13 Chapter 5

Chapter-5
Measures for Resolution of

NPAs
Chapter 5 Measures for Resolution of NPAs
5.1 Introduction
The previous chapter has given an insight of conceptual elucidation of NPAs as well as
discussed the factors attributable for them, their impact on banking operations, and
present status. NPAs are the biggest hurdle for financial soundness and viability of entire
banking system, particularly for public sector banks (PSBs) because they do not yield any
return while incurs a cost. If rigorous efforts should not be undertaken immediately, the
existence of the banking sector may be at risk. However, RBI and banks have initiated
various legal and non-legal measures to restrain the voluminous amount of bad loans but
all their efforts have gone in vain. This chapter gives a brief account of the several legal
and non-legal alternatives available to banks for resolution of NPAs.
5.2 Resolution of Non-Performing Assets

Presently, scheduled commercial banks (SCBs) have GNPAs of Rs. 6116.07 billion as on
March 31, 2016 which are very capacious and hard to recover. However, it is not possible
to recover all the NPAs of banking industry and bring them down to zero level, but with
underlying measures, they can be reduced upto a manageable limit. The key to effective
management of NPAs involves three steps:
(i) Prevention of fresh accretion of NPAs so that bank will not confront with the
problem of bad assets as much as possible,
(ii) Early identification of potential NPAs so that banks can handle them at initial
stage and necessary corrective measures will be taken to prevent their slippage
into bad accounts, and
(iii) Prompt implementation of requisite legal and non-legal measures by lenders
for recovering existing NPAs or sale of unviable accounts.
Though the signs of NPAs engender in early 1980s, the Government has taken
serious initiatives for curbing them only after the Narasimham Committee Report I (1991)
that mentioned the ill effects of NPAs and called for immediate action for reducing them.
The Parliament has passed several acts one after another for recovering NPAs namely and
RBI has introduced various measures for dealing with them. An account of the three
broad steps as mentioned aforesaid for resolving the chronic NPAs is explain as below:
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5.2.1 Prevention of Fresh Accretion of Non-Performing Assets

This is the foremost step towards efficient management of NPAs. There are various
internal reasons which are responsible for generation of NPAs and consequently the
solution to reduce them lies with the bank themselves. Along with numerous effective
measures, banks and RBI requires to follow such practices and norms, which prevents
creation of fresh NPAs in the system. Hence, there is a need of realistic approach to
reduce them. When banks undertake all such measures beforehand, they will avert
accretion of fresh NPAs. It encompasses following measures:
1. Appropriate credit assessment and monitoring
Banks should carry out proper credit assessment of the project before and after the loan is
given. Proper credit policy, loan eligibility criteria, and credit appraisal techniques should
be laid down so that only those projects will be approved which are financially sound and
have prospects to repay the loan (G.V.B. Prasad & Veena, 2011; Karunakar et al., 2008;
Yadav, 2014). Credit evaluation of the loan application facilitates banks to identify
unviable projects whereas credit monitoring inspects the progress of the project. The tools
of credit monitoring includes scrutiny of operations, stock statements, stock inspection,
stock audit, quarterly/half yearly statements, and annual review. Moreover, banks can
establish separate monitoring department for periodical reviewing of large accounts,
better management of cyclical ups and downs, for undertaking comparative risk analysis,
and for supervising the condition of project. The monitoring system should devise
quarterly report on feedback or functioning of the borrower company for conducting
critical analysis in order to detect early warning signals (A. Singh, 2013; V. Jain 2007).
2. Less reliability on interest income
In developed countries, banks do not depend entirely on interest income; they carry out
other functions as well. However, in case of Indian banks, 80 percent of the income is
earned via lending function, that is, interest income, and the remaining income is fee
based. Banks should explore for other income avenues rather relying on interest income
mainly. They should invest in safer securities, which generate sufficient net interest
margin, such as, higher average returns, as it is risk and service cost free rather than on
loans and advances that involves risk and provisioning (G.V.B. Prasad & Veena, 2011;
Karunakar et al., 2008; Yadav, 2014).
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3. Cohesive and conducive regulatory framework

RBI should relax prudential norms upto some extent at times of downturn or when the
economy is going through recession phase, particularly for those sectors which gets
severely affected due to economic glitch and political swindle. Liberalizing regulatory
standards at that juncture will assist borrowers to pay their due instalments timely.
4. Enhancing loan repayment culture
Restrictive measures should be initiated by banks towards prohibition of political loan
waiver scheme as it sends negative signals to borrowers, particularly, in case of
agricultural loan (A. Singh, 2013; Sahoo, 2015). This will enhance loan repayment
culture among those borrowers who thinks that their loan will be waive-off after some
time.
5. Remainder System
This is one of the easiest and effective measures for preventing creation of NPAs. Under
this system, banks send remainder to the borrowers via short message service or mail
before the instalment falls due. Usually, the borrowers respond positively to this
arrangement and pays instalment timely. However, banks should make rigorous efforts to
make this system more strengthened and prevalent (Rath et al., 2013; V. Jain, 2007).
6. Asset-Liability Management (ALM)
ALM is an important mean of risk management in banks. The Monitory and Credit Policy
for the second half of 1997-98 laid emphasis to put in practice an effective and
comprehensive ALM system for banks so that they can address the risk proactively and
undertake necessary actions to mitigate the losses arising from them (RBI, 1998). ALM is
an approach by which banks manage their balance sheet in order to allow for alternative
interest rates and liquidity scenarios. Banks should follow ALM approach as it provides
protection against credit risk, interest risk, and liquidity risk as well as enable them to
measure and monitor these risks in an effective manner (Vaidyanathan, 2013). It
assembles necessary information pertaining to assets and liabilities, undertake market
research, and reports empirical results with the aim of enhancing MIS (RBI, 1998). Due
to mismatches between assets and liabilities either in terms of currency or maturity
values, bank confronts the problems of illiquidity and insolvency and due to that reason,
RBI on the recommendations of Narasimham Committee (Report II) has issued
guidelines to SCBs on ALM system in April 1, 1999 (RBI, 1999).
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Asset-Liability Management
General Specific Financial
Asset, Income
Liability & Liability Asset Balance &
Capital Manage- Manage- Sheet Expendi-
Manage- ment Mange-
ment ture
ment ment Mange-
ment
Figure 5.1. Asset-Liability Management Structure

Source: Reserve Bank of India. (1999). Report on Trend and Progress of Banking in India
(1998-99, p.98). Retrieved from http://www.rbi.org.in
7. Incentives for recovery and prompt repayment

