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Chapter 14

Management of Non
performing Assets by
Banks

Indian Financial System, 5e

By: Bharati V. Pathak
 Course Objective

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To understand:

1. Non performing assets

2. Tools available to banks to manage their NPAs

Indian Financial System, 5e

By: Bharati V. Pathak
 Non-performing Asset

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 When it ceases to generate income for the
bank any interest or loan repayment delayed
for the bank
 The quality of assets held by banks and
financial institutions is a critical indicator of the
health of the financial system
 Public sector banks account for 79% of such
NPAs

Indian Financial System, 5e

By: Bharati V. Pathak
 Tools Available to Banks to
Manage their NPAs

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 One time settlement/ Compromise scheme
 Lok adalats
 Debt recovery tribunals
 Corporate debt restructuring
 Will ful defaulters
 SARFAESCI Act
 Asset Reconstruction Company
 CIBIL

Indian Financial System, 5e

By: Bharati V. Pathak
 One Time
Settlement/Compromise Scheme

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 Covers NPAs classified as doubtful and
substandard
 Board of Directors to evolve policy guidelines

Indian Financial System, 5e

By: Bharati V. Pathak
 Lok Adalats

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 To help settle disputes involving accounts
with outstanding balance of Rs 20 lakhs.
 Resolve by conciliation, mediation,
compromise or amicable settlement.

Indian Financial System, 5e

By: Bharati V. Pathak
Debt Recovery Tribunals (DRTs)

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Help in expeditious adjudication and recovery of
debts due to banks and FIs
 Two types of Tribunals
a. Debt recovery tribunal (DRT)
b. Debt recovery appellate tribunal (DRAT)
 29 DRTs and 9 DRATs
 Vested with new powers

Indian Financial System, 5e

By: Bharati V. Pathak
Corporate Debt Restructuring
(CDR)

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 Enable corporates to restructure debts of Rs 20
crore and above
 Two types of restructuring:
Category I
Category II
 Three tier structure:
 CDR standing Forum and its core group
 CDR Empowered Group
 CDR cell
 Separate guidelines issued for SMEs
Indian Financial System, 5e
By: Bharati V. Pathak
Willful Defaulters

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 When a borrower willfully defaults or funds
utilized for purposed other than those for
which granted.
 Banks to examine all cases of willful default
of Rs 1 crore and above.
 Banks to form a committee of higher
functionaries.

Indian Financial System, 5e

By: Bharati V. Pathak
 SARFAESI Act

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 Deals with
1. Securitization
2. Asset Reconstruction
3. Security Enforcement
 A secured creditor can issue a notice to borrower to discharge dues within 60 days
 Creditor can take one or more measures
 Take over possession or more measures
 Take over the management
 Appoint any person as a manager
 Issue a notice to the acquirer of the secured asset
 Act does not apply to
 unsecured loan
 loans below Rs. 1,00,000
 loans where the remaining principle due is less than 20% of the amount
advanced
 Act allows setting up of ARCs

Indian Financial System, 5e

By: Bharati V. Pathak
 Asset Reconstruction Companies
(ARCs)

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 Help in:
a. isolating non performing loans from balance sheets of banks
b. facilitate development under Companies Act and regulated by RBI as
NBFCs
c. Should have owned funds of not less than 15% of the assets acquired or
Rs. 100 or which ever is less
d. Maintain a minimum capital adequacy of 15% of its risk weighted assets
e. Can act as an agent, manager or a receiver
f. Can acquire financial assets by simple agreement or by issue of bonds/
debentures
g. Taken or change the management of the borrowers
h. Undertake sale/lease of the borrower’s business
i. Enter into settlements and reschedule debt
j. FIIs allowed to invest in ARCs
k. ARCIL is the first asset reconstruction company of India. ASREC – second
ARC

Indian Financial System, 5e

By: Bharati V. Pathak
CIBIL

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 Maintains records of credit histories of
individuals and business entities
 Data is shared on the principle of Reciprocity
 Helps in making informed credit decisions and
curbs the growth of NPAs

Indian Financial System, 5e

By: Bharati V. Pathak
RBI Initiatives to Revitalize
Stressed Assets

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 Introduction of Strategic Debt Restructuring
Scheme (SDR)
 Scheme for Sustainable Structuring of Stressed
Assets (S4A)
 Flexible Structuring of Long Term Project
Loans to Infrastructure and Core Industries
 The Insolvency and Bankruptcy Code, 2016

Indian Financial System, 5e

By: Bharati V. Pathak