npas and recovery policy

8/8/2019 NPAs and Recovery Policy

1/31

NPAs And Recovery Policy

Presented By-

Bipul Singh Rajput (09FT-041)

Chandan Jain (09FT-043)Chandan Jee (09FT-044)

Ankur Srivastava (09IT-002)

Rahul Jain (09IT-020)

Komal Agarwal (09IT-)


2/31

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 overdue for a specified period of

time

Under IRAC norms, specified period at presentis 90 days


3/31

IRAC Norms

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 morethan 90 days.

Direct Agricultural advances, a/c is NPA- overdue based

on crop seasons.


4/31

Asset Classification

Standard

totally regular, safe and conducted as per norms of sanction

Can be termed watch category if irregularity occurs

Substandard

NPA for period less than or equal to 12 months

Doubtful

Doubtful I NPAs for a period between 12 months and 24 months

Doubtful II NPAs over 24 months to 48 months

Doubtful III NPAs over 48 months

Loss

Loss identified by bank but amount not fully written off

Considered uncollectible and of little value


5/31

Provision forNPAs

Asset Classification Provision

Requirements

Standard Assets 0.25%

Sub-standard Assets 10%

Doubtful Assets (Doubtful I) 20%

Doubtful Assets (Doubtful II) 30%

Doubtful Assets (Doubtful

III)

100%

Loss Asset Should be written off


6/31

Some General Guidelines

No further charging of interest.

Asset classification will be borrower wise not facilitywise.

Under consortium-Based on recovery record of individualBanks.

Loan a/c -> NPA -> Standard a/c

But in case of Re-structuring NPA-> Standard a/cafter 1 year.

Stand Still Clause under CDR. Infrastructure Projects-Treated as Substandard if date of

completion extends by 1 yr.


7/31

WILFUL DEFAULTERS

Wilful Default is deemed when:

Unit has defaulted even when it has the capacity.

Unit not utilised the finance from the lender for the

specific purposes. Unit has siphoned off the funds.

Siphoning of Funds

Funds utilized for un-related operations of borrower.

Detriment to the health of the lender or any otherentity.

Decision based on the lenders judgement.


8/31

DIVERSION OF FUNDS

Utilization of short term WC funds for long term

purposes.

Deployment of funds for other activities not in sync for

which it was sanctioned. Transfer of funds to subsidiaries.

Investment in other companies acquiring equities/debt

without approval.

Shortfall in deployment in funds.


9/31

PENAL MEASURES

No additional facilities granted.

Debarred from Institutional finance- 5 years.

Legal proceedings & Recovery of dues.

Proactive approach change of management of wilfullydefaulting unit.

Incorporate a covenant in the loan agreement- steps for

removal of a wilful defaulter.

Tracking of Repayment performance to the lenders. RBI publishes booklet-list of suit filed accounts.


10/31

YoY NPA as Percentage of Total Assets

Type of Banks Gross NPAs/Total

Assets

Net NPAs/Total Assets

2006-

07

2007-

08

2008-

09

2006-

07

2007-

08

2008-

09

Public Sector Banks 1.6 1.3 1.2 0.6 0.6 0.6

Private Sector Banks 1.2 1.4 1.7 0.5 0.6 0.7

Foreign Banks 0.8 0.8 1.5 0.3 0.3 0.7

All Scheduled

Commercial Banks

1.5 1.3 1.3 0.6 0.6 0.6


11/31

YoY NPA as Percentage of Advances

Type of Banks Gross NPAs/Gross

Advances

Net NPAs/Net

Advances

2006-

07

2007-

08

2008-

09

2006-

07

2007-

08

2008-

09

Public Sector Banks 2.7 2.2 2.0 1.1 0.8 0.7

Private Sector Banks 2.2 2.5 2.9 1.0 1.2 1.5

Foreign Banks 1.8 1.8 4.0 1.0 0.9 1.7

All Scheduled

Commercial Banks

2.5 2.3 2.3 1.0 1.0 1.1


12/31

Income Recognition

Income from non-performing assets (NPA) is notrecognized on accrual basis but is booked as incomeonly when it is actually received

Interest on advances against term deposits, NSCs, IVPs,

KVPs and Life policies may be taken to income accounton the due date, provided adequate margin is availablein the accounts

Fees and commissions earned by the banks as a resultof re-negotiations or rescheduling of outstanding debtsshould be recognized on an accrual basis over theperiod of time covered by the re-negotiated orrescheduled extension of credit


13/31

Reversal of Income

If any advance becomes NPA as at the close of any

year, interest accrued and credited to income account in

the corresponding previous year, should be reversed or

provided for if the same is not realized.

Fees, 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,

if uncollected


14/31

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

propertyb) 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. Reacting promptly would be in favour of the Bank


15/31

Waiver of Appeal

Suit filed by the Bank has been dismissed by the Court

Suit is decreed in Banks favour but for the amountslower than prayed for

Reasons for award of lower than the prayed for andchances 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 Suit filed by the Bank has been dismissed by the

Court/DRT


16/31

Time frame for various actions

For action under DRT Act Filing for Recovery Application before DRT, if permitted by Competent

authority, should be done within two months from date of sanction

Within one month from date of passing of the Recovery Certificate itshould be taken on the record of the Recovery Officer for the purposeof execution

For action before Civil Courts In case of filing a civil suit before Civil courts, if permitted by Competent

authority, should be done within two months from date of sanction.

