Book_Credit Monitoring & NPA_31!3!2013

PREFACE

Banking business is directly dependent on economic conditions in the country. Due to liberalization, our economy is not insulated. It will have impact of economic conditions of other countries also. This we have witnessed lower rate of GDP and IIP. This has adversely affected the growth in Banking Industry on the one hand and poses a threat of mounting NPA on the other hand. In view of this Credit Monitoring has gained more importance. Credit Monitoring starts from the date bank parts with the funds.

One of the Pillars of our Business Policy Guidelines is continuous improvement in assets quality. In spite of best efforts, if we could not saved account from downgrading, then immediate steps need to be taken for recovery/up gradation of the account. The book contains guidelines on Compromise, DRT, SARFAESI Act etc.

An attempt has been made to give the field level functionaries a concise notes on various aspects of credit monitoring and NPA Management.

I have a pleasure to place this book for all Barodians.

I trust this book will be useful to the credit officers/branch for day to day work. However this cannot be a substitute of our Book of Instructions, circulars & various policies. If you have any suggestions to improve the quality of this book, please send it by e mail on [email protected].

Date:31.03.13 ( Kamlesh Patel)Place: Ahmedabad DGM & Principal I/C

Baroda Academy Inventing Methods for Igniting Minds

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mailto:sc.ahmedabad@bankofbaroda

INDEX

Sr No

Name of the Topic Page No

SECTION I CREDIT MONITORING1.. Credit Monitoring :Prevention is better than cure2 Early Warning Signals And Follow Up 53 Tools for Credit Monitoring 114 Reserve Bank Of India Guidelines For Restructuring 265 Restructuring Of Advance Accounts 356 SME Debt Restructuring 517 CDR 718 BIFR 78

SECTION II NPA MANAGEMENT9 NPA Management : Need of Hour 8910 Guiding Principles of Domestic Recovery Policy 2012 9011 Causes And Consequences Of Non-Performing Assets 9712 IARC Norms 10313 Recovery – Non Legal Measures 12014 Recovery – Legal Measures 13615 Policy for Recovery in Fraud Accounts 15816 Summary 161


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SECTION I - CREDIT MONITORING

`Credit Monitoring- Prevention is better than cure’

Credit Monitoring is an important part of Credit Management. Banking means accepting the deposits from the public for the purpose of lending. It is obligatory for Banks to make payment of these deposits on demand or after expiry of the contractual period. For making timely payment to depositors, we need fund i.e. timely return of money lent. The equilibrium will be maintained only if the money lent by the bank is also returned back well in time.

As we know that lending of money has its own risk,Thus Banks should be very cautious at the time of lending and should continue to follow up till the total money is repaid by the borrower. Credit Monitoring has become unevitable for safeguarding the bank`s interest. Credit monitoring starts the moment bank parts with the fund and continues till the liquidation of account in toto. But in real sense Credit monitoring starts the moment bank identifies the borrower.Good begin half done.

In credit decision, appraisal of the borrower is very important and if selection of borrower is done properly at the beginning; then the monitoring part will also be easy.

If we carefully track small-small, significant changes in the financial situations of the borrower or turnover in the account or we just watch the activity at the time of first default, it may ease to curb the situation and can be handled. But for this Banker is supposed to remain in touch with the borrower and need to pay full attention on monitoring.

Now a days where entire banking industry is facing the problem of rising NPAs and the problem of non-performing assets has shaken the entire Indian banking sector, the monitoring part can play a vital role in prevention of slippage and taking corrective measures in the beginning of problem.

For better credit monitoring, we are to keep our eyes and ears open and follow the different guidelines of the bank.It is easy to find out any adverse features in its beginning and may take corrective measure at once.

There is a need to strengthen the credit monitoring process at the branch level. Proper credit monitoring should be emphasized. There should be proper flow of information from the units regarding their financial area, annual accounts, stock reports etc., which would enable the banker to know the need based credit requirement of borrower and warning signals for taking quick remedial action.

If credit officer of the branch can keep a watch on the following points, credit portfolio of the branch may remain almost healthy.

Turnover in the account Timely repayment of interest and installments Timely submission of Stock Statements, QMR, information demanded by Bank,

Audited financials, Papers for Renewal Inspection of the unit on regular intervals


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Regular conversation with the borrower provides timely help to the borrower in genuine cases within the policy guidelines of the bank.