An efficient credit staff prevents accretion of fresh NPAs by monitoring accounts,
recognizing incipient signs of stress, and thereby initiating measures to prevent its
slippage. Bank may take legal and non-legal measures only when its credit staff is
incapable to mange bad assets. Therefore, when credit officials handle projects
effectively, they should be provided with incentives so that they will work with great zeal
and enthusiasm and take special interest in recovering dues by adopting necessary
measures in consultation with top management. Further, banks can also provide
incentives for prompt repayment particularly in rural areas which will act as motivation
tool for them and for others (Rani, 2012; V. Jain, 2007).
8. Imparting credit skills
Banks should improve credit skills and techniques of the credit officials and the staff
associated so that they will carry out appropriate credit appraisal and monitoring process
at the time of advancing loan (Karunakar et al., 2008; Yadav, 2014). Besides this, regular
training sessions should also be organized on credit and NPA management which
primarily aims at avoiding mistakes that create distressed loans (Poongvanam, 2011).
In addition, banks should comply with RBI latest prudential standards in respect
to IRACP as well as maintain minimum capital requirements. Adhering with these norms
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will protect the banks against financial risks as well as make them sound to face the
consequences of high NPAs.
5.2.2 Identification of Potential NPAs and Taking Corrective Measures
It is obligatory on part of the banks to identify problem accounts that reveal incipient
signs of credit deterioration, carry out their close monitoring, and accordingly initiate
prompt corrective to prevent their slippage into NPAs. Every bank has its own internal
process to identify potential NPA accounts, which composed of following measures:
1. Internal checks and controls
Banks should lay emphasis on stringent internal checks and control measures in
coordination with banking developments taking place in present scenario. It comprises
extensive gamut of internal audit and inspection, risk management systems,
documentation procedures, better MIS, and so forth (RBI, 2001c). It encompasses five
inter-related functions: risk assessment, information and communication, management
oversight, monitoring, and control activities (RBI, 2002b). When banks have well-
organized internal control measures, they would better gauge the extent of vulnerability
of a project and thereby initiate corrective action before the loan become NPA. RBI
conducted a study on internal checks and control at the instance of BFS and listed the
following components to be included:
(a) Relationship manger/ Credit officer: The credit manger is assigned with the
responsibility of monitoring borrowers account, business, future plans, and so
forth. He keeps in contact with the borrower and has complete knowledge of the
project for which the loan is granted. He carries out the scrutiny of borrower
projects’ regarding financial area, final accounts, stock reports, and so forth, as
well as inform bank about the necessary developments affecting borrower
accounts.
(b) Credit Rating System: It is a one point indicator to identify, measure, and monitor
the credit risk of borrower. Under this system, borrowers account is rated in terms
of credit exposure by taking account of financial, industry, management risks, and
so forth. Hence, it helps banks in tracking the entire credit portfolio. Many banks
follow their own developed credit rating system, while some follows the credit
rating models designed by various credit rating agencies. Ratings are assigned on
the basis of financial soundness and credit worthiness of borrowers. This process
is conducted by bank at the time of granting new loan or at the time of renewing
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existing credit facilities (Batra, 2003; G.V.B. Prasad & Veena, 2011; Report on
Non-Performing Assets, n.d; V. Jain, 2007).
(c) Special Mention Accounts (SMAs): SMAs are the assets classified between
‘Standard’ and ‘Sub-standard’ category. An asset that depicts earliest signs of
sickness/irregularities will be transferred to SMAs. These are the assets, which
show signs of continuing irregularities, inadequate cash flows, and incompetent
management integrity. These assets have potential weaknesses that require close
management attention and thereby they can be resolved through timely remedial
action. If not corrected, they will result in deterioration of repayment prospects
and slip into NPA account (RBI, 2002a). These are classified into three categories,
namely, SMA-0 in which principal or interest payment not overdue for more than
30 days; SMA-1 in which principal or interest payment overdue between 31-60
days; and SMA-2 in which principal or interest payment overdue between 61-90
days. Hence, banks should be vigilant in identifying SMAs. Accounts classified
under SMA-0 and SMA-1 category can be resolved by banks by discussing the
issue with the borrower and rectifying the deficiencies at the earliest. However,
SMA-2 requires mandatory formation of JLF and formulation of corrective action
plan (CAP) for the resolution of account (RBI, 2014a).
2. Prompt Corrective Action (PCA)
In accordance with the guidelines issued by BCBS in April 1997 regarding Core
Principles for Effective Banking Supervision, which authorized supervisory authorities to
initiate prompt corrective action (PCA) to prevent failure of banks; RBI has put it in place
with effect from December 2002 as part of ongoing efforts to strengthen existing
supervisory structure. PCA requires supervisory authorities to identify distressed/troubled
banks at earlier stage and then administer them to limit their losses to the minimal extent.
It also requires bank supervisors to maintain adequate provisions with themselves in order
to bring about timely PCA. In India, RBI includes NNPA, RoA, and CRAR as trigger
point in PCA regime (RBI, 2000, 2001c, 2003a). When banks position goes adverse in
respect of benchmark set up under PCAs regime, the RBI initiate specific regulatory
actions to protect the viability of credit institutions and restrict deterioration in the
soundness of banks. The RBI has issued revised PCA guidelines for commercial banks on
April 13, 2017 that will be effective from April 1, 2017 (RBI, 2017b). Hence, an efficient
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PCA system helps banks in reducing the massive bad assets by keeping an eye on trigger
indicators.
3. Robust Management Information System (MIS)
A well build up MIS is a pre-requisite for sound banking system as it enables to look after
day-to-day deposits and loans operations more conveniently. By enhancing information
technology (IT) methods, banks will increase their productivity and efficiency and
consequently improve their asset quality (RBI, 2001c). A robust IT and MIS help banks
in early detection of distressed asset and thereby serve as a mechanism for producing
reliable and qualitative data on asset quality for efficient decision-making. The data
generated under MIS system should be consistent with the data furnished by banks in
their statutory reports and it should provide information both at individual level and
segment level covering data on NPAs as well as on restructured accounts. An effective
MIS provides data relating to opening and closing balances, trading losses, additions,
reductions loan defaults, provisions, technical write-offs, operational losses, and so forth
(RBI, 2013a). With the help of a well-developed MIS, banks officials scrutinize
borrower’s transactions attentively and thereby initiate follow-up measures in case they
find irregularity in instalments of principal.
4. Restructuring of loan
If the bank early recognizes the problem account and finds that the borrower is not a
wilful defaulter, but there is genuine problem for non-payment. Then the bank may
restructure the account for making it viable. Restructuring is a mechanism under which
bank, for economic or legal reasons relating to borrowers financial difficulty, grants
concessions to him that it would not consider otherwise. It involves modification of terms
of the advances/securities such as alteration of repayment period/ repayable amount/the
amount of instalments/rate of interest (RBI, n.d.). Its main objective is to modify terms so
that the borrower can pay interest instalments.
5. Early Warning Systems
Banks may place early warning system (EWS) to identify the emerging problems in credit
exposures at an early stage, which leads to credit deterioration and fall in the asset
quality. It assist banks to monitor those warning systems carefully and thereby helps them
in taking suitable measures timely to prevent slippage of loan assets into NPA category
(RBI, 2002b, 2008b). The five broad categories of EWS that banks should keep in
consideration for identifying problem account are:
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(a) Early financial warning signals: These signals originate from borrowers’ balance
sheet, income and expenditure account, statement of cash flows, and so forth. Banks
should keep an eye on these annual statements of borrowers to identify probable
problem loans. It includes constant irregularity in the account, irregular interest
payments, declining sales, invocation of guarantees, worsening liquidity position/ low
working capital, net/operating losses, rising sales and falling profits, and so forth.
(b) Early Operations warning signals: These related to unsystematic operations of
business such as changes in the nature of companies business, disorganized
expansion; poor use of people; recurrent labor problems; low production; loss of one
or more financial sound customers; poor maintenance or deferred replacement of
plant and equipment; large inventories or inappropriate mix of inventories; and so
forth.
(c) Early management warning signals: These include change in behavior/personal
habits of key people; recurrence of problems presumed to have been solved; changes
in management, ownership, or key personnel; neglect or discontinuance of profitable
standard liens; poor financial reporting and controls; venturing into acquisitions, new
business, new geographic area, or new product line; change in business, economy or
industry; labor problem, and so forth.
(d) Early banking warning signals: These composed of declining bank balances, poor
financial planning for fixed asset requirement or working capital requirement, heavy
reliance on short term debts, dishonored cheques, opening account with other bank,
frequent request for loan, delays in submitting financial statements, sales transactions
not routed through the account, and so forth.
(e) Other External warning signals: These encompass changes in Government policies,
new acts, natural calamities, new competition, advanced technology, economic
recession, and so forth (G.V.B. Prasad & Veena, 2011; Report on Non-Performing
Assets, n.d.; V. Jain, 2007).
5.2.3 Recovery of Existing NPAs
Banks should undertake strong disciplinary actions to recover NPAs from non-
cooperative borrowers and willful defaulters who are primarily responsible for generation
of NPAs. They may take following legal measures for recovering existing NPAs or for
sale of unviable accounts:
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5.2.3.1 Legal Measures

