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Management of Non-PerformingAssets
K K JINDAL
Managing Director
Global Management Services
New Delhi1
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Contents
AssetsWhat is an NPA?Categories of NPAsProvisioning NormsFactors contributing to NPAsImpact of NPAs on operationsNPA management preventive measures
NPA management - resolution Negotiation process for settlement of non performing assets
2
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Assets of a Bank
Cash Securities
LoansProperty and
equipment thatallows it to operate.
Assets
3
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NPA
A non performing asset (NPA) is a loan or anadvance where:
interest and/ or instalment 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 anOverdraft/Cash Credit (OD/CC)The bill remains overdue for a period of more than 90days in the case of bills purchased and discounted
The instalment of principal or interest thereon remainsoverdue for two crop seasons for short duration crops
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NPA
The instalment of principal or interest thereonremains overdue for one crop season for longduration cropsThe amount of liquidity facility remains
outstanding for more than 90 days, in respectof a securitisation transaction undertaken interms of guidelines on securitisation datedFebruary 1, 2006.
In respect of derivative transactions, theoverdue receivables representing positivemark-to-market value of a derivative contract, if these remain unpaid for a period of 90 daysfrom the specified due date for payment.
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Categories of NPAs
Substandard Asset
w.e.f March 31, 2005,remained an NPA
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Trends
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2004-05 2005-06 2006-07 2007-08 2008-09
Gross NPAs/GrossAdvances
Scheduled Commercial Banks
Public Sector Banks
Nationalised Banks
0.0
0.5
1.0
1.5
2.0
2.5
2004-05 2005-06 2006-07 2007-08 2008-09
Net NPAs/Net Advances
Scheduled Commercial Banks
Public Sector Banks
Nationalised Banks
*Percentage7
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Provisioning Norms
Responsibility of making adequate provisions for anydiminution in the value of assets is that of the bankmanagements and the statutory auditors.provisions should be made on the nonperforming
assets on the basis of classification of assets.
8
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Provisioning Norms
should be written off /100 percent of the outstanding should be provided for.Loss Assets
100 % of the extent to which the advance is not covered by the realisable valueof the security
In case of secured portion, provision may be made in the range of 20% to 100%depending on the period of asset remaining sub-standard
Doubtful Assets
10 % on total outstanding additional provision of 10 % for unsecured exposures which are identified as
substandard . 100% for unsecured doubtful assets.
Substandard assets
direct advances to agricultural and SME sectors at 0.25%; all other loans and advances at 0.40%
Standard assets (w.e.f November 15, 2008 )
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FACTORS CONTRIBUTING TO NPAS
Poor Credit discipline
Inadequate Credit & Risk Management
Diversion of funds by promoters
Funding of non-viable projects
The parameters set for functioning did not project the paramountneed for these corporate goals.
Bound by rules of investing and loan issuance
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FACTORS CONTRIBUTING TO NPAS
Audit and control functions were not independent
Banks were not sufficiently developed in terms of skills and
expertise to regulate the humongous growth in credit andmanage the diverse risks that emerged in the process
Inadequate mechanism to gather and disseminate creditinformation amongst commercial banks
Effective recovery from defaulting and overdue borrowerswas hampered due to external factors
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IMPACT OF NPAS ON OPERATIONS
Drain on Profitability
Impact on capital adequacy
Adverse effect on credit growth as the banker s prime focus becomeszero percent risk and as a result turn lukewarm to fresh credit.
Excessive focus on Credit Risk Management
High cost of funds due to NPAs
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NPA MANAGEMENT PREVENTIVEMEASURES
Formation of the Credit Information Bureau (India) Limited (CIBIL)
Reporting of Frauds to RBI
Release of Willful Defaulter s List.
Norms of Lender s Liability framing of Fair Practices Code
Risk assessment and Risk management
Reporting quick mortality cases
Special mention accounts for early identification of bad debts.
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NPA Management - Resolution
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Compromise Settlement Schemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Proceedings under the Code of Civil Procedure
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NPA Management - Resolution
Board for Industrial & Financial Reconstruction (BIFR)/AAIFR
National Company Law Tribunal (NCLT)
Sale of NPA to other banks
Sale of NPA to ARC/ SC under Securitization and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 (SARFAESI)
Liquidation
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Restructuring and Rehabilitation
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Banks are free to design and implement their
own policies for restructuring/ rehabilitation of
the NPA accountsRescheduling of payment of interest and
principal after considering the Debt service
coverage ratio, contribution of the promoter and
availability of security
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Corporate Debt Restructuring
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The objective of CDR is to ensure a timely and transparent mechanism forrestructuring of the debts of viable corporate entities affected by internal and
external factors, outside the purview of BIFR, DRT or other legal proceedings
The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA).
All participants in the CDR mechanism must enter the ICA with necessaryenforcement and penal clauses.
The scheme applies to accounts having multiple banking/ syndication/ consortium
accounts with outstanding exposure of Rs.100 crores and above.