Timely Review of the facility Compliance of terms and conditions Comparison of performance with projections Transaction in the account Analysis of the performance of the unit with Industry trend

In the following chapters we have tried to discuss various monitoring tools which will be useful for better Credit Management.


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EARLY WARNING SIGNALS AND FOLLOW UP

Quick Bites

The early warning signals The incipient sickness Special mention accounts The follow up of advance accounts Definition of willful Defaulter Guidelines on financing of willful defaulter

Early Warning Signals

Reserve Bank of India has issued broad guidelines on preventing Slippage to NPAs by recognizing the problems early and corrective measures to restructure the accounts after an objective assessment of the viability of the unit and promoter's intention (and his stake). Bank shall put in place 'Early Alert System' that captures early warning signals in respect of accounts showing first signs of weakness. The following features may be treated as early warning signals. Appropriate Credit Monitoring System has been in places at BCC and at Zonal level/ Regional level in order to take care of the above.

Continuous irregularities in cash credit/ overdraft accounts such as inability to maintain stipulated margin on continuous basis or drawings frequently exceeding sanctioned limits, periodical interest debited remaining unrealized.

Outstanding balance in cash credit account remaining continuously at the maximum without appropriate turnover.

Failure to make timely payment of installments of principal and / or interest on term loans

Complaints from suppliers of raw materials, water, power etc about non payment of bills

Non submission or undue delay in submission or submission of incorrect stock statements & other control returns and statements.

Attempts to divert sale proceeds through accounts with other banks Downward trends in credit summations Frequent return of cheques or bills Steep decline in production figures Downwards trends in sales and fall in profits Rising level of inventories, which may include large proportion of slow or non moving

items


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Larger & longer outstanding in bills accounts Longer period of credit allowed on sale Failure to pay statutory liabilities Utilization of funds for purposes other than running the units Not furnishing required information/ data on operations in time Unreasonable variations in sales/ receivables Devolvement of DPG installments and non-payment within a reasonable period. Frequent devolvement of LCs and non-payment within a reasonable period Frequent invocation of BGs and non-payment within a reasonable period Non-payment of bills discounted or under collection. Poor financial performance in terms of declining sales and profits, cash losses, net losses and erosion of net worth etc. Incomplete documentation in terms of creation/registration of charge/Mortgage etc. Non-compliance of terms and conditions of sanction.

Incipient Sickness

Sickness in a unit at its initial stage is called Incipient Sickness. No unit becomes sick suddenly except due to natural calamities like flood, riots or fire or change in government policies and bad intentions. Generally sickness erupts in the unit slowly and such units generally throw signals. These signals may be of financial or non-financial in nature. Some of the signals are as under:

Continuous Irregularity in cash credit account. Low capacity utilization. Profit fluctuations, downward trend in sales and stagnation or fall in profits followed

by contraction of the share of the market. Higher rate of rejection of goods manufactured. Reduction in turnover. Whenever the borrower is in financial difficulty, he may open a

separate account with another bank and deposits all collections therein. Failure to pay statutory liabilities Larger and longer outstanding in the bill accounts Longer period of credit allowed on sale documents negotiated through the bank and

frequent returns by customer of the same Continuous utilization of cash credit facilities to the hilt and failure to pay timely

installment of principal and/ or interest on term loan. Non-submission of periodical financial data/ stock statement, etc. in time. Financing capital expenditure out of funds provided for working capital purposes Decrease in working capital. A general decline in that particular industry. Rapid turnover of key personnel. Existence of a large number of law suits against the borrower. Rapid expansion and too much diversification within a short time. Diversion/Siphoning of funds. Any major change in the share holdings. Frequent requests for 'Stop payment' of cheques. Non compliance of irregularities pointed out in Inspection, Audit Reports.


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Special Mention Accounts

For early recognition of slippage and timely interventions, it is suggested that banks introduce a new asset category between ‘Standard’ and ‘Sub-standard’ for their own internal monitoring and follow up. This asset category may be in line with international practice of ‘Special Mention Assets’ used by U.S.A., Singapore, etc.

2. An asset may be transferred to this category once the earliest signs of sickness/ irregularities are identified. This will help banks to look at account with potential problems in a focused manner right from the onset of the problem, so that monitoring and remedial actions can be more effective.