1. Debt Recovery Tribunals (DRTs)
In 1981, the GOI has set up a committee under the chairmanship of Shri T.Tiwari for
examining the legal difficulties confronted by banks and FIs in recovering loan and
enforcing interest charged with them. The Committee suggested that there is an urgent
need of establishing Special Tribunals for speedy recovery of debts due to banks and FIs
as well as some changes has to be made in law for reducing the massive amount of NPAs.
The Narasimham Committee on FSRs (1991) also advocated for establishing tribunals.
As a result of these recommendations, the Recovery of Debts due to Banks and Financial
Institutions Act (RDDBFI Act), 1993 (Act 51 of 1993) came into force on June 24, 1993
and it was passed in Parliament on August 27, 1993. The main objective of passing this
Act was the establishment Debt Recovery Tribunals (DRTs) and Debt Recovery
Appellate Tribunals (DRATs) which exercise speedy recovery of debts dues to banks and
FIs under the powers conferred to it by this Act. It deals with the cases where the amount
of debt due to any banks or FIs or to a consortium of banks/FIs is more than 1 lakh rupees
but less than 10 lakh rupees (Department of Financial Services [DFS], 2015a, 2015b).
The DRTs and DRATs are set up under the RDDBFI Act, 1993 with the specific
aim of “expeditious adjudication and recovery of debts due to banks and FIs”. The
Central Government can establish the DRTs under sub-section (1) of Section 3 and
DRATs under sub-section (1) of Section 8 of this Act. Before creation of DRTs and
DRATs, the process of recovering suit filed loan was quite cumbersome and prolonged
due to lengthy legal proceedings and high cost of litigation (DFS, 2015a; The Debt
Recovery Appellate Tribunal,1997; The Debt Recovery Tribunal, 1997).
Banks/FIs that are confronting difficulties in recovering any debt from any person
may file an application to the Tribunal. After receiving the application, the Tribunal will
issue the summons requiring defendant to explain in written statement within 30 days
regarding his defense that why the relief appealed by banks/FIs should not be granted.
Hearings of DRTs will be conducted in which defendants and applicant (banks/FIs) files
claim and counter-claim within the time specified by the Tribunal. When the defendant is
not able to provide proper evidences that why he was not able to pay the required debt or
fails to supply the security timely for recovering debts due to banks and FIs, the Tribunal
will issue an order regarding attachment of whole or part of that security for recovering
the debt amount claimed by the applicant to the extent of secured debt (DFS, 2015b). As
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per Section 20 of RDDBFI Act, 1993, the applicant can appeal to DRATs, if he is not
satisfied by the order passed by the DRTs within 45 days from the date on which the copy
of the order is received (Report on Non-Performing Assets, n.d.; V. Jain, 2007).
2. The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI ) Act, 2002
The Parliament enacted the SARFAESI Act in the 53 rd year of Republic of India and it
came into force on June 21, 2002. The Government re-promulgated the act on August 22,
2002. As per RBI (2003b), under SARFAESI Act, 2002, a Securitization Company
(SC)/Reconstruction Company (RC) carries on the business of securitization or asset
reconstruction as provided in Section 10 of this Act. Every SC/RC must attain a
certificate of registration provided under this Act and should register itself with the RBI
before carrying on the business of securitization and reconstruction of financial assets
(FAs) (The Securitization and Reconstruction, 2016).
The SARFAESI Act, 2002 is the result of recommendations suggested by
Narasimham Committee (Report I and II) and Andhyarujina Committee. They advocated
for passing a new legislation for recovering bad debts by granting powers to banks and
FIs to take possession of the security and to sell them without intervention of court (The
SARFAESI Act, 2002: Statement of objects, 2016). The period of realization of acquired
assets extends from 5-8 years and in case the SC/RC is unable in resolving the assets or
redeeming the Security Receipt (SR) within this period, then the FAs will be considered
as loss assets (RBI, 2013a). Here Company refers to SC or RC. The important provisions
under this Act are as follows:
(a) Securitization, that is, issue of security by raising of receipts or funds by
securitization /reconstruction company
As per the directions provided in RBI (2003b), a SC/RC follow the provisions as given in
Sections 7(1) and (2) under SARFAESI Act, 2002 and set up one or more trusts for
issuing SRs. The company transfers the acquired assets to the established trust for the said
purpose at the price at which they were acquired from the originator/borrower. The trust
shall issue the SRs to the Qualified Institutional Buyers (QIBs) as well as kept and
manage the financial assets for the advantage on QIB. After acquisition of financial
assets, the SC/RC can issue security receipts to QIBs for subscription as per the
provisions of the Act, and raise finances from them through devising schemes for
acquisition of such assets (The Securitization and Reconstruction, 2016).
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(b) Measures for asset reconstruction

Pursuant to the guidelines under SARFAESI Act, 2002 and following the rules framed by
RBI in this behalf, the reconstruction company or securitization company may adopt one
or more of the following measures for asset reconstruction-
(i) to possess/take over the management of the business of the borrower;
(ii) to sale or lease of a part or whole of the business of the borrower;
(iii) to reschedule the payments of debts payable by the borrower;
(iv) to enforce the security interest as per the provisions of this Act;
(v) to settle the dues which is payable by the borrower; and
(vi) to take possession/ownership of the secured asset as per the provisions of this
Act (The Securitization and Reconstruction, 2016).
(c) Enforcement of security interest
The SARFAESI Act 2002 granted power to the secured creditor, that is, banks/FIs (if 75
percent of the secured creditors agree) to enforce security interest for recovering its debts
without the intervention of court or tribunal. Before enforcing security interest, the
secured creditor send a notice to the borrower for discharging all his/her liabilities within
60 days relating to the loan which was classified as NPAs, after then the secured creditor
will exercise all or any of the rights which are conferred to it under sub-section (4) of the
SARAFESI Act, 2002. If the borrower discharge all his liabilities within 60 days from the
date of issuing notice, then the secured creditor will not enforce security interest; but if he
fails to pay within the specified period as given in sub-section (2), then the secured
creditor will implement one or more of the following measures to recover the amount
overdue to it:
(i) take possession of the secured asset of the borrower as well as the right to
transfer the secured assets by means of sale, lease or assignment in order to
recover the debt amount;
(ii) take over the management of the business of the borrower including the right
to transfer by way of sale, lease or assignment of substantial or whole part of
the business which was kept as security for the loan by the borrower;
(iii) employ any person as the manager of the secured asset which was taken over
by the secured creditor;
(iv) send a notice to the person/persons who has/have acquired any secured asset
from the borrower, or to the person from whom any amount is due to the
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borrower, and recover the amount from that secured asset or from that person
to the extent the liability was due by the borrower to the bank (The
Securitization and Reconstruction, 2016).
The SARFAESI Act was amended in August 2016 and now it is called as The
Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
Provisions (Amendment) Act, 2016. As per SARFAESI Amendment Act, 2016, the
SC/RC will be known as ARCs (RBI, 2017a).
3. Lok Adalats
Lok Adalats provide a platform to all SCBs and FIs for settlement of their dues and
thereby resolving disputes via means of conciliation, mediation, compromise, amicable or
negotiated agreement (RBI, 2001a). It is constituted under Legal Services Authorities
Act, 1987 and laid down under Section 89 of the Civil Procedure Code (Report on Non-
Performing Assets, n.d.). The forum of Lok Adalats offers numerous benefits to banks
and FIs as well as reduces the burden on court. It charges no fees when new cases or
disputes referred to it for settlement. It carefully cognizance any existing suit filed in the
court by the banks/FIs as well as pass order regarding fresh disputes after looking into the
matter. The verdict given by Lok Adalats should be legally acceptable and it has binding
on both the parties. On May 2, 2001, the RBI had issued guidelines in respect of
compromise settlement of dues of banks and FIs through Lok Adalats involving smaller
amounts upto Rs. 5 lakhs and it includes both suit filed and non-suit filed accounts
covering all NPA accounts (RBI, 2001c). There are no cut-off dates in Lok Adalats as it is
an on-going process (RBI, 2001a). Later on, the GoI in consultation with RBI, raise the
ceiling limit from Rs. 5 lakhs to Rs. 20 lakhs (RBI, 2004a, 2004b, 2005d).
Under Lok Adalats, the settlement of dues is flexible and it is left at the discretion
of Board of Directors (BoD) of each institution. In Lok Adalats cases are decided on the
spot with the aim of expeditious recovery of NPAs. It is presumed that the repayment
should be made by the borrower within three years and in case, he will not pays his
instalments periodically, then the whole debt would fall for payment and bank may induct
legal actions against him. The BoD of each institution frames a policy under which all the
terms and conditions are laid down which can be accepted and rejected. After negotiating,
if the representatives of both parties agree to the settlement subject to the conditions laid
down in policy framework, and accepts the decision given by the Presiding Officer of the
Lok Adalats, the settlement of arrears would be made expeditiously. And, if in case they
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Table 5.1
NPAs of Scheduled Commercial Banks Recovered through Various Channels as on March 31 (Amount in Billion)
Lok Adalats DRTs SARFAESI Act Total
Year
(1) (2) (3) (4) (1) (2) (3) (4) (1) (2) (3) (4) (1) (2) (3) (4)
2003 272793 12 2 16.7 57915 823 58 7.05 33736# 121 50 41.3 364444 956 110 11.5
2004 186100 11 1 9.1 7544 123 21 17.1 2661# 78 12 15.4 196305 212 34 16.0
2005 185395 8 1 12.5 4744 143 27 18.9 39288# 132 24 18.2 229427 283 52 18.4
2006 268090 21 3 14.3 3534 63 47 74.6 41180# 85 34 40.0 312804 169 84 49.7
2007 160368 8 1 14.0 4028 92 35 37.8 60178# 91 37 41.4 224574 191 73 38.2
2008 186535 21 2 8.2 3728 58 30 51.9 83942# 73 44 61.0 274205 152 76 50.0
2009 548308 40 1 2.4 2004 41 33 81.1 61760# 121 40 33.0 612072 202 74 36.6
2010 778833 72 1 1.6 6019 98 31 32.0 78366# 142 43 30.0 863218 312 75 24.0
2011 616018 53 2 3.7 12872 141 39 27.6 118642# 306 116 37.9 747532 500 157 31.4
2012 476073 17 2 11.8 13365 241 41 17.0 140991# 353 101 28.6 630429 611 144 23.6
2013 840691 66 4 6.1 13408 310 44 14.2 190537 681 185 27.2 1044636 1057 233 22.0
2014 1636957 232 14 6.0 28258 553 53 9.6 194707# 953 253 26.6 1859922 1738 320 18.4
2015 2958313 310 10 3.2 22004 604 42 7.0 175355 1568 256 16.3 3155672 2482 308 12.4
2016 4456634 720 32 4.4 24537 693 64 9.2 173582 801 132 16.5 4654753 2214 228 10.3
Mean 969365 114 5 8.2 14569 285 40 28.9 179825 393 95 31.0 1083571 791 141 25.9
Note. Column 1 indicates number of cases referred; Column 2 indicates amount involved; Column 3 indicates amount recovered; and
Column 4 indicates 3 as percent of 2 (i.e., the percentage of total amount recovered to total amount involved); Column 3 refers amount
recovered during the given year as well as during previous years; #: Number of notices issued; Some values of column 4 have been
calculated by researcher.
Source: Compiled by researcher from various issues of RBI-RTPBI and STRBI. Retrieved from http://www.rbi.org.in
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don’t agree with the settlement of dispute, then they can carry on with legal proceedings
with courts. Lok Adalats can be organized by individual banks and FIs with the help of
Taluk/District/State level Legal Services Authorities as well as convened by various
DRTs and DRATs. Banks/FIs should lay down clear instructions regarding this and keep
an eye on the progress of the cases filed in Lok Adalats (RBI, 2001a).
It is apparent from Table 5.1 that among the various channels available to SCBs,
SARFAESI is the most effective channel as it recovered NPAs of Rs. 95 billion on an
average basis followed by DRTs and Lok Adalats respectively. However, the numbers of
cases referred were highest in case of Lok Adalats (i.e., 969365) on an average basis
followed by SARFAESI (179825) and DRTs (14569). The total number of cases referred
to these three major channels increased sizably from 364444 in 2003 to 1083571 in 2016,
that is, it increased by 719127 in absolute terms and by 197.32% in relative terms. It is
also worth mentioning that during the period 2005-10, both DRTs and SARFAESI
performed efficiently, but the percentage of recovery was higher in DRTs (i.e., 49.38%)
as compared to SARFAESI (i.e., 37.27%) on an average basis. However, during 2011-16,
SARFAESI outperformed and recovered NPAs of Rs. 1043 billion. In regards to Lok
Adalats, there was negligible improvement as its recovery rate continuously declined over
the period 2006-15, except in the years 2011 and 2012.
4. Corporate Debt Restructuring (CDR)

