19/02/2020

UNIT-5

DOCUMENTATION & CREDIT RATING

&
NPA MANAGEMENT

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DOCUMENTATION
 Execution of documents in paper form by the borrowers as per
the law.

 A legal right given to the bank & establishes legal connection

between the bank & borrower

 It is necessary to enforce the banks right against the borrower

to recover the amount lent.

 Documentation contains the terms and conditions reduced to

writing and confer the rights and responsibilities in relation to
the charges over the properties and also repayment of loan and
payment of interest and other clauses.

 A document is used for the purpose of evidence as per section 3

of evidence act.
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LAWS RELATING TO DOCUMENTATION

 Contract act , 1872

 Negotiable instrument act ,1881

 Sale of goods act,1930

 Transfer of property act, 1882

 Companies act ,2013

 Partnership act,1932

 Indians stamp act,1899

 Registration act ,1908

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NEED FOR DOCUMENTATION

 Requirement of law

 Permanent record evidencing the fact of transaction

 Identify the borrower & security

 Terms & conditions

 Create & decide the type of charges

 Limitation period

 Rights & liabilities of bank

STEPS IN DOCUMENTATION

Drafting Preparing the set Stamping Filling up

Done by legal 1. Constitution As per sec In one

experts in 17/35 of handwriting
comprehensive 2. Type of facility Indian
way for ( Sanction letter) stamping By one person
uniformity and act 1899
to avoid 1. Nature of security In one ink
ambiguity should be
2. Type of charge stamped In one sitting
created properly.
All pages to be
Stamp duty signed
depends on
the place of changes made
execution needs full
attestation of
the borrower
 STEPS IN DOCUMENTATION (CONT’D)

Attestation Registration Renewal of ACK of debt

limits
Two or more Mortgages need to To be in writing
witnesses be registered as Fresh
per the respective documents Signed by the
Affixes the act need to be borrower
signature obtained as
Companies have to the life of To be executed
Full address of register the documents is before the
the witness to charges with R O C normally three expiry of the
be mentioned within 30 days years as per main document
from the date of the limitation ( 3 years)
execution of act
documents as per Appropriate
companies act ACK of debt stamp duty to
1956 can also be be affixed
Sec 125 obtained
Credit rating
 CREDIT RATING C R

C R is an opinion on the future ability & legal obligation of an insurer to

make timely payment of principle & interest

As per C R agencies regulation 1999, a C R means

1. An opinion regarding securities

2. Expressed in the form of standard symbols
3. Assigned by a C R agency
4. Used by an issuer of a security.

C R is expressed in alphabetical terms & is a symbolic indicator of the

current opinion of the relative capability to service the obligations .

Grading is assigned to indicate the relative risks.

The classification of credit ratings are Debenture, Bond, equity, CD, CP,
FD, Chit funds, Real estate developers, banks, Structured obligations,
Sovereign (country), customer rating etc.
 CREDIT RATING C R

Some of the well known C R agencies are Moody services, Standard &
Poor, Dun & Bradstreet, CRISIL, ICRA, CARE, Duff & Phelps credit rating
India etc.

C R is for a particular instrument only.

Two different rating agencies can give two different ratings for same
instrument.

Any person proposing to set up C R agency has to get certificate from

SEBI under SEBI regulation (3)

The following can set up a CR agency

 A Public Financial Institution

 A scheduled commercial bank
 A foreign C R agency recognized by any law & with 5 years experience
.
 C R PROCESS

Primary stage Fact finding analysis Rating stage Final stage

Rating request Collection of information Preview meeting Communication

Assigning rating team Meeting & visits to the Rating committee Acceptance
plant meetings
Surveillance
Preparation of reports Rating

C R Frame work

Industry Market Operational Legal position management

efficiency
 ADVANTAGES OF C R

To Investors To the issuer Intermediaries

Assessment of Lowers the cost of Enables proper
credibility borrowings planning, pricing,
underwriting,
Risk indicators Widens investors base placement of issues
etc
Protects against Fosters better image
bankruptcy Saves time, cost,
Induces self discipline manpower in
Easy to understand analysing the risk
Lowers the cost of exposure
Enables quick growth
decisions Securitization of
Motivates growth assets.
Rating surveillance