3. Once these accounts are categorized and reported as such, proper top management attention would also be ensured.

4. Introduction of a ‘Special Mention’ category of assets would be on the basis of not only overdue position in the account but also other factors, which reflect sickness/irregularities in the account.

The following types of accounts in standard category shall be brought under special mention a/cs:

i. Irregularity in the account for 30 days.ii. Non-compliance of terms & conditions for 30 days (unless the Sanctioning authority has given extended time period for compliance ) iii. No turnover in Working Capital account for 30 days.

Follow up of Advance Accounts

As the health of the advance truly lies on proper follow-up, it is obligatory on the part of the authorities concerned to exercise sufficient care to monitor the account. Branch should keep close watch on account like routing of turnover, diversion of funds, proper utilization of funds, frequent excesses and stock inspection remarks etc. Such controls would provide advance information for taking appropriate decision in order to avoid slippage of the account. Some of the major post sanction follow-up systems devised by the bank are:

Submission of Control Returns by the borrower viz., Stock Statements, Quarterly Information System/ Returns etc., and scrutiny of the same, periodical Inspection of Securities, ensuring end use of funds.

The follow up of advances is a sum of all activities starting from the date of disbursement to the date of recovery of last installment/amount.

The important objectives of follow-up of credit facilities are:

1. To ensure proper end use of funds. Funds should be used for the purpose, for which these are given. It should not be used for any other purpose.


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2. To ensure that the operations of the borrower are on expected lines both physically and financially.

3. To test the assumptions of lending. Advance is granted on the basis of projections. All projections depend on a bundle of assumptions. Many of such assumptions can and do go wrong. Actual working only shows whether the assumptions have proved correct or not. Most important are capacity utilisation, costs incurred, price level, market conditions etc.

4. To ensure that the terms and conditions of sanction are satisfied. While sanctioning an advance, bank stipulates certain conditions to be satisfied, such as restrictions on declaration of dividend, expansion in capacity, or acquisition of fixed assets, repayment of private borrowings etc.

5. To ensure that the securities offered/charged are and continue to be in order. Physical existence, valuation, quality turnover etc. are important.

6. To detect whether any danger signals are developing indicating sickness. Many a time, warning signals are thrown up indicating the existence/emergence of a problem situation. Proper follow-up action only can take care of such situation.

7. To see whether there is any change in management structure, reconstitution, death or resignation of a key person leading to the possible failure of the firm.

8. To examine whether there is any change in the environment affecting the unit, like Government Policies, Economic situations, crop failures etc.

9. To evaluate the operations of the borrower in a constructive way and to advise/devise measures for correction/ improvement etc. This will require a total study of the operations, results and trends of the borrower.

10. To formulate future programme/lines of action in the light of the operational results or records.

11. To anticipate problems and reorient plans of action in order to contain such problems effectively. This requires the banker to take a futuristic view of things and advise the borrower suitably.

Wilful Defaulter

Based on recommendations of working group on willful defaulter RBI has w.e.f. Mar 2002 instructed as under:

A Wilful defaulter is one who has adequate resources / cash flows / net worth to pay the dues, but deliberately does not pay, or siphons funds to the detriment of the unit, misrepresents / falsifies the records or conducts fraudulent transactions.

A willful default would be deemed to have occurred if any of the following is noted:

The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honor the said obligations.

The unit has defaulted in meeting its payment /repayment obligations to the lender and has not utilized the finance from the lender for the specific purpose for which finance was availed of but has diverted the funds for other purposes.


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The unit has defaulted in meeting its payment /repayment obligations to the lender and has siphoned off the funds such that funds are not utilized for the specific purpose for which finance was availed of nor are the funds available with the unit in the form of other assets.

The unit has defaulted in meeting its payment /repayment obligations to the lender and has disposed off / removed the assets without the knowledge of the bank.

Further, default in honoring the settlement by the party to be treated as willful default

as per the recent judgment by Delhi High court dated 29.11.05.

As per RBI guidelines, every bank is required to submit a list of suit filed accounts of willful defaulters with outstanding (FB+NFB) of Rs.25 lacs and above, at the end of every quarter (March, June, September and December) to CIBIL or any other RBI registered credit information company and a list of non suit filed accounts of willful defaulters to only RBI.

