmation of debt-cum-acknowledgement of debt, (vi) securities are already sold
by the borrower, etc.

Similarly, write-off is proposed under certain circumstances such as : (i) borrowers

are adjudicated as insolvents and the bank has already realized part of the dues as a
secured creditor, (ii) revenue authorities under the State Public Recovery Act
(SPRA) have recovered some amount and there is no further chance of any
recovery, (iii) both borrower and guarantor are untraceable after selling their assets
and (iv) decrees remain unexecuted several times due to reasons beyond the control
of the bank.

Decisions to waive legal action or write-off are taken at controlling office on the
recommendation of the branch manager. If permission of the CGTMSE is required,
the same may be obtained. For write-off, various factors are considered which
include: (i) means or capacity of the borrower and guarantor, (ii) the amount to be
written off, (iii) efforts already put in for recovery and (iv)staff accountability.
Write-off is an internal exercise and the branch staff should keep the matter
confidential. Even after write-off, recovery efforts should continue.

4.3. Rehabilitation of Sick Units

At present, there are two types of sick units financed by banks and financial
institutions. These include :( i) Enterprises both in industrial and service related
activities in Micro, Small and Medium Enterprises (MSME) sector and (ii)

Page 21 of 30
 Course: Credit Management (Module III: Credit Management) NIBM, Pune

Enterprises both in industrial and service related activities in the non- MSME sector
in which category, there are ‘weak’ and ‘sick’ companies. Weak companies do not fall
under the purviews of Sick Industrial Companies (Special Provisions) -SICA Act
,1985. Both sick MSMEs and Weak companies are rehabilitated based Reserve Bank
of India (RBI) guidelines..

(i) Rehabilitation of Sick MSMEs:

Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to have
become Sick, if (a) Any borrowal account of the enterprise remains Non- Performing
Asset (NPA) for three months or more or, (b) There is erosion in the net worth due
to accumulated losses to the extent of 50% of its net worth during the previous
accounting. Weak units are those whose accumulate losses exceed 50 per cent of
peak net worth during the last 5 years. Lastly, under section 3 (O) of the SICA, a
company is called as sick if it is a registered company, engaged in industrial/ service
related activities, and incurred losses which is more than peak net worth during the
last five years

Causes of Industrial sickness have to be viewed from the general background of

industrial economy. At any point of time, however problems of industries may not
be identical. Yet , causes of sickness can be divided into two categories: external and
internal. External causes are those over which the unit has no direct control, but
internal causes are those which are within the control of the management of the
unit. Sickness can originate at any time i.e. before implementation or during
commercial operations of the project. Normally, no account falls sick all of a sudden.

As these are already heavily debt burdened, any rehabilitation programme should be
based on an achievable and viable break-even point (BEP). It may necessary, once
rehabilitation is on, units should operate at much higher levels than before. Keeping
in view all the possible outcomes, risk involved and the extent of irregularity in the
account, bank decision should aim at sustaining the business activity and not the
borrower as an individual. The decision should be based on likelihood of possible
recovery. Finally, bank can support the borrower provided he has equal interest in
coming out of the sickness.

The rehab programme should be finalized after a detailed study of the sick unit and
understanding its problems and feasibility to revive. The following are important
aspects/ stages involved in preparation of the rehabilitation programme. (i) study
of the feasibility level of operation (ii)assessment of additional funds (iii)
determinants of sources of funds (iv) preparation of cash flow estimates (v)
arrangements with other creditors (vi) measures for sales promotion (vii) freezing

Page 22 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

of existing bank borrowings (viii) strategies for recovery of overdue debts and
disposal of unwanted assets (ix) additional financial arrangements with other
financial institutions and equity holders (x)arrangements for better management
performance.

Monitoring of Rehabilitation Programme: Having decided to rehabilitate the unit,

the bank has to undertake follow-up activities relating to implementation of the
programme and performance during the post implementation. The follow-up action
starts with the collection of necessary information from the borrower. Before
rehabilitating the sick unit, bank must indicate information required for follow-up
so that the borrower can develop his own information system. Bank monitoring
includes periodical stock inspection, study of periodical returns and statements
received from the borrower, forming a monitoring committee consisting the
borrower, the bank executive and the consultant holding meetings periodically,
annual factory inspection , study of annual financial statements, sending a nominee
of the bank on the board of the company etc.

