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Management of Non-Performing Assets
K K JINDAL
Managing Director
Global Management Services
New Delhi1
Contents Assets What is an NPA? Categories of NPAs Provisioning Norms Factors contributing to NPAs Impact of NPAs on operations NPA management – preventive measures NPA management - resolution Negotiation process for settlement of
non performing assets
2
Assets of a Bank
3
NPA
A non performing asset (NPA) is a loan or an advance 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 an Overdraft/Cash Credit (OD/CC)
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted
The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops
4
NPA The instalment of principal or interest thereon
remains overdue for one crop season for long duration crops
The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
5
Categories of NPAs
*Asset Classification to be borrower-wise and not facility-wise.6
Trends
*Percentage7
Provisioning Norms Responsibility of making adequate provisions
for any diminution in the value of assets is that of the bank managements and the statutory auditors.
provisions should be made on the nonperforming assets on the basis of classification of assets.
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Provisioning Norms
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FACTORS CONTRIBUTING TO NPAS
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FACTORS CONTRIBUTING TO NPAS
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IMPACT OF NPAS ON OPERATIONS
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NPA MANAGEMENT – PREVENTIVE MEASURES
NPA Management - Resolution
14
Compromise Settlement Schemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Proceedings under the Code of Civil Procedure
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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Compromise Settlement Schemes
16
Banks are free to design and implement their own policies
for recovery
Specific guidelines were issued in May 1999 for one time
settlement of small enterprise sector.
Guidelines were modified in July 2000 for recovery of
NPAs of Rs.5 crore and less as on 31st March 2007.
Restructuring and Rehabilitation
17
Banks are free to design and implement their
own policies for restructuring/ rehabilitation of
the NPA accounts
Rescheduling of payment of interest and
principal after considering the Debt service
coverage ratio, contribution of the promoter and
availability of security
Lok Adalats
18
Lok Adalat is a system of alternative dispute resolution developed in India.
Presided over by a sitting or retired judicial officer or other person of respect and legal knowledge as the chairman, with two other members.
Fees There is no court fee and no rigid procedural requirement. Parties can directly interact with the judge.
Intake Cases that are pending in regular courts can be transferred to a Lok
Adalat if both the parties agree. Focus
The focus in Lok Adalats is on compromise. Small NPAs up to Rs.20 LacsAdvantages
Speedy Recovery Veil of Authority Less expensive Easier way to resolve
Corporate Debt Restructuring
19
The objective of CDR is to ensure a timely and transparent mechanism for
restructuring 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 necessary
enforcement 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 potential
cases 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
DRT Act
20
The banks and FIs can enforce their securities by initiating recovery proceeding under the Recovery if Debts due to Banks and FI act, 1993 (DRT Act) by filing an application for recovery of dues before the Debt Recovery Tribunal 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 creation of third party interest by debtors in the properties charged to creditor and to pass attachment orders in respect of charged properties
In case of non-realization of the decreed amount by way of sale of the charged properties, the personal properties if the guarantors can also be attached and sold.
However, realization is usually time-consuming Steps have been taken to create additional benches
Proceeding under Code of Civil Procedure
21
For claims below Rs.10 lacs, the banks and FIs can initiate proceedings under the
Code of Civil Procedure of 1908, as amended, in a Civil court.
The courts are empowered to pass injunction orders restraining the debtor
through itself or through its directors, representatives, etc from disposing of,
parting with or dealing in any manner with the subject property.
Courts are also empowered to pass attachment and sales orders for subject
property before judgment, in case necessary.
The sale of subject property is normally carried out by way of open public
auction subject to confirmation of the court.
The foreclosure proceedings, where the DRT Act is not applicable, can be
initiated under the Transfer of Property Act of 1882 by filing a mortgage suit
where the procedure is same as laid down under the CPC.
BIFR AND AAIFR
22
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
the date 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 down
under the CPC.
The shelter of BIFR misused by defaulting and dishonest borrowers
It is a time consuming process
National Company Law Tribunal
23
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
SARFAESI Act, 2002
•The Securitization and Reconstruction of Financial Assets and
Enforcement 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
24
SARFESI Act 2002
25
Legal notice to discharge in full his liabilities within 60 days
from the 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 the
management 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.
SARFESI Act 2002
26
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 the
borrower 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
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 the
consortium / 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 excess
provision will be utilized to meet the loss on account of sale of other
NPA.
Negotiation Process For Settlement Of Non Performing Assets
29
Factors - Acceptance of Proposal by Bank
30
• Bank’s Documentation.
• Security value. Realizable sale value.
• Bank’s ability to sell.
• Ability & Source of the borrower.
• Ability & Source of the guarantor.
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.
Preparation Stage
32
• 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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