This document discusses the management of non-performing assets (NPAs) by banks in India. It defines NPAs and categorizes them into substandard, doubtful, and loss assets. It outlines the provisioning norms required for each category. The document also discusses the factors that contribute to the growth of NPAs, their impact on bank operations, and the status of NPAs from 2005-2006. It describes various preventive measures taken by RBI and resolution methods used by banks to manage NPAs such as compromise settlements, restructuring, Lok Adalats, corporate debt restructuring, and SARFAESI Act.

1. MANAGEMENT
OF
NON-
PERFORMING
ASSETS
1

2. DEFINITION OF NPAS
• A NPA is a loan or an advance where;
– Interest and/ or installment 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
– The bill remains overdue for a period of more than
90 days in the case of bills purchased and
discounted
– The installment or interest remains overdue for two
crop seasons in case of short duration crops and
for one crop season in case of long duration crops
2
2

3. CATEGORIES OF NPA
• Substandard Assets – Which has remained
NPA for a period less than or equal to 12
months.
• Doubtful Assets – Which has remained in
the sub-standard category for a period of
12 months
• Loss Assets – where loss has been
identified by the bank or internal or external
auditors or the RBI inspection but the
amount has not been written off wholly. 3
3

4. PROVISIONING NORMS
• Standard Assets – general provision of a
minimum of 0.25%
• Substandard Assets – 10% on total outstanding
balance, 10 % on unsecured exposures identified
as sub-standard & 100% for unsecured
“doubtful” assets.
• Doubtful Assets – 100% to the extent advance not
covered by realizable value of 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
• Loss Assets – 100% of the outstanding
4
4

5. FACTORS CONTRIBUTING TO
NPAS
• Poor Credit discipline
• Inadequate Credit & Risk Management
• Diversion of funds by promoters
• Funding of non-viable projects
• In the early 1990s PSBs started suffering from
acute capital inadequacy and lower/ negative
profitability. The parameters set for their
functioning did not project the paramount need for
these corporate goals.
• The banks had little freedom to price products,
cater products to chosen segments or invest
funds in their best interest 5
5

6. FACTORS CONTRIBUTING TO
NPAS
• Since 1970s, the SCBs functioned as units cut off
from international banking and unable to
participate in the structural transformations and
new types of lending products.
• Audit and control functions were not independent
and thus unable to correct the effect of serious
flaws in policies and directions
• Banks were not sufficiently developed in terms of
skills and expertise to regulate the humongous
growth in credit and manage the diverse risks that
emerged in the process
6
6

7. FACTORS CONTRIBUTING TO
NPAS
• Inadequate mechanism to gather and disseminate
credit information amongst commercial banks
• Effective recovery from defaulting and overdue
borrowers was hampered on account of sizeable
overhang component arising from infirmities in the
existing process of debt recovery, inadequate
legal provisions on foreclosure and bankruptcy
and difficulties in the execution of court decrees.
7
7

8. IMPACT OF NPAS ON
OPERATIONS
• Drain on Profitability
• Impact on capital adequacy
• Adverse effect on credit growth as the
banker’s prime focus becomes zero percent
risk and as a result turn lukewarm to fresh
credit.
• Excessive focus on Credit Risk Management
• High cost of funds due to NPAs
8
8

9. STATUS OF NPAS 2005-06
• All SCB’s average Net NPA Ratio for 2005-06 is
1.22 (As per RBI’s Statistics)
• The banks have been able to report lower NPA
percentage mostly by providing against or writing
off NPAs.
• The provision to certain extent was facilitated by
higher profits on account of treasury management
• The better Net NPA ratio was also facilitated by
higher credit off take resulting in larger asset
portfolio/ book size.
9
9

10. NPA MANAGEMENT – PREVENTIVE
MEASURES
• Formation of the Credit Information Bureau
(India) Limited (CIBIL)
• Release of Wilful Defaulter’s List. RBI also
releases a list of borrowers with aggregate
outstanding of Rs.1 crore and above against
whom banks have filed suits for recovery of
their funds
• Reporting of Frauds to RBI
• Norms of Lender’s Liability – framing of Fair
Practices Code with regard to lender’s liability
to be followed by banks, which indirectly
prevents accounts turning into NPAs on 10
account of bank’s own failure
10

11. NPA MANAGEMENT – PREVENTIVE
MEASURES
• Risk assessment and Risk management
• RBI has advised banks to examine all cases of
wilful default of Rs.1 crore and above and file
suits in such cases. Board of Directors are
required to review NPA accounts of Rs.1 crore
and above with special reference to fixing of
staff accountability.
• Reporting quick mortality cases
• Special mention accounts for early
identification of bad debts. Loans and
advances overdue for less than one and two
quarters would come under this category.
However, these accounts do not need 11
provisioning
11