Review the Performance at end of Rehabilitation Period: Bank will have to review
the performance of the borrower regularly, say, quarterly. Review of the account
should aim in examining whether there has been improvement in the overall
working of the unit. It should be ensured that there is not much variance between
the projected and actual figures of production and sales and, the funds are used as
agreed upon. If the cash budget system is introduced, business should generate as
much cash as expected. Review of the account should reveal the areas of weakness.
A detailed study of such areas would suggest the line of action to be taken.
There could be some small units, which have become sick on account of external
factors like lack of power supply, water, raw material, etc. Such units may be
referred to the State Level Coordination Committee, which has been set-up at the
State level with representatives of banks, term lending institutions, State
Governments, etc.

(ii) Rehabilitation of Sick Companies under the SICA:

SICA makes it mandatory for sick units to make reference to the Board for Industrial
and Financial Reconstruction – BIFR within 60 days of adoption of audited financial
statements in the Annual General Body meeting and determination of measures that
may be adopted. BIFR determines whether the company has become sick and then
registers the case. After registration, BIFR appoints an operating agency which
prepares a revival scheme/plan for revival. Once the scheme is prepared BIFR
consults all the stakeholders to seek suggestions on the same. Changes are made in
the draft scheme including financial assistance, fresh terms and conditions , if

Page 23 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

necessary. Thereafter, the legal formalities as stated under the relevant Acts (such
as Companies Act 1956, Foreign Exchange Management Act, Income Tax Act, etc.)
have to be completed by the company and other relevant parties. After the
formalities are completed, the scheme is sanctioned which then will be binding on
all the concerned parties. When the sanctioned scheme is implemented, BIFR may
call for any information from the company for assessing the progress and effects of
the scheme on overall performance of the company. Through enough arrangements
are made under the Act in terms of formulation of policy guidelines, rehabilitation
schemes, creation of sufficient number of institutions to look after revival of sick
units, the success rate is very low. Hardly, 5 per cent of the total sick units have
been fully revived. This is mainly due to lack of seriousness on the part of
entrepreneurs, lack of coordination between banks and financial institutions,
substantial delay in release of subsidies/ reliefs from the government, etc.

4.4. Circulation of List of Defaulters:

Reserve Bank of India has introduced the practice of circulating the list of defaulters
and also willful defaulters among Financial Institutions (FIs) and Banks. This
practice has been found useful in ensuring that defaulters do not avail of fresh loans.
For identification of willful defaulters, the RBI has provided broad parameters such
as diversion of funds, missing of primary security, etc. Auditors of companies have
also to mention in their certificate about diversion of funds, if any. In 2001, Credit
Information Bureau India Limited (CIBIL) was set-up to provide credit history of a
borrower as a critical input to credit institutions for arriving at credit decision.
CIBIL collects information from its members and makes the credit history available
to any credit institution on demand. Members are obliged to inform the CIBIL about
details of fresh sanctions / enhancement of credit limits on timely basis. On the line
of CIBIL, three y other credit information bureaus have also been set up. Due to
circulation of list of defaulters, it is possible to penalize defaulters which in turn
helps in creating a conducive environment for loan recovery.

4.5. Special Mention Accounts (SMAs)|:

Bank should not wait for the account to become an NPA before it starts taking action
for recovery. Rather it should review all the account for repayment and prevent
accounts from slipping into NPA. This will help in reducing the number of NPAs by
arresting the slippage in the loan asset quality. In the wake of increasing NPA, in
February 2014, RBI came out with a Framework to monitor such accounts (and
named them SMAs) more effectively. Under the Framework, Accounts which have
defaults within Standard Assets are classified into three categories: SMA-0, SMA-1
and SMA-2 based on the period of default of up to 30 days, 31-60 days and 61-90

Page 24 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

days respectively. And in respect of high value advances under this framework,
lenders are asked to form a Joint Lenders Forum (JLF) and prepare a Corrective
Action Plan (CAP) for SMA-2 accounts with a total debt of more than Rs. 100 crores.
For restructuring of debt of more than Rs. 500 crores, Technical Evaluation Viability
(TEV) study should be prepared by professional agencies identified by IBA and
approval by JLF creditors with super majority of more than 75 percent of value
(total debt)and 60 percent of creditors in number. This Framework has come to
stay and is found to be a useful tool for monitoring of SMAs. But high value NPAs
from corporates continued to remain in the books of banks due to difficulties in
resolving them through legal measures. Hence, it was felt necessary to introduce
new recovery measures during the last 203 years.

