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K K JINDAL
NPA-Non Performing Assets
A/c which ceases to generate income for the bank Defined as a credit facility in respect of which the interest and / or instalments of principal has remained µoverdue¶ for a µspecified period¶ of time Under IRAC norms, specified period at present is 90 days
An a/c is an NPA: Interest and Principal remain overdue for a period of more than 90 days. Account remain out of order in respect of an overdraft / cash credit for more than 90 days. Bill remain overdue for a period of more than 90 days in the case of bills purchased and discounted. Any amount to be received remains overdue for more than 90 days. Direct Agricultural advances, a/c is NPA- overdue based on crop seasons.
Provision for NPAs Asset Classification Standard Assets Sub-standard Assets Provision Requirements 0.25% 10% Doubtful Assets (Doubtful I) 20% Doubtful Assets (Doubtful II) 30% Doubtful Assets (Doubtful III) Loss Asset 50% Should be written off .
. Under consortium-Based on recovery record of individual Banks. Asset classification will be borrower wise not facility wise. Loan a/c -> NPA -> Standard a/c But in case of Re-structuring NPA-> Standard a/c after 1 year.Some General Guidelines No further charging of interest. Infrastructure Projects-Treated as Substandard if date of completion extends by 1 yr.
5 0.6 200809 0.5 200708 1.3 0.6 0.8 1.4 0.YoY NPA as Percentage of Total Assets Type of Banks Gross NPAs/Total Assets Net NPAs/Total Assets 200607 Public Sector Banks Private Sector Banks Foreign Banks All Scheduled Commercial Banks 1.3 1.6 .3 200607 0.3 0.2 1.5 1.6 0.3 200809 1.6 200708 0.7 0.6 1.6 0.7 1.2 0.8 1.7 0.6 0.
9 4.8 1.5 1.0 1.7 1.0 2.5 1.0 1.0 200708 0.5 200708 2.3 200607 1.7 2.7 1.2 0.8 2.8 2.9 1.1 .1 1.YoY NPA as Percentage of Advances Type of Banks Gross NPAs/Gross Advances Net NPAs/Net Advances 200607 Public Sector Banks Private Sector Banks Foreign Banks All Scheduled Commercial Banks 2.3 200809 2.0 200809 0.2 2.0 2.2 1.
.WILFUL DEFAULTERS Wilful Default is deemed when: Unit has defaulted even when it has the capacity. Unit has siphoned off the funds. Detriment to the health of the lender or any other entity. Decision based on the lender¶s judgement. Unit not utilised the finance from the lender for the specific purposes. Siphoning of Funds Funds utilized for un-related operations of borrower.
.DIVERSION OF FUNDS Utilization of short term WC funds for long term purposes. Shortfall in deployment in funds. Investment in other companies ±acquiring equities/debt ±without approval. Transfer of funds to subsidiaries. Deployment of funds for other activities not in sync for which it was sanctioned.
Proactive approach ± change of management of wilfully defaulting unit. RBI publishes booklet-list of suit filed accounts. Debarred from Institutional finance. . Tracking of Repayment performance to the lenders.PENAL MEASURES No additional facilities granted.5 years. Legal proceedings & Recovery of dues.
Reasons for Non Performing Assets Incremental Component (Internal Factors) Overhang Component (External Factors) .
Incremental Factors These are due to the environment reasons.Long legal tangles Scarcity of raw material. Eg. Import duty changes etc . business cycles etc. power and other resources. Government policies like excise duty changes. Industrial recession. Includes: Sluggish legal system .
power and other resources. Includes: Sluggish legal system . Import duty changes etc . Industrial recession. business cycles etc. Eg.Overhang Components These are due to the environment reasons.Long legal tangles Scarcity of raw material. Government policies like excise duty changes.
NSCs.Income Recognition Income from non-performing assets (NPA) is not recognized on accrual basis Interest on advances against term deposits. KVPs and Life policies may be taken to income account on the due date Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered . IVPs.
commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods.Reversal of Income If any advance becomes NPA as at the close of any year. if uncollected . interest accrued and credited to income account in the corresponding previous year. Fees. should be reversed or provided for if the same is not realized.
Recovery Action To recycle the funds to meet the banks objectives Banks are free to design and implement their own policies for restructuring / rehabiliation of NPA accounts Action recommended only when there is no hope of revival or recovery without legal action .