CDR system is an important measure for restructuring the corporate debts of viable
entities in a fair and transparent manner that are encountering difficulties, outside the
framework of BIFR, DRT, and other legal procedures. Its main objective is to protect
viable corporate bodies which got affected due to certain internal or/and external causes
as well as to minimize the losses of the creditors and other stakeholders by implementing
an organized and synchronized restructuring mechanism (RBI, 2005d). RBI introduced
the concept of CDR and issued comprehensive guidelines regarding its implementation
by banks and FIs on August 23, 2001 (Corporate Debt Restructuring [CDR] Mechanism,
2005a). It became operational on March 2002 with the execution of Inter-Creditor
Agreement (ICA) on February 25, 2002 by 49 financial institutions, which included 34
PSBs and 15 PVBs (RBI, 2004b).
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The CDR Mechanism is a voluntary non-statutory system based on Debtor-

Creditor Agreement (DCA) and ICA. All banks and FIs, including NBFC, ARCs, State
Level Institutions (SLIs), and Co-operative banks can join it on transaction-specific basis
(CDR Master Circular, 2012, 2015). It deals with only multiple banking accounts,
consortium or syndication accounts, in which all the banks and FIs jointly accounted for
total outstanding (fund based and non-fund based) exposure of Rs. 100 million and above.
In the present context, CDR cover cases with outstanding exposure of Rs. 20 crore and
above and it is be applicable to standard and substandard accounts (RBI, 2001c). It covers
all types of assets that are prescribed in RBI prudential guidelines (CDR Mechanism,
2005a). It calls for the support of 60 percent of creditors by numbers in addition to the
support of 75 percent of creditors by value in order to make the decision process more
equitable and transparent (RBI, 2005d, 2006b).
According to the directions given by RBI (2012), Para 11.1.5 and 11.1.6,
restructuring will not be provided to borrowers who indulge in frauds and malfeasance,
whereas BIFR can be eligible for restructuring only if they provide express approval. An
important aspect of CDR is its “stand still” agreement under which both the parties enter
into an agreement that for a period of 90 or 180 days, no other recourse measure will be
undertaken. This provides the necessary time to CDR mechanism for carrying out debt
restructuring measures effectively without outside intervention, judicial or any (RBI,
2015e). The CDR framework in India comprises of three-tier structure. These are:
(a) CDR Standing Forum and its Core Group

The CDR Standing Forum is the representative general body of all banks and FIs that
takes part in CDR framework at their own interest. It is a self-empowered forum, which
lay down various rules, regulations and guidelines, and supervises the progress of CDR
mechanism. It should held a meeting at least once in every six months in which it frames
guidelines for CDR Empowered Group and CDR Cell as well as it ensures that they work
smoothly and as per the guidelines framed by it (CDR Mechanism, 2005e; RBI, 2005d).
The CDR Core Group carved out of CDR Standing forum and its main purpose is to lend
a hand to CDR Forum in organizing various meetings and to arrive at decisions regarding
various policies on behalf of Forum (CDR Mechanism, 2005c; RBI, 2005d).
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(b) CDR Empowered Group