4.6. Flexible Restructuring of Long Term Project (5/25) Scheme:

This initiative leads to improve the position of loan recovery from infrastructure
projects which become non-performing more often in July 2014. RBI introduced
5/25scheme which involves flexible structuring of long term project loans to
infrastructure and core-sector industries. Under the scheme, banks can extend a
loan for a period of 20-25 years in such a way that it matches with the cash flows.
The term 5/25 is used since the loan would be subject to refinancing every five
years. However, both lenders and the borrowers have to adhere to certain
conditions which were found to be difficult to fulfil. Consequently, there is lack of
interest on the part of banks to associate with such long-term projects due to their
perception of high credit risk.

4.7. Strategic Debt Restructuring(SDR):

As a next step towards strengthening the NPA resolution, the RBI introduced SDR in
June 2015 to bypass legal hurdles faced by the banks while taking over a defaulting
company by converting part / full of its debt into equity to acquire management
control and finding a new buyer for equity holding within 18 months. However, if
the bank does not get a new buyer during the period, the asset has to be classified as
an NPA. After introduction of this scheme in few cases, very soon banks realized that
the period of 18 months was too short to comply with the requirements. Further, for
resolution of large borrowal accounts which are facing severe financial difficulties, it
also requires coordinated deep financial restructuring which calls for a substantial
write-down of debt and/or making large provisions towards bank sacrifice. Hence,
banks made a representation to RBI for allowing more time to write down the debt
and make the required provisions in cases of resolution of large accounts which was
not considered. As a result of this, while two dozen cases entered into negotiations
under SDR, only two cases have actually been concluded as of end-December 2016.

Page 25 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

4.8. Scheme for Sustainable Structuring of Stressed Assets (S4A):

Appreciating difficulties faced by banks in implementing the SDR with special
reference to acquiring management control, in June 2016 the RBI came out with
Scheme for Sustainable Structuring of Stressed Assets (s4a) to facilitate the
resolution of large accounts. For being eligible for resolution of large accounts
under the scheme, certain conditions need to be fulfilled which include : (i) The
project must have commenced commercial operations.(ii) The aggregate exposure
should be more than Rs.500 crores. (iii)The debt should meet the requirement of
test of sustainability of debt i.e. a portion of total debt can be serviced over the same
tenor as that of the existing facilities even if the future cash flows remain at their
current level. (iv) The sustainable debt should not be less than 50 percent of current
funded liabilities. Under the Resolution Plan, it is not necessary to change the
management. Regarding formalities, the Joint Lenders Forum (JLF) shall, after an
independent TEV, bifurcate the total bank debt of the borrower into two parts: Part
A debt (subordinated debt) and Part B debt i.e. total debt minus Part A debt. For
Part A debt, there will be no fresh moratorium granted on interest or principal
repayment and extension of the repayment schedule or reduction in the interest
rate. Part B debt shall be converted into equity/redeemable cumulative optionally
convertible preference shares, the fair value needs to be calculated by following the
prescribed methodologies. JLF shall engage the services of credible professional
agencies to conduct the TEV and prepare the resolution plan. The resolution plan
should be agreed upon by a minimum of 75 percent of lenders by value and 60
percent of lenders by number in the JLF meeting. At individual bank level, the
bifurcation into Part A debt and Part B debt shall be in the proportion of Part A debt
to Part B debt at the aggregate level. Overseeing Committees (OCs), comprising
eminent persons were also constituted by IBA in consultation with RBI. The
resolution plan shall be submitted to the OC by the JLF which will review the
processes involved in preparation of the resolution plan etc. for reasonableness and
adherence to the provisions of these guidelines and opine on it. Their success,
however, has been limited due to several reasons and one of them is delay in
decision making by JLF due to failure to fulfil the super majority criterions for
approval of Corrective Action Plan (CAP) by lenders. Hence, the RBI subsequently
reduced the minimum stake of creditors for super majority from 75 percent to 60
percent by value and from 60 percent to 50 percent by number. Under S4A, hardly
one case been cleared by National Company Law Tribunal (NCLT). Hence to
facilitate the process of NPA resolution, it was felt necessary to enact a new law to
avoid legal hurdles in the matters concerning insolvency and bankruptcy.