In general C R helps in grading the security instruments, provides

Reliable information, identifies strengths & weakness, enhances
Marketability of securities & widens the investors base.
 C R AGENCIES IN INDIA

CARE DPCRI ONICRA

CRISIL ICRA
Credit Rating Investment & Credit analysis & Duff & Phelps Onida Individual
Information credit rating research Ltd credit Rating Credit Rating
Services agency of India India (P) ltd agency of India
Of India Ltd Ltd

S No CRISIL ICRA CARE Significance

1 AAA LAAA CARE AAA Highest safety

2 AA LAA CARE AA High safety
3 a LAA CARE A Adequate safety
4 BBB LBBB CARE BBB Moderate safety
5 BB LBB CARE BB Inadequate safety
6 B LB CARE B Risk prone
7 C LC CARE C Substantial risk

8 D LD CARE D Default
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N P A MANAGEMENT

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The three concepts of N P A

INCOME RECOGNITION

ASSET CLASSIFICATION

NON PERFORMING ASSETS

(N PA)
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INCOME RECOGNITION & ASSET CLASIFICATION

Income from assets should not be recognized on accrual basis

It has to be booked as income only when it is actually received

within a specific period.

Assets to be classified in two broad categories .

Performing & Non Performing

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CATEGORIES OF ASSETS

Performing assets Non Performing assets

 Standard assets  Sub-standard assets

 Doubtful assets -

 Loss assets -
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PERFORMING

An asset is performing when it generate income for the

bank

 interest and/ or installment of principal is regularly

paid in respect of a term loan

 the account remains in order in respect of an

Overdraft/Cash Credit (OD/CC)

 the bill remains paid on time

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NON PERFORMING

An asset becomes non-performing (NPA) when it ceases

To generate income for the bank

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

where;

 interest and/ or installment of principal remain overdue

for a certain period in respect of a term loan

 the account remains ‘out of order’ in respect of an

Overdraft/Cash Credit (OD/CC)

 the bill remains ‘over due’ more than certain period

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OUT OF ORDER/ OVERDUE

 the outstanding balance remains continuously in excess of the

sanctioned limit/drawing power.

 No credits continuously for over certain period as on the date of

Balance Sheet.

 credits are not enough to cover the interest debited during the
same period.

 Any amount due to the bank under any credit facility is ‘overdue’
if it is not paid on the due date fixed by the bank.
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CATEGORIZATION OF NPA

 interest and/ or installment of principal remain overdue

for a period of more than 90 days in respect of a term
loan

 the account remains ‘out of order’ in respect of an

Overdraft/Cash Credit (OD/CC) over 90 days period

 the bill remains overdue for a period of more than 90

days
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PROVISION ON STANDARD ASSETS

Global portfolio

SME/ Agriculture/ SSI- 0.25%

All others- 0.40%

Commercial estate- 1.00%

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PROVISION ON SUB STANDARD ASSETS

 NPA’s for a period up to 12 months

 A general provision of 15 percent on total outstanding should

be made for secured assets

 The ‘unsecured exposures’ which are identified as ‘substandard’

would attract additional provision of 10 per cent ie 25%
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PROVISION ON DOUBTFUL ASSETS

 100 – On unsecured portion

 On secured portion-

1. 25% up to 1 yr
2. 40% 1-3 yrs
3. 100% over 3 yrs.
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PROVISION ON LOSS ASSETS

 Loss assets should be written off.

 If loss assets are permitted to remain in the books for

any reason, 100 percent of the outstanding should be
provided for
NPA MANAGEMENT

Assessment Provisioning Recovery Prevention

of fresh
NAP’s
 RBI- MEASURES

DRT Lok Adalats ARCIL& other Corporate Securitisation

ARC’s Debt &
restructuring reconstruction
CDR Of financial
assets&
enforcement of
security interest

SARFAESI
Act 2002
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CONCLUDED

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 19/02/2020

UNIT -5 CONCLUDED

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