The CDR Empowered Group has the authority to take decisions regarding individual
cases of corporate debt restructuring. It includes Executive Director (ED) level of
representatives of IDBI, ICICI, and SBI as standing members as well as ED level
representatives of banks and FIs who have an exposure/experience with the concerned
company. It carefully examines the viability and rehabilitation capability of corporate and
passes the restructuring package in respect of cases referred to CDR System. The final
decision will be approved by it. If it finds that the restructuring of debt is viable and
feasible, then it will put the company on restructuring mode, otherwise it will allow the
creditor to recover its dues by following any other legal measures or by liquidating or
winding up the company either individually or collectively (CDR Mechanism, 2005d;
RBI, 2005d).
(c) CDR Cell
CDR Cell helps in carrying out the functions of CDR Standing Forum and CDR
Empowered Group. It is responsible for scrutinizing the proposals received from the
borrowers regarding CDR and rehabilitation package. The proposals which it found
feasible will be put before CDR Empowered Group within the time period of one month
to decide whether rehabilitation plan is possible (CDR Mechanism, 2005b; RBI, 2005d).
As per the revised guidelines issued by RBI in respect of restructuring of advances, the
restructuring package should be implemented within 120 days from the date of approval
under CDR System; while the restructuring cases outside the purview of CDR System
should be implemented within 90 days from the date of receipt of application by the
banks (RBI, 2008a).
It is evident from Table 5.2 that all the particulars relating to CDR followed an increasing
trend. The number of applications increased from 225 to 655 during the period 2009-16,
reporting an increase of 430 in absolute terms. The amount of aggregate debt under
various finalization-restructuring schemes has increased from Rs. 4261 crore in 2009 to
Rs. 42005 crore in 2014, accounting an increase of Rs. 37744 crore. The total number of
cases approved by CDR also increased significantly from 184 to 530, reporting an
increase of 346 (188.04%) whereas the amount of aggregated debt increased from Rs.
86536 crore to Rs. 403004 crore which implies an increase of Rs. 316468 in absolute
terms and increase of 365. 71% in relative terms during 2009 to 2016.
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Table 5.2
CDR Cell Progress Report as on March 31 (Amount in Crore)
Total Cases Approved
Cases under
(including cases
Total References Cases finalization of
withdrawn/
Received Rejected/Closed Restructuring
Exited/Merged after
packages
Year approval)
No. No.
Aggregate Aggregate No. of Aggregate No. of Aggregate
of of
Debt Debt cases Debt cases Debt
cases cases
2009 225 95815 29 5018 12 4261 184 86536
2010 256 115990 32 7050 9 4641 215 104299
2011 305 138604 42 9667 21 18023 242 110914
2012 392 206493 59 20817 41 35161 292 150515
2013 521 297990 87 36894 33 32083 401 229013
2014 622 429989 111 57540 35 42005 476 330444
2015 655 474002 125 70998 -- -- 530 403004
2016 655 474002 125 70998 -- -- 530 403004
Source: Compiled by researcher from various issues of CDR Mechanism. (2009-16).
Retrieved from http://www.cdrindia.org/statistical.htm
Table 5.3
CDR progress summary as on March 31 (Amount in Crore)
Cases Withdrawn on account
Year Cases exited successfully Live cases in CDR
of package failure
No. of No. of Aggregate No. of Aggregate
Aggregate Debt
cases cases Debt cases Debt
2014 121 29980 75 58205 280 242259
2015 165 56995 80 59604 285 286405
2016 213 88552 86 62217 231 252235
Source: Compiled by researcher from various issues of CDR Mechanism. (2009-16).
Retrieved from http://www.cdrindia.org/statistical.htm
Table 5.3 reveals that the total number of cases withdrawn on account of package failure
was 121 in 2014 which increased to 213 in 2016, reporting an increase of 92 cases
(76.03%) over the period. The aggregate amount involved in these cases increased from
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Rs. 29980 crore to Rs. 88552 crore, accounting an increase of Rs. 58572 crore. During
2014 to 2016, the net increased in the number of cases exited was 11, while the number of
live cases in CDR decreased from 280 to 231 over the same period. The data relating to
loans subjected to restructuring and corporate debt restructuring regarding various bank-
groups is provided in Table K1 of Appendix A.
5. One-Time Settlement (OTS) / Compromise Schemes
The RBI issued modified guidelines to PSBs on July 27, 2000, for recovering NPAs of all
sectors, including the small sector with outstanding balance of upto Rs. 5 crore as at end
March 1997 via OTS mechanism. This scheme was the result of unsatisfactory
performance of Settlement Advisory Committees in settling chronic NPAs of small
sector. The OTS scheme offers a simple, non-discriminatory, and non-discretionary
procedure for recovering NPAs classified as substandard or doubtful or loss assets and it
does not include the cases of willful defaults, malfeasance, and fraud (RBI, 2000). The
RBI issued revised OTS guidelines on January 29, 2003 for recovering NPAs due to
PSBs in all sectors; and on March 31, 2004 for recovering NPAs of Small and Medium
Enterprises (SMEs) sector in banks books covering all categories of bad assets upto Rs.
10 crore (RBI, 2003a, 2005c). The RBI extended the limit for receiving and processing
application under these schemes.
The guidelines of OTS Scheme apply to all PSBs covering NPAs of all sectors
irrespective of nature of business and it covers the cases regarding which banks have
taken actions under the SARFAESI Act, 2002 as well as the cases that are pending before
BIFR/Courts/DRTs, subject to the approval of judgment order passed by the latter. The
borrower has to pay the lump sum amount under OTS Scheme, but in case he is unable to
pay 100 percent of debt, then the authority will allow him to pay 25 percent sum at the
spot and the remaining 75 percent of debt in instalments within a year, including interest
charged at the current prime lending rate from the date of settlement to the date when
final payment has been made by the borrower. A competent authority having delegated
powers take the decision regarding OTS and subsequent payment of debt (RBI, 2005a).
6. Winding up proceedings
Banks can also initiate winding up proceedings against defaulting companies. In India,
the provisions regarding this are contained in the Companies Act, 1956, which lay down
that a company can be wind up either voluntarily or by an order of the Company Law
Board (CLB). Among the various other reasons, a CLB is empowered to pass an order of
167
winding up, if the Company is unable to pay its debts. The petition for winding up
company may be filed by bank/FIs, any contributor or contributors or by all of the parties
together or separately or by the Registrar of Companies, or by any authorized person of
state and central Government. However, as it is very lengthy and time consuming,
therefore it is less opted measure to seek redressal by banks (Batra, 2003; Mehta, 2009).
7. Asset Reconstruction Companies (ARCs)
On recommendations of Narasimham Committee in 1991, the Union Budget for 1998-99
proposed establishment of Asset Reconstruction Fund (ARF) that will take over the bad
assets (i.e., NPAs) of banks and swap them with special bonds. The idea to set up ARF
was embedded due to the slow recovery of DRTs owing to legal and other structural
factors (RBI, 1998). However, this recommendation could not put into practice and later
on the CBSR suggested for setting up Asset Reconstruction Companies (ARCs) that
would take over all loan assets in doubtful and loss category and issue NPA Swap Bonds
to the banks, which represents the realizable value of the bad loans transferred (RBI,
1999). Under the SARFAESI Act, 2002, ARCs set up under the Companies Act, 1956
and registered itself with RBI. The SARFAESI Act regulates the transfer of NPAs to
ARCs and RBI provides necessary guidelines regarding its registration, functions, norms,
and so forth. ARCs take over NPAs of banks/FIs at a discounted rate and manage them
with the aim of recovering and/or liquidating the loan in default (Mehta, 2009). Banks/FIs
assign their NPAs to trusts formed by ARCs. The trusts issues SRs to QIBs and thereby
pays the amount of proceeds of financial assets to banks/FIs. ARCs adopt number of
measures for realizing the amount stuck in NPAs like re-schedulement of debt, OTS
schemes, recovering through DRTs, Lok Adalats, enforcing security interest, initiating
legal measures, and so forth. If ARCs don not able to recover the amount via above-
mentioned measures, then it liquidate the assets or sell them by auction. Presently, there
are 24 ARCs in the country, which are regulated and supervised by RBI under the
provisions of SARFAESI Act, 2002. The RBI has increased the minimum net owned fund
requirement for ARCs from Rs. 0.02 billion to Rs. 1 billion with effect from April 28,
2017 keeping in view of its role in resolving stressed assets (RBI, 2017a).
Asset Reconstruction Company India Limited (ARCIL/Arcil) was incorporated in
2002 as a public limited company and in pursuance of Section 3 under the Securitization
Act, 2002. The certificate of registration is issued by RBI and it operates as a NBFC
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under Section 451(f) (III) of RBI Act, 1934. Arcil’s process for acquisition, management,
resolution, and recovery of financial assets is given in Figure 5.2 below:
Figure 5.2. The Process of Arcil’s Acquisition, Management, Resolution and

Recovery of Financial Assets
Source: Arcil’s process for acquisition, management, resolution and recovery (2016, p.1).
Retrieved from http://arcil.co.in/business/business_details.php?id=41
8. Credit Information Bureau (CIB)

On the basis of recommendations provided by Working Group (1999) on setting up CIB
in India, the Union Budget of 2000-01 declared its establishment for developing better
institutional mechanism for sharing credit-related information between banks and FIs
relating to borrowers. RBI in its Monetary and Credit Policy of April 2000, advised
banks/FIs to make proper in-house arrangements regarding submitting of credit
information pertaining to suit-filed accounts of Rs. 1 crore and above by March 31 and
list of suit-filed willful defaulters of Rs. 25 lakh and above as at the end of March, June,
September, and December every year to the bureau. In January 2001, SBI entered into a
169
Memorandum of Understanding (MOU) with HDFC, Dun and Bradstreet Information