Guidelines were modified in July 2000 for recovery of NPAs of Rs.NPA Management ± Compromise Settlements Settlement of disputes reached by mutual consent Non Legal remedy Objective: Negotiate settlements to maximise the compromise amounts Banks free to design & implement their own recovery policies with board approval Specific guidelines were issued in May 1999 for one time settlement of small enterprise sector.5 crore and less as on 31st March 2007 .
quicker & cost effective disposal Both parties need to volunteer Lok adalat award = court decree Maximum claim dealt in Lok Adalat is 20 lakhs Cases for court can be refered .Lok Adalat Administering justice w/o resort to courts Simpler.
the Bank can file claim before Official liquidator Insolvency proceedings before the Insolvency courts .Types of Legal Action Enforcement Action under SARFAESI Act 2002 to enforce banks rights Debts above 10 lakhs. Recovery application before DRT Debts below 10 Lakh. filed through civil courts Registered company winding up.
Legal Action under DRT DRT Centre vested with power to entertain Bank¶s application for recovery Not bound by Code of Civil procedure.1908 Lesser time to award Recovery Certificates Applicable when SARFAESI act not feasible Dues above 10 lakhs Full dues of the bank not recovered from sale of assets .
Recovery through civil suit Dues less than 10 lakh Filed in form of: Mortgage suit Mortgage obtained as security for advance Money suit Suit filed to get a money decree No securities by way of mortgage Recover money on the basis of loan document or money paid .
Recovery through civil suit -Summary suit Suit against a borrower on a promissory note where in no security is enforced Suit against a borrower on a Pro-Note where in no security is enforced against either Suit against a guarantor on his letter of Guarantee when no security is enforced In Bills of purchase suit against the borrower wherein no security is enforced .
Banks should file an Affidavit of proof of debt In case of guarantors a suit needs to be filed against guarantors Stage3 Company taken to liquidation due to filed suit or decree Leave of the company court required to execute the decree .Recovery through winding up petition Stage1 Bank is an unsecured creditor Secured assets of borrower of negligible value No guarantors of substantial means Stage2 Order passed by the Company court and official liquidator appointed Claim not time barred.
Filing of insolvency proceeding Bank can file insolvency against borrowers Debtor is a judgment debtor and failed to pay the decretal dues Debtor owing Rs 2000 or above commits: Transfer of property to delay creditors Departs out of India .
Reacting promptly would be in favour of the Bank .Recovery using Recovery Certificate Recovery Officer proceeds to recover the amount in any of the following ways : a) attachment and sale of the movable and immovable property b) arrest and detention of the defendant c) appointing a receiver for the management of the movable or immovable properties d) issue Garnishee Order against third parties.
Waiver of Appeal Suit filed by the Bank has been dismissed by the Court Suit is decreed in Bank¶s favour but for the amounts lower than prayed for Reasons for award of lower than the prayed for and chances of success of appeal Availability of security from which to recover the dues Cost benefit analysis. if appeal is preferred Time value of money and the possibility of delay in execution of decree in case of preferring appeal .
Time frame for various actions For action under DRT Act Filing for Recovery Application before DRT. Further. Within one month from date of filing of the Bank¶s Application/ Requisition it should be taken on the record of the Revenue authority for the purpose of execution. location of assets and other necessary particulars should also be provided to the Revenue Officials within one month of date of filing of Bank¶s Application / Requisition . if permitted by Competent authority. should be done within two months from date of sanction. if permitted by Competent authority. particulars of assets. should be done within two months from date of sanction Within one month from date of passing of the Recovery Certificate it should be taken on the record of the Recovery Officer for the purpose of execution For action before Civil Courts In case of filing a civil suit before Civil courts.
Further Review of all suit filed and decreed accounts based on book-outstanding will be done once in a year .Review of suit filed /decreed cases The developments of all suit filed and decreed accounts shall be assessed and reviewed by the Branch and reported to the Zone once in a quarter.
BIFR Board for Industrial and Financial Reconstruction(BIFR) is a body constituted under Sick Industries Companies (Special Provision) Act (SICA) 1985 Timely detection and power to consider revival and rehabilitation of sick companies Any sick company can make a reference to BIFR within 60 days from date of adoption of annual accounts after which the board of directors have come to a conclusion that company has become sick Shipping companies. Industrial units registered as SSIUs and service units like hotels are not eligible for reference .
BIFR Immediate effect of reference: No legal action/ recovery action can be instituted against the borrower company and the guarantors All pending cases against the borrower/ guarantors are suspended during the pendency of reference Legal proceedings can be instituted/ continued after obtaining the permission of BIFR .
outside the purview of BIFR. DRT and other legal proceedings.Corporate Debt Restructuring(CDR) Objectives: ensure timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems. for the benefit of all concerned preserving viable corporate that are affected by certain internal and external factors minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme .
empowered body laying down policies and guidelines. it prepares detailed rehabilitation plan with the help of lenders .CDR -Structure CDR Standing Forum Representative general body of all financial institutions and banks self. and monitor the progress of CDR Carves CDR core group which lays down policies and guidelines for debt restructuring CDR Empowered Group Deals with individual cases of CDR Examines viability and feasibility of debt restructuring and if possible approves restructuring package CDR Cell Assists other two groups in all functions initial scrutiny of the proposals received from borrowers / lenders and puts up the matter with Empowered group If feasible.
