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PROGNOSIS-STRATEGIES
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Preventive
Detective
Corrective
STOP
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PREVENTIVE
1. Implementation of NPA MANAGEMENT POLICY
Basic tenets Seeks to lay down banks policy on management &
recovery of NPAs.
Stresses to prevent fresh NPAs by prescribing timenorms for detection of early warning signals fortaking corrective actions
Aims to contain the NPAs to manageable level
Lays down a broad approach for recovery of loansthrough compromise settlements
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MACRO LEVEL
A clear credit policy- keeping in view
the cost of funds Vs.Return on asset
exposure norms
industry / region wise exposure
effective rating system
past experiences
periodical review of policy
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effective market intelligence
periodic dialogue with borrowerScrutiny of financial statements
Control over excess drawings / ODs. periodical evaluation of securities
continuous watch over management ofborrowing company
existence of system to identify border lineNPAs and monitoring of their migration
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TONING UP OF CREDITSUPERVISION & FOLLOW UP
Regular review /renewal of credit limits
Close watch on excess drawals /ODs.
Toning up the Audit & Inspection system
Credit Audit
Effective MIS to identify border line cases
Increased and effective role by controllingoffices
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MICRO LEVEL
Continuous vigil over the conduct of A/Cs
Recognition of early warning signals in theA/Cs
Compliance of pending audit/inspectionirregularities
Up to date documentation / ROC search
Unit inspection- Pre & Post sanction andperiodic.
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PROBLEM LOAN REVIEW &MONITORING
Diagnose the reasons for the deterioration inasset quality and put the account under closemonitoring
Verify the adequacy of cash accruals
Revalidate the assumptions made at the time ofsanction particularly the assessment of creditrisk
Bring to the notice of borrower/guarantor thedeterioration in asset quality and call upon themto remedy the same
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Verify the completeness and correctness ofdocumentation, creation/registration of
charge, insurance cover etc.
Evaluate collateral for liquidity,
marketability and value
Obtain realistic and time bound commitmentfrom borrower/guarantor to arrest thedeterioration- have a dialogue wherepossible
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DETECTIVE-
WARNING SIGNALS
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Internal Records- Look for pressure onthe accounts
Unauthorised excesses;
Turnover increasing /decreasing unusually
Hard core borrowing
Unpaid cheques in or out
Cheques for round amounts
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Frequent requests for increase in facilities
Delays in realisation of bills receivables
Frequent devolvement of LCs and invocation of BGs
Increasing average debit balance
Local news, rumours, information from staff aboutproblems
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Requests for release of security(particularly third party)
Changes in terms of trade
Idle assets
Dead stock
Pressure from creditors
Management changes, succession,
Changes in attitude since last meeting1
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Un cleared effects
Status enquiries in or out
Court judgements
Stopped cheques-in or out
Unusual cash withdrawals
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AUDITED ACCOUNTS
Look for
Evidence of borrowing elsewhere
High gearing
Small surplus or loss
Accounts late or only draft
Two sets of accounts
Auditors certificate qualified
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Other bankers
Revalued assets
Material difference from forecasts toactuals
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VISITS OR INTERVIEWS
Look for
Difficulties in getting hold of promoters/directors
Lack of long term plans
Failure to meet orders
Reliance on one supplier or customer
Diversification
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CORRECTIVE
Action check- list
Discuss with customer
Collect as much information as possible
Carry out a SWOT analysis
Consider what information is available- ismore needed? Visit business premises.
Check the existing security. Is additionalsecurity available?
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Obtain borrowerscommitment or any plans forrepayment, particularly timing and amounts. Getagreements in writing, if possible.
Set objectives for the way forward. Investigateas to what went wrong with original proposal
Take firm control of the position. Ifcommitments are not met take speedy and firmaction.
Keep controlling office informed.
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RECOVERY OF NPAS AVAILABLEMEASURES
Basically two types ofmeasures
1. Legal
2. Non legal
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RECOVERY OF NPAS LEGAL MEASURES
Lok AdalatsIt is an institutions help banks to settle
disputes involving accounts in "doubtful"and "loss" category, with outstanding
balance of Rs.5 lakh (Rs 20 lakh) forcompromise settlement under Lok Adalatsconvened by DRT/DRTAs.