Guidelines on financing of willful defaulter:

In order to prevent the access to the capital markets by the willful defaulters, a copy ot the list of willful defaulters (non-suit filed accounts) and list of willful defaulters (suit filed accounts) are forwarded to SEBI by RBI and CIBIL respectively.

No additional facilities should be granted by any bank / FI to the listed willful defaulters. In addition, the entrepreneurs / promoters of companies where banks / FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of the willful defaulter is published in the list of willful defaulters by the RBI.

Units becoming sick on account of, willful default, unauthorised diversion of funds, should not be considered for rehabilitation and steps should be taken for recovery of bank dues.


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TEST YOUR UNDERSTANDING

State whether the following statements are True or False

1. Classification of the borrower as Wilful Defaulter will not have any impact, as he can raise the funds from marked.

2. Provisions for classification of Borrower as wilful defaulter are applicable only to those borrowers whose outstanding is of Rs 25 lac and above.

3. If any irregularity persists in any borrowal account for a period of 30 days or more then we have to classify the account as Special Mention Account.

4. If in a borrowal account there are no overdues, but compliance of terms of sanction is pending for 5 weeks, then the account will be classified as Special Mention Account.

5. Incomplete documentations is not a early warning signal.

ANSWERS

Q 1 2 3 4 5

A FALSE TRUE TRUE TRUE FALSE


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CREDIT MONITORING TOOLS

Quick Bites

Various tools of Credit Monitoring Stock / Book Debt Audit Monthly Monitoring Report Credit Audit & Guidelines concurrent auditors for large borrowal accounts Exit policy for high risk borrowers End Use of Funds Review Post Sanction Reporting (PSR) Norms for Risk based inspection/verification of stock & BDs Credit Rating Internal Inspection ASCROM

Important Tools of Credit Monitoring:

1. Monitoring day to day operations in the account at least on a test basis; 2. Stock/ book-debts statements; 3. Review of the account; 4. Periodical inspection / verification of the securities charged to the bank; 5. Credit Rating at stipulated intervals; 6. Satisfying upon whether the borrower is paying statutory dues / Electricity bills

telephone bills / wages etc. in time. 7. Finding whether the borrower has recently cut-down any major activity / expenses

which he was doing otherwise in ordinary course of business. 8. Keeping an ear to the market news / reports. 9. Meeting with the borrowers and discussing with him, besides the business, what else

he is doing / planning and whether something is bothering him in business or in personal life like family separation, sickness of important person in the family, heavy financial commitment of personal nature etc.

1. Stock / Book Debt Audit

As per extant guidelines, major features for Stock/Book Debt Audit are as under:-

• The existing practice of conducting stock inspections and book debts verification by branch officials and random inspection by concurrent auditors to continue as per guidelines.

• Annual Stock/Book Debt Audit (i.e. covering the period 1st April to 31st March every year) is to be carried out in all accounts having fund- based working capital limits (including DA LC limit) of over Rs. 5.00 crores with our Bank.


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• The Stock Audit/Book Debt Audit may be conducted at more frequent intervals (i.e. more than once a year) if deemed necessary by the Bank.

• Initially, this stock audit to be restricted to sole banking accounts, accounts under multiple banking and consortium accounts where our Bank is the leader of the consortium.

• Panel of Chartered Accountants / C.A. firms for entrusting Stock Audit Work to be finalized by Zonal Authorities.

2. Monthly Monitoring Report:

The purpose of MMR is to ensure and facilitate qualitative supervision of the bank’s credit portfolio. The MMR will provide information on early warning signals with a view to trigger timely corrective actions. These will facilitate slippage prevention and impairment of credit quality

The basic purpose is to ensure that branches are following the guidelines of loan policy, Recovery policy, Review of the accounts, Compliance of terms and conditions, Credit rating and other monitoring tools available for the purpose

Objectives: 1. Slippage prevention and improve the credit rating 2. Early detection of warning signals, potential NPA, incipient sickness. 3. To initiate timely and corrective action for preventing impairment. 4. To take necessary action for follow up and review of credit facility. 5. To ensure that no revenue leakage in respect of ROI or charges 6. Weak rated accounts BOB-7, B and C rated, Rescheduled, CDR accounts are to be

closely monitored.