12. NPA MANAGEMENT -
RESOLUTION
• Compromise Settlement Schemes
• Restructuring / Reschedulement
• Lok Adalat
• Corporate Debt Restructuring Cell
• Debt Recovery Tribunal (DRT)
• Proceedings under the Code of Civil Procedure
• 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 (SRFAESI)
12
• Liquidation
12

13. Compromise Settlement
Schemes
• Banks are free to design and implement
their own policies for recovery and write
off incorporation compromise and
negotiated settlements with board
approval
• 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. 13
13

14. Restructuring and Rehabilitation
• Banks are free to design and implement
their own policies for restructuring/
rehabilitation of the NPA accounts
• Reschedulement of payment of interest
and principal after considering the Debt
service coverage ratio, contribution of
the promoter and availability of security
14
14

15. Lok Adalats
• Small NPAs up to Rs.20 Lacs
• Speedy Recovery
• Veil of Authority
• Soft Defaulters
• Less expensive
• Easier way to resolve
15
15

16. Corporate Debt
Restructuring
• 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.10 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 16
• Drawback of CDR – Reaching of consensus amongst the
creditors delays the process
16

17. DRT Act
• 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
17
17

18. Proceeding under Code of Civil
Procedure
• 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
18
is same as laid down under the CPC.
18

19. BIFR AND AAIFR
• 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 19
• It is a time consuming process
19

20. NATIONAL COMPANY LAW
TRIBUNAL
• 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 20 the
performance of judges based on the standards
20

21. SALE OF NPA TO OTHER BANKS
• A NPA is eligible for sale to other banks only if it 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 but
not to bank, which originally sold the NPA.
• The NPA may be classified as standard in the books of the
purchasing bank for a period of 90 days from date of
purchase and thereafter it would depend on the record of
recovery with reference to cash flows estimated while
purchasing
• The bank may purchase/ sell NPA only on without
recourse basis
• 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. 21
21

22. SARFESI Act 2002
• SARFESI provides for enforcement of security
interests in movable (tangible or intangible assets
including accounts receivable) and immovable
property without the intervention of the court
• The bank and FI may call upon the borrower by way of
a written 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.
22
22

23. SARFESI Act 2002
• Chapter II of SARFESI provides for setting up of
reconstruction and securitization companies for
acquisition of financial assets from its owner, whether
by raising funds by such company from qualified
institutional buyers by issue of security receipts
representing undivided interest in such assets or
otherwise.
• 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, enforcement of security
interest, settlement of dues payable by the borrower
or take possession of secured assets
• Additionally, ARCs can act as agents for recovering
dues, as manager and receiver.
• Drawback – differentiation between first charge 23
holders and the second charge holders
23

24. Whether Second
Amendment to Companies
Act and SARFESI Provide
effective and compatible
enforcement
24
24

25. Second Amendment &
SARFESI
• The second amendment and SARFESI are a
leap forward but requirement exists to make
the laws predictable, transparent and
affordable enforcement by efficient
mechanisms outside of insolvency
• No definite time frame has been provided for
various stages during the liquidation
proceedings
• Need is felt for more creative and commercial
approach to corporate entities in financial
distress and attempts to revive rather than
applying conservative approach of liquidation
25
25

26. Second Amendment &
SARFESI
• Tribunals have largely failed to serve the
purpose for which they were set up.
NCLT(National Co. Law Tribunal) would
be over-burdened with workload. Change
in eligibility criteria for making a
reference would itself generate a greater
workload.
• The second amendment stops short of
providing a comprehensive bankruptcy
code to deal with corporate bankruptcy.26
26

27. Second Amendment &
SARFESI
• Does not introduce the required roadmap of
the bankruptcy proceeding viz:
– Application for initiating
– Appointments & empowerment of trustee
– Operational and functional independence
– Accountability to court
– Monitoring and time bound restructuring
– Mechanism to sell off
– Number of time bound attempts for restructuring
– Decision to pursue insolvency and winding up
– Strategies for realization and distribution
• Need for new laws & procedures to handle
bankruptcy proceedings in consultation with 27
RBI
27

28. NEGOTIATION PROCESS
FOR SETTLEMENT OF
NON PERFORMING
ASSETS
28
28

29. Factors Affecting the Acceptance
of Proposal by Bank
• Bank’s Documentation.
• Security value. Realizable sale value.
• Bank’s ability to sell.
• Ability & Source of the borrower.
• Ability & Source of the guarantor.
• Vulnerability of the borrower/guarantor.
• Time frame.
• Strength and Zeal of bank's field staff.
• What message is bank sending out (No in a fraud
case.)
• Banks Policy.
• Success rate. 29
29

30. Preparation Stage
• 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.
30
30

31. ROLE OF CHARTERED
ACCOUNTANTS
• Assist and Prepare Viability study
• Conduct Business, Assets & Share Valuation
• Carry out Due Diligence Study for Business
Restructuring
• Verification and Vetting of Documents
• Preparation of Scheme of Arrangement
• Consultancy on Taxation aspects
• Monitoring of Accounts
• Credit Audit of borrowers
• Stock Audits
31
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