Services (India) Pvt. Ltd., and Trans Union International Inc., (as foreign partners) to
form Credit Information Bureau (India) Ltd. (CIBIL) with a paid up capital of Rs. 25
crore (RBI, 2000, 2002b). The Credit Information Act was passed in May 2005 for
strengthening the process of collecting, processing, and sharing credit information on
borrowers of banks/ FIs (RBI, 2006b). The prime objective of CIBIL is obtaining and
circulating information on suit-filed accounts and publicizing the list of defaulters in a
systematic manner so that banks would not confront adverse selection of projects while
granting loans.
9. Recovery through Courts
When the account becomes irrecoverable, banks resort to civil litigation without wasting
time. Filing of civil suits has become a common practice in banks for recovering loan
amount, although it is a very time consuming process. The legal procedure for handling
such civil litigations composed of following steps:
(a) Pre-Filing Stage: The bank branch should properly scrutinize all the documents
before giving to advocate for filing in the court. The documents must be properly
stamped, completely filled, and corrections are authenticated as well as they
should be registered with the Registrar of Assurances and must be enforceable.
Bank branch should give a prior notice to the borrower/guarantors before filing
the suit and provide reasonable time to comply with the notice. If the borrower
will not respond to the notice, then the bank should file a case.
(b) Filing stage: The branch should file the suit based on securities and pleadings to
be made. It file the suit timely and call for suit particulars (viz. suit number, date
of filing, amount of suit, date of next hearing etc.) from the candidate.
(c) Post-Filing Stage: The banks have to file an application for appointment of
receiver in case of suit against companies. They may also file an application for
restraining the borrower to use the machinery while the suit is in progress as its
usage may result in wear and tear leading to poor market value which is
detrimental for the interest of bank or in lieu deposit appropriate amount in court.
After filing the suit, the branch has to be in constant touch with the advocate, keep
itself updated regarding suit from time to time, and ensure that the suit is decreed
by the court as prayed for. If the bank is not satisfied by the order, then it may
appeal to the respective courts within the limitation period. The execution petition
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should be file within decree-limitation period of 12 years that is computed from

the date of money decree in recovery suits and from the date of final decree in
case of title suits (V. Jain, 2007).
10. The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017
This bill is introduced in Lok Sabha on August 10, 2017 and it aims for providing speedy
and efficient resolution of distress in specified categories of financial service providers;
providing deposit insurance to consumers of certain categories of financial services; and
designating Systematically Important Financial Institutions by the Central Government. It
also proposed for setting up a resolution corporation for protection of consumers of
specified service providers and of public funds for ensuring the stability and resilience of
financial system. It may be called as the FRDI Act, 2017 and this will help banks in
resolving the problem of distress assets from their balance sheets timely and
economically. This bill is applicable only for financial sector entities such as banks and
insurance companies. The resolution corporation has the power to acquire, hold or
dispose of movable and immovable property, and shall be sue or sued, subject to the
provisions of this Act. The RC will take over the Deposit Insurance and Credit Guarantee
Corporation and thereby perform the deposit insurance functions (The Financial
Resolution, 2017).
11. The Sick Industrial Companies (Special Provisions ) Act, 1985
The Sick Industrial Companies Act (SICA), 1985 came into force on 12 January, 1987
and it applies to all scheduled industries other than the scheduled industry relating to
ships and other vessels drawn by power. It is established with the objective of securing
timely detection of sick and potentially sick companies; determining preventive,
ameliorative, remedial, and other measures for their rehabilitation/revival by body of
experts; and enforcing them expeditiously so that their idle investments will become
productive. Apart from reviving sick units, it also aims for closure of unviable companies
so that their locked up investments would be released for productive use elsewhere (The
Sick Industrial, 1985). The body (or Board) of experts were named as Board for Industrial
and Financial Reconstruction (BIFR), constituted in January 1987 and came into the
functional form on May 15, 1987. The Appellate Authority for Industrial and Financial
Reconstruction (AAIFR) was set up in April 1987. The SICA constituted BIFR, AAIFR,
and their benches (Board for Industrial and Financial Reconstruction, n.d.). If the sick
industry is not paying regular instalments of loan and it has generated NPAs, than the
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BoD of such sick company make a reference and report to BIFR for rehabilitation and
other measures to be adopted for its revival. Hence, BIFR is an effective regulatory body
for reviving sick industrial company by providing legal, financial restructuring, and
managerial measures. It also provides guidelines for sale of assets of sick companies.
However, from 1 December 2016, the SIC (Special Provisions) Repeal Act 2003 (1 of
2004) came into force which implies that both BIFR and AAIFR stands dissolved on such
date (MOF notification, 25 Nov, 2016). All its proceedings will be referred to NCLT and
the appeal against NCLT will be made to National Company Law Appellate Tribunal
(NCLAT) as per provisions of IBC, 2016 (Varottil, 2016).
12. The Insolvency and Bankruptcy Code (IBC), 2016 (No. 31 of 2016)
This act was passed by the Parliament on May 28, 2016 and it aims for resolution or
liquidation of stress assets of corporate debtors in a time-bound and effective manner,
where the minimum amount of the default is one lakh rupees and the maximum amount
of default should not be more than one crore rupees . To make it more efficient, the
Insolvency and Bankruptcy Code (Amendment) Bill 2017 came into force on November
23, 2017. It consolidates and amends various laws relating to reorganization and
insolvency resolution and hence become the single law that deals with insolvency and
bankruptcy. It is applicable to non-financial entities such as companies, SMEs,
individuals, other legal entities, partnerships, and proprietorship firms. It empowers the
creditors to initiate insolvency and liquidation proceedings at their own to realize
promptly the best value of assets, instead of waiting for regulatory directions. It stands on
four pillars, namely, insolvency professionals, information utilities, adjudicating
authorities, and the Insolvency and Bankruptcy Board of India. The financial creditor has
to file an application for initiating corporate insolvency resolution process against
corporate debtor before the Adjudicating Authority when a default has occurred. The
committee of creditors, having majority vote of not less than 75 percent, must approve the
resolution plan. The corporate insolvency resolution process shall be completed within
180 days from the date of admission of the application to initiate such process, which can
be extended to 90 more days in case of certain circumstances (Insolvency and Bankruptcy
Board of India, 2016; RBI, 2017a).
13. National Company Law Tribunal (NCLT)
The Budget of 2001-02 announced repeal of Sick Industrial Companies Act (SICA) and
wound-up of BIFR and proposed to set up NCLT as their alternative by amending the
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Companies Act, 1956. NCLT was expected to consolidate the powers of Companies Act,
BIFR, and High Court to avoid multiplicity of forums; and all the parties concerned with
rehabilitation of sick units should abide its orders (V. Jain, 2007). After 11 years of its
announcement, the Central Government has constituted NCLT under section 408 of the
Companies Act, 2013 (18 of 2013) with effect from June 1, 2016. The Ministry of
Corporate Affairs (MCA) established 11 branches of NCLT in the first phase having
Principal Bench at New Delhi and one each Regional Benches at New Delhi,
Ahmedabad, Allahabad, Bangalore, Chandigarh, Chennai, Guwahati, Hyderabad,
Kolkata, and Mumbai. The President, 16 Judicial Members, and 9 technical members
head these benches at different locations (National Company Law Tribunal, 2016). NCLT
works on the line of BIFR in the matter of rehabilitation and assess the viability of the
projects based on ‘cash test’. Further, a rehabilitation and revival fund is set up for paying
interim dues to workers of the sick company or under liquidation, for protecting their
assets, and for their rehabilitation (V. Jain, 2007).
14. Company Mergers
The Companies Act, 1956 permits mergers and as per Section 72-A (inserted in 1977) of
the Income Tax Act, 1961, the healthy companies which take over sick companies and
prepare revival plans will be given tax incentives. However, this scheme has not
motivated the companies due to delays in completing lengthy formalities as laid down by
the High Court and Income Tax Department. Hence, this scheme need to be reviewed
under Section 72-A for encouraging company mergers and providing minimum
formalities (V. Jain, 2007). In addition, committee on banking sector reforms
recommended mergers among strong banks for reducing NPAs in banking industry.
Therefore, mergers and acquisitions should be given due significance and companies
should be encourage for that. Government should introduce legislation regarding that to
facilitate smooth mergers and acquisition process.
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Figure 5.3. Restructuring Alternatives Available to Banks /Decision-Making Process for Banks
Source: Alvarez & Marsal. (2014). Outlook for stressed assets market in India, p. 14. Retrieved from
http://www.alvarezandmarsal.com/sites/default/files/sidebar-callouts/india-stressed-assets.pdf
174
5.2.3.2 Other Measures for Resolution of NPAs