Page 26 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

4.9. Insolvency and Bankruptcy Code (IBC Code), 2016:

IBS Code was enacted since there was no single law that dealt with insolvency and
bankruptcy in India for individuals and corporates. Under this, secured creditors
with more than 75 percent share in total debt will be allowed to file an application
for the rescue of the company at a sufficiently early stage, rather than wait for the
same to have defaulted on 50 per cent of its outstanding debt, as currently provided
for in the Companies Act, 2013. Even unsecured creditors representing 25 per cent
of the total debt shall be allowed to initiate rescue proceedings against the debtor
company. Lastly, all existing laws that deal with insolvency of registered entities will
be removed and replaced by this single Code.

A timeline of 180 days which can be extended by another 90 days, in all 270 days, by
the adjudicating authority in exceptional cases, for dealing with applications of
insolvency resolution. The IBC envisages a competitive industry of insolvency
professionals, insolvency professional agencies and information utilities. These will
be regulated by an insolvency regulator namely, Insolvency and Bankruptcy Board
of India IIBBI), to regulate insolvency professionals and agencies.

As regards , during the insolvency resolution period of 180/270 days, the

management control will be passed on to a resolution professional who will come
up with an insolvency resolution plan which has to be approved by lenders with
super majority and also by the adjudicating authority. If rejected, the adjudicating
authority will order for liquidation. Under the Law, Debt Recovery Tribunal (DRT)
and National Company Law Tribunal (NCLT) are deployed as the adjudicating
authority. While NCLT will deal with rehabilitation and restructuring matters, DRT
will look after loan recovery if not feasible for rehabilitation and restructuring.
About the process to be adopted during the period of 180/270 days, the regulatory
authority appoints an administrator to take control of the assets and management of
the firm and prepare the resolution proposal. About information asymmetry
between creditors and debtors about the financial status of the company, the JLF
will approach an industry of information utilities so that decision on turnaround
strategy or bankruptcy shall be taken up quickly. It was also proposed to strengthen
DRTs since they are already overburdened with insolvency cases by increasing their
number.. As per information available in IBBI “After notification of relevant
provisions of the Insolvency and Bankruptcy Code 2016 on 01.12.2016, 2,434 fresh
cases have been filed before NCLT and 2,304 cases of winding up of companies have
been transferred from various High Courts. Out of these, a total number of 2,750
cases have been disposed of and 1,988 cases were pending as on 30.11.2017. As per
information received from Public Sector Banks (PSBs), as on 30.11.2017, an amount

Page 27 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

of Rs. 39.63 crore had been realized after filing of cases with NCLT, and an amount
of Rs. 2.89 crore had been borne by the banks as haircut”.2

4.10 Amendments in Debt Recovery Laws:

To facilitate effective NPA resolution, Government also thought of making
amendments in the existing Debt Recovery Laws which include: Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest (
SARFAESI) Act 2002, Recovery of Debts Due to Banks and Financial Institutions
(RDDBFI) Act- 1993, Indian Stamp Duty Act- 1899 and Depositories Act- 1996.
Accordingly, in May 2016, the Enforcement of Security Interest and Recovery of
Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 was cleared by
the Parliament to amend Debt Recovery Laws. All these amendments would create a
conducive environment for recovery of bank due on a war footing.

4.11 Banking Regulation (Amendment) Act, 2017:

Despite several initiatives both by RBI and Government discussed above, banks have
continued to witness a very high level of stressed assets. The problem is that the
above initiatives like SDR, S4A and IBL are new, and financial restructuring
negotiations under these mechanisms inevitably take some time. But the country
cannot wait till then since over dues from the corporates are mounting. Hence, the
Government has enacted passed he Banking Regulation (Amendment) Act l, 2017 in
August 2017. It seeks to amend the Banking Regulation Act, 1949 to insert
provisions for handling cases related to stressed assets. The Act is aimed at tackling
the menace of massive stressed assets in the banking system granting more specific
powers to the RBI. Act also amends certain provisions of the Prevention of
Corruption Act (PCA),1988 to encourage bankers to take commercially bold
decisions, especially on haircuts on toxic assets, without fear of subsequent
prosecution. To state specific amendments to BR Act, while a new Section i.e. 35AA
is inserted as per the Ordinance to empower the government to authorize the RBI to
issue directions to banks as it deems fit to initiate insolvency process in case of a
default under the provisions of the IBC. Further, another section i.e. Section 35AB is
included in the Act to grant powers to the RBI to specify one or more authorities or
committees (called as Oversight Committees- OCs) to advise banks on resolution of
stressed assets. These OCs will be able to help banks in decision-making and also to
monitor the progress in resolving stressed assets (gross non-performing assets and
restructured standard advances). Thus, the central bank could monitor specific
cases, especially the more difficult ones, even when the resolution process under

2
This was stated by Shri P.P. Chaudhary, Minister of State for Law & Justice / Corporate Affairs in written
reply to a question in Rajya Sabha today i.e. 21/12/17

Page 28 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

IBL is under way. Bankers could also pursue the IBL mechanism more vigorously if
other mechanisms to deal with the NPA issue do not succeed.