20 crores and above by banks and institutions applicable only to accounts classified as 'standard' and 'sub-standardµ BIFR cases not eligible Requests of any corporate indulging in wilful default.CDR .Features Covers only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs. fraud or misfeasance not considered Reference to CDR can be triggered by: any creditor who have minimum 20% share in either working capital or term finance by the concerned corporate .
Sale of NPA To Other Banks/FIs Only NPA accounts with outstanding balance over Rs. 25 lakh and assets classified as NPA for atleast 2 years are eligible Purchasing bank should hold NPA for a minimum of 15 months before selling it to other banks except to the bank which sold NPA to it The sale consideration should be received from the purchasing Bank in Cash NPA transferred to purchasing bank on ³without recourse´ basis If the sale is at a price below Net Book Value (NBV). the shortfall will be debited to the P&L a/c of the year If sale is for a value higher than the NBV. the excess provision shall not be reversed but will be utilised to meet shortfall on account of sale of other NPAs in future .
. 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.SARFAESI Act 2002 The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
Methods for Recovery Securitization Asset Reconstruction Enforcement of Security without the intervention of the Court .
Securitization & Asset Reconstruction Securitisation is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors Securitisation company or reconstruction company may raise funds from the qualified institutional buyers by formulating schemes for acquiring financial assets Any securitization or reconstruction company can act as an agent to a bank/financial institution for the purpose of recovering their dues ARCs have authority to take over the management of the business of the borrower ARC restructure NPAs and sell them to investors as ³Pass Through Certificates´ (PTCs) .
lien/ assets financed under lease or hire purchase are not covered Either a bank must be the sole Banker to the borrower or in case of joint lending.Provisions of the Act NPA loans with outstanding above Rs 1 lac Amount less than 20% of the principal and interest are not eligible to be dealt with under this act Assets under pledge. at least lenders representing 75 % of the contractual amount due and out-standing agree to take Action Any security interest created over agricultural land can¶t be proceeded with .
Empowerment to Bank The Act empowers the bank to: To issue demand notice to the defaulting borrower and guarantor. calling upon them to discharge their dues in full within 60 days from the date of the notice. To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.SARFAESI Act. To ask any debtor of the borrower to pay any sum due or becoming due to the borrower .
Procedure for Proceeding under SARFAESI Act Identification of accounts & Obtain Approval for Action Issue of duly signed notices by Authorised Officer to borrower and guarantor asking them to discharge their dues within 60 days If borrower makes any representation or raises any objection and if on careful consideration Bank doesn¶t accept it. then it has to communicate within one week from receipt of such representation or objection with the reasons for non-acceptance .
bank can take one or more of the following measures: Take possession of the secured assets Take over the management of the secured assets Issue notice for collection of receivables / book debts Bank can also sell or lease out the business and take over the management of the Company If the sale proceeds are not sufficient to liquidate bank¶s dues then bank will have to file recovery suit / DRT application before Civil Court / DRT for enforcing the personal covenant against the borrower / guarantor .Procedure for Proceeding under SARFAESI Act If the borrower/guarantor fails to meet the liability within notice period.
Appeal to DRT/DRAT If any person is aggrieved by any of the measures taken by the bank. he may file an application to DRT within 45 days from the date such measures have been taken Borrower can also appeal to DRAT after DRT but only after depositing 50% of the amount of debt due or determined by DRT whichever is less but can¶t be below 25% .
Write Off Policy When the Bank has exhausted all possible avenues of recovery and there are no more chances for effecting the recovery Two kinds of write off Regular write off Prudential write off .
In exceptional cases.Regular Write Off (General Conditions) Account is classified as Loss Asset. 100% provision is held in such loss assets as at the end of previous quarter. All efforts under SRFAESI Act have been taken. Termination of suit proceedings and pending legal action shall be taken before considering regular write off. in which whereabouts of borrower and guarantor cannot be traced Where any further effort is considered cost-ineffective .
Under Rehabilitation scheme . All avenues of recovery are explored. In case of BIFR accounts Outstanding balance under OTS scheme. There is no prospect of recovery in case of ECGC/DICGC guaranteed accounts. In case winding up has been ordered by BIFR. Suit is filed for non-BIFR cases.Prudential Write Off (General Conditions) Doubtful/Loss assets with outstanding balance >= Rs 50 lacs.
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