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

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Assets of a Bank

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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

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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.

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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

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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

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

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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

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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

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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

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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

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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 (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

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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

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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

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

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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

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

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SARFESI Act 2002

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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

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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 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

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Factors - Acceptance of Proposal by Bank

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• 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

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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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