The Reserve Bank issued a directive bringing certain changes to the existing
regulations on dealing with stressed assets With a view to facilitating decision
making in the JLF, the requirement of super majority which was necessary to initiate
procedure has been relaxed. Banks who were in the minority on the proposal
approved by the JLF are required to either exit by complying with the substitution
rules within the stipulated time or adhere to the decision of the JLF. Participating
banks have been mandated to implement the decision of JLF without any additional
conditionality Lastly, the Boards of banks were advised to empower their executives
to implement JLF decisions without further reference to them. The RBI has made
clear to the banks that non-adherence would invite enforcement actions. It was also
decided to reconstitute the OC under the aegis of the RBI and also enlarge it to
include more Members so that the OC can constitute requisite benches to deal with
the volume of cases referred to it. The RBI is planning to expand the scope of cases
to be referred to the OC beyond those under s4a as required currently. It is also
working on a framework to facilitate an objective and consistent decision-making
process with regard to cases that may be determined for reference for resolution
under the IBL. The RBI sought information on the current status of the large
stressed assets from the banks and constituted a Committee comprising majorly of
its independent Board Members to advise on the subject. RBI is also exploring the
feasibility of rating assignments being determined by itself by involving rating
agencies. Thus, with these initiatives from RBI, it is hoped that the Act would
produce the desired results.

5. CONCLUSION:
It is evident that NPAs cannot be avoided completely. Yet every bank should
attempt to keep the level of NPAs lower. Based on the discussion made above, few
learning could be summarized. Non-Legal measures are always preferred to legal
measures in terms of quick recovery and cost. But, a stern action is needed in
respect of wilful defaulters. For effective loan recovery, it calls for professional,
collective and timely action and maximum use of technology. Efforts of the
Government should be strengthened to develop a healthy climate for recovery by
seeking co-operation from all stakeholders. In addition, there should be an effective
coordination between banks and FIs in recovery aspects. It is also necessary to
ensure the adequate staff in the field to contact defaulters more frequently. Besides,
staff involvement in the recovery drive has be ensured by offering an incentive to
them. Further, judicial machinery has to become more efficient to dispose off the
cases pending before them early. In particular, DRTs have to gear-up to assist

Page 29 of 30
Course: Credit Management (Module III: Credit Management) NIBM, Pune

banks and FIs in their recovery effort. Lastly, banks to look into the recovery
matters more seriously. In other words, they should consider the loan recovery as a
continuous fight in which all of them have to participate more closely . In this
context, banks have a long way to go.

References:
1. Address by Dr K C Chakrabarty, Deputy Governor, Reserve Bank of India
titled “Corporate Debt Restructuring- Issues and Way Forward” at the
Corporate Debt Restructuring Conference 2012, Mumbai, dated 11 August
2012
2. CDR Web-site.
3. Report on Trend and Progress of Banking in India 2015-16Reserve Bank of
India.
4. Framework for Revitalizing Distressed Assets in the Economy, RBI Circular,
February 26, 2014.
5. Flexible Structuring of Long Term Project Loans to Infrastructure and Core
Industries, RBI Circular, July 15, 2014.
6 Strategic Debt Restructuring Scheme, RBI Circular, June 08, 2015.
7. Scheme for Sustainable Structuring of Stressed Assets, RBI Circular, June 13,
2016
8. Timelines for Stressed Assets Resolution, RBI Circular, May 05, 2017.
9. Insolvency and bankruptcy Bill, Tabled in Parliament on December 15, 2015
10. The Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Bill, Tabled in Parliament on May
11, 2016
11. RBI launches action plan upon introduction of Ordinance, RBI Press Release,
May (Amendment) Bill, Tabled in Parliament on May 11, 2016(Amendment)
Bill, Tabled in Parliament on May 11, 2016 22, 2017.

Page 30 of 30