1. Special Recovery Cell/ Special Workout Units
Banks should set up special recovery cell/special workout units at head office/zonal office
and regional office, which primarily deal with resolving the nuisance of NPAs. The
recovery officers should be appointed at branches composing high level of bad loans;
their credit skills, knowledge, practical experience, and negotiating skills should be
matched with the complexity or difficulty of distressed asset management; and their
performance should be monitored on monthly basis. Banks may organize recovery camps
during harvest season in respect of agricultural loans. Further, banks should fix target
plan for recovering NPAs and put attention towards monitoring the progress of time
bound action plan (Poongavanam 2011; Srinivas K.T., 2013; V. Jain 2007).
2. Disclosure of Information about defaulters of banks and FIs
RBI on its website has put in place details of information about borrowers with
outstanding aggregate amount of Rs. 1 crore and above, classified as ‘doubtful’ or ‘loss’
assets as on March 31 and September 30 every year and quarterly list of wilful defaulters
(Rs. 25 lakh and above) where suits have not been filed. The information regarding non-
suit filed accounts will be submitted to RBI only, while information regarding suit-filed
accounts will be submitted to CIBIL only after December 2002 (RBI, 2001c, 2002b,
2003a). The RBI disseminates this information among banks and FIs only for their own
use and it is confidential (RBI, 2014a). Banks should keep themselves updated with this
information so that they will not grant loans to these borrowers, wilful defaulters, and
their associate partners; and thereby safeguard themselves against the hazards of fresh
generation of NPAs. This information will also help banks in taking productive decisions.
3. Implementation of Risk Management Systems
Banks should set up a comprehensive risk management system for ascertaining risk
profiles concerning assets portfolios, MIS, better evaluation of risk, and for setting up
contingency plans to meet the liquidity crisis (RBI, 2002b). Furthermore, banks may
implement Risk Assessment Model (RAM), which assess the risk facing capability by a
bank/FI. It facilitates banks to scrutinize credit risk and consequently initiate measures to
stop slippage of standard advances into substandard category and subsequently helps in
controlling NPAs. An appropriate risk management system enables banks to identify,
measure, monitor, and control various kinds of financial risks while carrying out their
operations (RBI, 2003a). The RBI issued guidelines relating to risk management system
175
of banks on October 21, 1999 (RBI, 1999). Primarily to risk management system, the
Department of Banking Supervision (DBS) has put in place an on-site surveillance system
for banks in 1995 with the aim of identifying weak banks, which would encounter
financial difficulties in the near future (RBI, 1998).
Board of Directors
Risk Management
Committee (CRMC)
Credit Risk Management

Asset Liability
Risk Management Committee (CRMC)
Management
Committee of the
Committee
(ALCO) Board (RMCB) Market Risk Management
Committee
MD (Compliance & Risk) Operational Risk

Management Committee
DMD & CRO Enterprise and Group

Risk Management
CGM (RM) Committee (EGRMC)
Figure 5.4. Risk Management Structure

Source: State Bank of India. (2016a). Annual Report 2015-16, p.82.
5. Risk Based Supervision (RBS)

In the Monetary and Credit Policy of April 2002, RBI proposed banks to move towards
adoption of Risk Based Supervision (RBS) model by 2003 with the assistance of
international consultants for allocating supervisory resources in accordance with the risk
profile of banks. RBS model assess the risk profile of banks, develop a unique
supervisory action plan, define the scope/extent of supervision, and set the enforcement
functions regarding application of supervisory standards (RBI, 2001c). The RBI
introduced RBS in 2012-13 under the Supervisory Programme for Assessment of Risk
and Capital (SPARC) for banks operating in India. RBS is a risk-centric forward-looking
framework, which provides a consistent, comprehensive, and objective basis for
supervisory assessment of risk and capital using the integrated risk and impact scoring
(IRISc), a proprietary risk scoring and aggregation model. All SCBs in India will be bring
176
under SPARC framework by 2016-17 (RBI, 2017a). An effective RBS model help banks
in better gauging stressed assets.
6. Purchase/Sale of NPAs
In order to resolve the problem of chronic NPAs, RBI has also framed guidelines
regarding selling/purchasing of NPAs (i.e., assets under multiple/consortium banking
arrangements) within financial system (i.e., among banks, FIs, and NBFCs) excluding
securitization/reconstruction company. The purchase/sale of financial assets must be
made as per the policies framed by the Board and the transaction should be made only on
“without recourse” basis involving sale consideration in cash basis only (RBI, 2015c).
7. Follow-up measures/Visit to Borrowers Business Premise
Banks should conduct proper follow-up (i.e., regular visits) of the projects for ensuring
that funds are not diverted or siphoned and the loan amount is utilized for the purpose for
which it was granted. It is a dependable measure of recovery that encompasses dedicated
involved bank staff at all levels. The bank officials or branch managers should put sincere
efforts to gauge psychological evaluation of borrowers and should be in personal contact
with them to make sure that the project is carrying out without any difficulty instead of
just issuing notices. Hence, frequent visits to hard-core borrower’s business
premise/residence should be increase to make the recovery process more efficient (Rath et
al., 2013; V. Jain, 2007).
8. Joint Lenders Forum (JLF)
Once an account is reported as SMA-2 to CRILC, the lenders should form a joint lenders
forum (JLF) committee under a convener and formulate a joint corrective action plan
(CAP) for early resolution of the stress in the account. JLF is mandatory for distressed
borrowers, who are engaged in type of activity having aggregated fund based and non-
fund based exposure of Rs. 1000 million and above. However, JLF can be also formed
when aggregate exposure is less than 1000 million and the account is reported as SMA-0
and SMA-1. JLF closely monitors the stress account and take CAP namely, rectification,
restructuring, and recovery option timely for its effective resolution. The decision of
restructuring or recovery of account requires a minimum of 75 percent of creditors by
value and 60% of creditors by number in JLF (RBI, 2014a).
9. Credit Information Companies (CICs)
RBI has issued guidelines regarding CICs under the Credit Information Companies
(Regulation) Act, 2005 which were notified in December 2006. CICs provides
177
information on a borrower’s prospective capacity to repay a loan as well as track record

of earlier projects, and in this way, assist banks/FIs to take sound decision regarding
granting loan. Banks make use of this information for the purpose of risk evaluation and
thereby limit credit rationing to wilful defaulters. Recording and maintaining historical
data by CICs propel borrowers to keep loan repayment history clean, which subsequently
results in curbing NPAs and in improving asset quality (RBI, 2008b). In present context,
banks submit the list of suit-filed accounts of wilful defaulters of Rs. 2.5 million and
above to the CICs of which they are member(s) and that information will be displayed on
respective website (RBI, 2014a).
10. Central Repository of Information on Large Credits (CRILC)
RBI established CRILC with the aim of collecting, storing, and disseminating data on all
borrowers having aggregate fund-based and non-fund based exposure of Rs. 50 million
and above. Banks/notified NBFCs have to quarterly report/submit information pertaining
to exposure to large borrowers, reporting of Technically/Prudentially Written-Off
Accounts, reporting of balance in current account, and reporting of non-cooperative
borrowers. All these quarterly submissions relates with global operations. In addition,
banks/notified NBFCs also requires reporting the SMA status of the borrowers to CRILC.
It is an effective tool for off-site supervision and it is effective from April 1, 2014 (RBI,
2014d). The RBI is making efforts for improving its reporting mechanism with respect to
external ratings and industry. Further, it requires the dates of assets turning into NPAs and
Special Mention Accounts (SMAs) in its database for getting a deeper insight into the
ageing of stressed assets (RBI, 2016b). In case banks/notified NBFCs have not reported
actual SMA status with a view to conceal or evergreening the accounts; they will be
subjected to accelerate provisioning in respect of such NPAs (RBI, 2014a). In this way, it
helps banks in reducing stressed assets.
11. Recapitalization of Banks
Recapitalization is an effective and faster measure for cleaning up banks balance sheet. Its
major purpose is to provide a lifeline for potentially viable banks, which have temporarily
low asset values and corporate earnings, but their positions can be improved when credit
increases and economy grows. Though, recapitalization improves capital position of
banks and does not results in recovering NPAs, but it aims at improving banks position
which are facing financial difficulties due to poor asset quality. The Government buffer
up the capital position of banks (i.e., recapitalization) to make them more strengthen and
178
to remove distress from their balance sheets (RBI, 2017a). An account of capital infusion
by the Government in PSBs during 2000-16 is given below:
300
250
250
201
200
150
150 120 125
100
100 70
50 13 19 12
0 8 0 0 5 0
0
Graph 5.1. Recapitalization amount by Government in PSBs (Amount in Billion)