The CDR system is applicable to standard and sub-standard accounts with potentialcases of NPAs getting a priority.
Packages given to borrowers are modified time & again
Drawback of CDR Reaching of consensus amongst the creditors delays the process
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DRT Act
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The banks and FIs can enforce their securities by initiating recovery
proceeding under the Recovery if Debts due to Banks and FI act, 1993 (DRTAct) by filing an application for recovery of dues before the Debt RecoveryTribunal constituted under the Act.
On adjudication, a recovery certificate is issued and the sale is carried out by
an auctioneer or a receiver.DRT has powers to grant injunctions against the disposal, transfer or creationof third party interest by debtors in the properties charged to creditor and topass attachment orders in respect of charged properties
In case of non-realization of the decreed amount by way of sale of thecharged properties, the personal properties if the guarantors can also beattached and sold.
However, realization is usually time-consuming
Steps have been taken to create additional benches
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BIFR AND AAIFR
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BIFR has been given the power to consider revival and rehabilitation of
companies under the Sick Industrial Companies (Special Provisions) Act of 1985
(SICA), which has been repealed by passing of the Sick Industrial Companies
(Special Provisions) Repeal Bill of 2001.
The board of Directors shall make a reference to BIFR within sixty days from thedate of finalization of the duly audited accounts for the financial year at the end
of which the company becomes sick
The company making reference to BIFR to prepare a scheme for its revival and
rehabilitation and submit the same to BIFR the procedure is same as laid downunder the CPC.
The shelter of BIFR misused by defaulting and dishonest borrowers
It is a time consuming process
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National Company Law Tribunal
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In December 2002, the Indian Parliament passed the Companies Act of 2002
(Second Amendment) to restructure the Companies Act, 1956 leading to a new
regime of tackling corporate rescue and insolvency and setting up of NCLT.
NCLT will abolish SICA, have the jurisdiction and power relating to winding up of
companies presently vested in the High Court and jurisdiction and power
exercised by Company Law Board
The second amendments seeks to improve upon the standards to be adopted to
measure the competence, performance and services of a bankruptcy court by
providing specialized qualification for the appointment of members to the NCLT.
However, the quality and skills of judges, newly appointed or existing, will need
to be reinforced and no provision has been made for appropriate procedures to
evaluate the performance of judges based on the standards
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SARFAESI Act, 2002
The Securitization and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 (SARFAESI) empowers
Banks / Financial Institutions to recover their non-performing assets
The Act provides three alternative methods for recovery of non-
performing assets :
Securitization
Asset Reconstruction
Enforcement of Security without the intervention of the Court
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SARFESI Act 2002
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Legal notice to discharge in full his liabilities within 60 days fromthe date of notice, failing which the bank would be entitled to
exercise all or any of the rights set out under the Act.
Another option available under the Act is to takeover themanagement of the secured assets
Any person aggrieved by the measures taken by the bank can
proffer an appeal to DRT within 45 days after depositing 75% of
the amount claimed in the notice.
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SARFESI Act 2002
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Chapter II of SARFESI provides for setting up of reconstruction and
securitization companies for acquisition of financial assets from its
owner
The ARC can takeover the management of the business of the
borrower, sale or lease of a part or whole of the business of theborrower and rescheduling of payments, or take possession of
secured assets
Additionally, ARCs can act as agents for recovering dues, as manager
and receiver.
Drawback differentiation between first charge holders and the
second charge holders
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Selling Of NPA
A NPA, including a non-performing bond/ debenture, and
a Standard Asset where:
the asset is under consortium/ multiple banking arrangements,
at least 75% by value of the asset is classified as non- performing
asset in the books of other banks/FIs, and
at least 75% (by value) of the banks / FIs who are under theconsortium / multiple banking arrangements agree to the sale of the
asset to SC/RC.
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Selling Of NPA
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The bank may purchase/sell NPA only on without recourse basis.If NPA has remained a NPA for at least two years in the books of the
selling bank.
The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banks.
If the sale is conducted below the net book value, the short fall
should be debited to P&L account and if it is higher, the excessprovision will be utilized to meet the loss on account of sale of other
NPA.
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Negotiation Process ForSettlement Of Non Performing Assets
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Factors - Acceptance of Proposal by Bank
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Banks Documentation.
Security value. Realizable sale value.
Banks ability to sell.
Ability & Source of the borrower.
Ability & Source of the guarantor.
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Factors - Acceptance of Proposal by Bank
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Vulnerability of the borrower/guarantor.
Time frame.
Strength and Zeal of bank's field staff.
Banks Policy.
Success rate.
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Preparation Stage
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Thorough study of the case Find out our strengths and weaknesses in
the case. Find out the vulnerable point/weaknesses
of the borrower. Follow-up with the Borrower and
Guarantors. Visit factory/Collaterals/residence. Find out properties not charged to the bank. Indicate that Bank is willing to compromise.
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Team 9
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