Within one month from date of filing of the Banks Application/Requisition it should be taken on the record of the Revenue authority forthe purpose of execution.

Further, particulars of assets, location of assets and other necessaryparticulars should also be provided to the Revenue Officials within onemonth of date of filing of Banks Application / Requisition


17/31

Review of suit filed /decreed cases

The developments of all suit filed and decreed accounts shall beassessed and reviewed by the Branch and reported to the Zoneonce in a quarter.

Review is to ensure that All suit filed accounts are properly followed up by the Branch and its

Advocates Summons is served on all the defendants at the earliest

Assets of the borrowers / guarantors are identified by making localenquiries and by perusing the Income Tax / Wealth Tax Returns, CBD23 etc of the borrowers / guarantors

Decree / Recovery Certificate is obtained at the earliest

Branch supplies the assets detail to the Banks Advocates within one

month of the issuance of the Decree / Recovery Certificate or files anapplication, before DRT or before the Civil Court praying for an orderdirecting the defendants to declare on Affidavit all the particulars ofattachable assets of them

Further Review of all suit filed and decreed accounts based onbook-outstanding will be done once in a year


18/31

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 andrehabilitation 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


19/31

BIFR/AAIFR

Immediate effect of reference:

no legal action/ recovery action can be institutedagainst the borrower company and the guarantors

all pending cases against the borrower/ guarantorsare suspended during the pendency of reference

legal proceedings can be instituted/ continued afterobtaining the permission of BIFR

If any of the parties is aggrieved by any of the order of

BIFR, such affected party may prefer to appeal within 45days from the date of order to Appellate Authority forIndustrial & Financial Reconstruction (AAIFR)

Being misused by defaulting and dishonest borrowers


20/31

Corporate Debt Restructuring(CDR)

Objectives:

ensure timely and transparent mechanism for

restructuring the corporate debts of viable entities

facing problems, outside the purview of BIFR, DRTand other legal proceedings, 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


21/31

CDR -Structure

CDR StandingForum

Representative generalbody of all financialinstitutions and banks

self- empowered bodylaying down policiesand guidelines, andmonitor the progress of

CDR Carves CDR core groupwhich lays downpolicies and guidelinesfor debt restructuring

CDR EmpoweredGroup

Deals with individualcases of CDR

Examines viabilityand feasibility of debtrestructuring and ifpossible approves

restructuringpackage

CDR Cell

Assists other two

groups in all functions initial scrutiny of the

proposals received fromborrowers / lenders andputs up the matter withEmpowered group

If feasible, it prepares

detailed rehabilitationplan with the help oflenders


22/31

CDR - Features

Covers only multiple banking accounts / syndication /consortium accounts with outstanding exposure of Rs.20crores and above by banks and institutions

applicable only to accounts classified as 'standard' and

'sub-standard BIFR cases not eligible

Requests of any corporate indulging in wilful default,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


23/31

SARFAESI Act 2002

The Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002

(SARFAESI) empowers Banks / Financial Institutions to

recover their non-performing assets without the

intervention of the Court.

The Act has three segments:

Securitization and Asset Reconstruction Companies

Central Registry

Enforcement of Security Interest


24/31

Methods for Recovery

Securitization

Asset Reconstruction

Enforcement of Security withoutthe intervention of the Court


25/31

Securitization & Asset Reconstruction

Securitisation is the process of pooling and repackaging ofhomogenous illiquid financial assets into marketablesecurities that can be sold to investors

Securitisation company or reconstruction company may raisefunds 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 ofrecovering their dues

ARC will be treated as secured creditors once they take overfinancial assets and have authority to take over themanagement of the business of the borrower

ARC restructure NPAs and sell them to investors as PassThrough Certificates (PTCs)


26/31

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, lien/ assets financed under leaseor hire purchase are not covered

Either a bank must be the sole Banker to the borrower or

in case of joint lending, at least lenders representing 75

% of the contractual amount due and out-standing agree

to take Action

Any security interest created over agricultural land cant

be proceeded with


27/31

SARFAESI Act- 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.

To ask any debtor of the borrower to pay any sum

due or becoming due to the borrower


28/31

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 doesnt

accept it, then it has to communicate within one week

from receipt of such representation or objection with the

reasons for non-acceptance


29/31

Procedure for Proceeding under SARFAESI

Act

If the borrower/guarantor fails to meet the liability withinnotice period, bank can take one or more of the followingmeasures:

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 takeover the management of the Company

If the sale proceeds are not sufficient to liquidate banksdues then bank will have to file recovery suit / DRTapplication before Civil Court / DRT for enforcing thepersonal covenant against the borrower / guarantor


30/31

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 onlyafter depositing 50% of the amount of debt due or

determined by DRT whichever is less but cant be below

25%


31/31

Sale ofNPA 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

The sale consideration should be received from thepurchasing Bank in Cash

NPA transferred to purchasing bank on without

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 otherNPAs in future

npas and recovery policy

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