Note. Data for the year 2000-01, 2003-05, and 2006-07 is not available/nil
Source: Compiled by researcher from various issues of RBI. Report on Trend and
Progress of Banking in India. Retrieved from http://www.rbi.org.in
12. Asset Quality Review (AQR)

The RBI advised banks to conduct AQR from the year 2015-16 in supplement with the
existing prudential regulatory norms for large borrower accounts to gauge the real
position of NPAs. AQR uses the off-site data and other dump data in a coordinated
manner and subsequently compares the quality of loans against the prudential norms. It
brings forth the significant discrepancies in the reported level of impaired assets and their
actual position, and thereby led to increase in provisioning requirements. This review
helps banks in appropriately adjusting the impaired assets in their books (RBI, 2016b).
13. Scheme for Sustainable Structuring of Stressed Assets (S4A)
The RBI introduced the Scheme for Sustainable Structuring of Stressed Assets on June
13, 2016 for a deep financial restructuring of large accounts. Under S4A, the RBI after
due consultation with banks, carry out deep financial restructuring of large accounts to
give a chance of sustained revival. The RBI further streamlined the process of selling
stressed assets by banks to facilitate better valuation, price discovery, and creation of a
vibrant stressed assets market in India (RBI, 2016b).
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14. Credit Risk Management (CRM)

As per RBI (2014c), banks should carry out their own independent credit appraisal reports
rather depending upon reports prepared by outside consultants. They should conduct
sensitivity tests and scenario analysis of projects, especially the infrastructural one as well
as include project delays and cost overruns so that viability of the project can be decided
at the time of initiating CAP. In addition, banks should ascertain the quality and source of
equity capital brought in by promoters or shareholders and verify that the names of any of
the directors of the companies have appeared in wilful defaulters list. Further, banks are
advised to engage their own auditors for ensuring proper end-use of funds. All these
measures of credit risk management plays a significant role in recognizing financial
distress of projects and avoid creation of fresh NPAs.
15. Strategic Debt Restructuring (SDR) Scheme
RBI introduced the SDR scheme in 2015, which allows banks to acquire majority stake in
ailing companies by converting their sticky loans (i.e., debt) into equity and get a new
buyer for sale. SDR allows banks to take control of the distressed companies and
implement change in the ownership after satisfying about the viability and feasibility of
the company on change of ownership. The lenders resort to the scheme of SDR after
exercising restructuring stage. Its objective is to revive stressed companies by providing a
mean to lenders to bring change in the management of companies, which fails to stand on
the milestones of specified critical conditions of restructuring loan settlement (Press Trust
of India [PTI], 2016).
16. Stressed Assets Management Group (SAMG)
Besides adopting above-mentioned measures for expedite recovery and resolution of
NPAs, the SBI Group has its own Stressed Assets Management Group (SAMG). It is a
specialized division which works for efficient resolution of stress assets. It was created in
April 2011 with a view to give attention to high level of NPAs in SME and Corporates.
Deputy Managing Director heads the SAMG and the two Chief General Managers
oversee the entire efforts of banks in resolving NPAs. It has 19 Stressed Assets
Management Branches (SAMBs) and 44 Stressed Assets Recovery Branches (SARBs)
across the country as on March 31, 2016 (State Bank of India [SBI], 2016a). It
introduced number of innovative methods for resolution of stressed assets, which
provides first mover advantage to the bank in the areas like arranging Mega e-Auction of
large number of properties on Pan-India basis, identification of un-encumbered properties
180
of the borrowers/guarantors, and organizing for attachment of properties before

judgement. It sale properties under Symbolic possession as well as encourage sale of
properties through Private Treaty as per SARFAESI Act; examine engagement of
specialized agencies for scouting of buyers for sale of high value properties; and engage
services of Multiple Resolution Agents for sale of property through E-auction (after
failure on first auction) (SBI, 2017). SBI employs following systems for managing NPAs:
 Litigation Management System (LMS) of SBI Group monitor all the cases that
have been filed for and against bank in respect of NPAs and advances under
collection account (AUCA).
 Loan Life-Cycle Management System (LLMS) deals with all credit processes of
bank. It is an online credit processing software and it assist bank in generating
dynamic MIS report and in monitoring account from inception.
 SBI Group has also put in place Early Warning System (EWS) for identifying
potential stressed accounts so that timely remedial action can be taken for
preventing its slippage into NPA category.
 In addition, it has Electronic Document Management System (EDMS), which
enables secure, single point storage, timely, and efficient retrieval of all important
documents, transactions, audit trails, accounting reports, compliance documents,
workflow processes, and so forth electronically.
 The NPA1 PORTAL of SBI Group is a single point repository of standardized
information pertaining to NPA/AUCA accounts and their movements. It monitors
recovery of NPAs by SAMBs on daily basis and circulate comparative recovery
position of each branch among the Group (SBI, 2016a).
 Other measures for controlling high value of NPAs in SBI Group includes:
engaging business correspondents, business facilitators, and Self Help Groups in
recovering NPAs of agricultural sector; participating in Lok Adalats and
organizing Bank Adalat; attending court cases and monitoring advocates
performance by CLOs/Law Officers/DGMs/AGMs personally; introducing E-
auction for better price realization and increasing transparency; exploring SDR
scheme in viable cases; identifying and engaging with strategic investors for
takeover of stressed assets of banks; employing resolution agents for taking
possession of mortgaged assets and arranging for their auction; using Debt Asset
swaps in some cases; appointing investigation agencies for finding out
181
unencumbered assets of promoters and guarantors and obtaining attachment over

these properties before judgement; publishing photographs of defaulters in
newspapers where warranted; conducting OTS with borrowers; adopting web
based Assets Tracking & Monitoring (AT@M) software which provides a
common platform to all stakeholders to view and track their assets- SMA as well
as substandard; reminding Risk Grade I level customers through SMS by
AT@M; monitoring SMA accounts in agriculture and SMEs by Assets Tracking
Centres at circle level; making calls to probable NPA accounts; and initiating
follow up measures for recovery (SBI, 2016a, 2017).
5.3 Summary
The present chapter provides an elucidation of various legal and non-legal measures
adopted by banks and Government for resolving the problem of massive NPAs. It gives
an account of measures which banks undertakes for preventing fresh accretion of NPAs,
for identifying potential NPAs, and thereby taking corrective actions to prevent its
slippage into NPA. The chapter also shed light on empirical data relating to important
recovery channels, that is, DRTs, SARFAESI, Lok Adalats, and CDR mechanism. It
further, discusses the Stressed Assets Management Group of SBI and the underlying
systems for recovering and reducing NPAs.
182

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Chapter-5

Measures for Resolution of

5.2 Resolution of Non-Performing Assets

5.2.1 Prevention of Fresh Accretion of Non-Performing Assets

3. Cohesive and conducive regulatory framework

General Specific Financial

Figure 5.1. Asset-Liability Management Structure

7. Incentives for recovery and prompt repayment

5.2.3.1 Legal Measures

(b) Measures for asset reconstruction

4. Corporate Debt Restructuring (CDR)

The CDR Mechanism is a voluntary non-statutory system based on Debtor-

(a) CDR Standing Forum and its Core Group

(b) CDR Empowered Group

Figure 5.2. The Process of Arcil’s Acquisition, Management, Resolution and

8. Credit Information Bureau (CIB)

Memorandum of Understanding (MOU) with HDFC, Dun and Bradstreet Information

should be file within decree-limitation period of 12 years that is computed from

5.2.3.2 Other Measures for Resolution of NPAs

Credit Risk Management

MD (Compliance & Risk) Operational Risk

DMD & CRO Enterprise and Group

Figure 5.4. Risk Management Structure

5. Risk Based Supervision (RBS)

information on a borrower’s prospective capacity to repay a loan as well as track record

Graph 5.1. Recapitalization amount by Government in PSBs (Amount in Billion)

12. Asset Quality Review (AQR)

14. Credit Risk Management (CRM)

of the borrowers/guarantors, and organizing for attachment of properties before

unencumbered assets of promoters and guarantors and obtaining attachment over

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