- It proved to be quite effective for
speedy justice and recovery of small loans.
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RECOVERY OF NPAS LEGAL MEASURES
Debt Recovery Tribunals
The Recovery of Debts due to Banks and FinancialInstitutions (amendment) Act, passed in March2000 has helped in strengthening the functioningof DRTs.
-Provisions for placement of more than oneRecovery Officer,
- Power to attach defendant's property/assetsbefore judgement,
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RECOVERY OF NPAS LEGAL MEASURES
-Penal provisions for disobedience ofTribunal's order or for breach of any termsof the order and
-Appointment of receiver with powers ofrealization, management, protection andpreservation of property provides necessaryteeth to the DRTs and speed up the
recovery of NPAs in the times to come
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The Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest(SARFAESI) Act, 2002
It provides for enforcement of security interest forrealisation of dues without the intervention of courtsor tribunals.
It also provides sale of assets by banks / FIs toSecuritisation companies / reconstruction companies.
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Recovery of NPAs Legal Measures
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RECOVERY OF NPAS LEGAL MEASURES
Asset Reconstruction Company:It negotiates with banks and financial
institutions for acquiring distressed assetsand develop markets for such assets.
It will buy NPAs at the pre determineddiscounted value and issue NPA Redemption
Bonds which carry a fixed return.
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RECOVERY OF NPAS LEGAL MEASURES
Circulation of information on defaulters
Credit Information Bureau of India Ltd. (CIBIL).Suit filed cases and willful defaults/diversion offunds for arriving at credit decision.
Its success depends upon cooperation extended
by the members in supplying required informationon timely basis.
Civil Courts: Recovery through courts is possibleprovided decrees are awarded early.
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RECOVERY OF NPAS NON-LEGALMEASURES
Reminder System
The cheapest mode of recovery is to send reminders
to the borrowers before the loan instalments fallsdue.
Visits to Borrowers Business Premises/ Residence
This is a more dependable measure of recovery
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Recovery Camps
It helps in recovery for small and agriculturaladvances.
Rephasing Unpaid Loan Instalments
Due to natural calamities or for some otherconvincing reasons, unpaid loan instalments may berephased / rescheduled.
Rehabilitation of Sick units
Causes of sickness should be genuine. If project isfound viable, rehabilitation package should beprepared.
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Recovery of NPAs Non-Legal Measures
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RECOVERY OF NPAS NON LEGAL MEASURES
Compromise and Settlement
This is the last resort of recovery.
Banks are free to design and implement theirown policies for recovery and write-offincorporating compromise and negotiatedsettlements with the approval of their Boards,as per broad framework advised in July 1995by RBI.
One Time Settlement Scheme - Specific
guidelines were issued in May 1999 to publicsector banks for one time non discretionaryand non discriminatory settlement of NPAsand subsequent schemes.
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Appointment of Professional Agencies for recovery
Other Measures
- Staff incentives for recovery of hardcore NPAs
- incentives to lawyers to get decrees in record time.
-Close monitoring of suit-filed cases.
- Loan write-off in small advances if chances ofrecovery are remote.
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POINTS TO PONDER UPON & REMEMBER
The NPA Reduction Mantra:
Do not give money but lend
What matter is what foryou are
financing and not what against
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Borrowal accounts in general need real timemonitoring; not post-mortem.
An NPA account need not necessarily mean that the
borrowing company is unviable or sick.
Try to identify and bridge viability gaps of industrialunits.
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Many sick units need nourishment in the formof fresh dose of loan funds to regain health.
One time settlement with wilful defaults maybe good mathematics but bad banking.
Always follow basic lending norms.
Put credit decision on fast track.
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FOR REGULATORS
Loan failures due to malafide decisions warrantfixation of accountability.
Radical legal reforms to expedite suitproceeding.
Say no to loan waivers.
If a unit cannot exist, let it exit.
Facilitate mergers and acquisitions involving sickunits.
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Prevention is better than Cure
In any financial institution, NPAs areinevitable in the loan portfolio. Butefforts should be made to maintain areasonable level of NPAs.
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