Under the system, branches are required to submit monthly monitoring reports as under:-• Advance accounts of Rs.10 crores (FB+NFB) through Zonal Office to Corporate Centre within 10 days of reporting date (i.e. by 25th of every month)

For a better and efficient system of monitoring of large advances bank has introduced a web based centralized solution for credit monitoring reports for advances accounts with FB and NFB exposure of Rs 10 crores and above . Hence submission of MMRs in word format for advances account of Rs 10 crore and above has been discontinued.

The Software can be opened through the Finacle System by entering the following URS:spgrs.bankofbaroda.co.in/cremon

1. Branch USERID : Branch Alpha Code2. Password : Default password is bob1234* The branch should change the password.

New password should contain 8 characters with alpha, numeric and special characters.3. In case of existing account only necessary changes in the data are to be made in the all

parameters like outstanding, overdues, date of review etc.4. New account should be opened through system.


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• Zonal Manager to monitor all advance accounts above Rs.5 crore to Rs.10 crore (FB+NFB) based on the MMR received through Regional Office. The Zones will also submit copies of the MMRs of these accounts to BCC for further monitoring.

• Regional Manager to monitor all accounts above Rs.1 crore to Rs.5 crores (FB+NFB) based on MMRs received from branches. Regional Office will also submit copies of the MMRs of these accounts to Zonal Office for further monitoring.

• Branch Manager to monitor accounts of Rs.1 crore and below.

Further Regional Offices are also to monitor: - Advance accounts with exposure of Rs.25 lacs to Rs.1 Crore based on Quarterly

Monitoring Reports received from Branches / Scrutiny of ASCROM data. Advance accounts with exposure of RS. 1 lacs to Rs. 25 lacs based on scrutiny of

ASCROM data.

Accounts Causing Concern:

Regional Offices are to submit a summary report in the prescribed format on advance accounts causing concern:

With exposure above Rs. 1 crore to Rs. 5 crore alongwith copy of MMRs to BCC with a copy to Zonal Office at monthly interval, within 7 days of reporting date of MMR i.e. before 22nd of every month.

With exposure above Rs. 25 lacs to Rs.1 crore alongwith copy of Quarterly Monitoring Report (QMR) to BCC with a copy to Zonal Office at quarterly interval within 7 days of reporting dates of QMR which are 15th March, 15th June, 15th

September and 15th December.

As regards to accounts causing concern, officials from RO/ZO may take appropriate decision to visit such accounts on case- to-case basis, to conduct on the spot study of the unit and discussions with the borrower for taking timely remedial actions to prevent slippage in the account.

3. Credit Audit & Guidelines

A. As per the recommendations of Narang Committee, RBI has advised all banks to have lending mechanism for large advances soon after the sanction.

B. The objectives of credit audit are; (i) Review sanction process and compliance status of large loans (ii) Improvement in quality of credit portfolio. (iii) Recommend corrective action to improve credit quality, credit administration and credit skill of staff.

(iv) Pick up early warning signals and suggest remedial actions.

C. Cut off limit for the account - (i) Existing accounts with FB + NFB limit of Rs. 10 crores and above,


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(ii) Fresh sanction including increase/ adhoc with limit Rs. 5 crores and above (iii) 5% of the accounts of the Region on random basis with sanction limit of Rs. 1 crores and above but below Rs. 10 crores.

D. No Credit audit for NPA accounts .

E. The credit audit is required to be carried out within 3 to 6 months from the date of sanction/ review.

F. Credit audit of eligible accounts of one region is to be carried out by officers of another region within the zone.

G. The credit auditor has to study conduct of the account, turn over in the account, excess drawing, return of cheques, inter-firm transactions and compliance of terms and conditions and will submit the report in prescribed format directly to CIAD with a copy to respective branch, Regional office, Zonal office & ZIC through soft copy

4. Appointment of concurrent auditors for large borrowal accounts. With a view to curb the mounting NPA, a continuous on sight monitoring of the borrowal accounts is essentials. Our bank has decided to appoint Concurrent auditors for the purpose. Accounts falling under the criteria are as under: -

(i) Accounts with exposure of Rs. 25 crores and above with B+ rating as per old credit rating models and BOB-6 as per new rating

(ii) Accounts with exposure of Rs. 10 crores and above with B & C rating as per old rating models and BOB-7 & below as per new rating .

(iii) In case of sole banking or multiple banking, concurrent audit should be introduced immediately

(iv) .In case of consortium accounts where we are leader and account falling under any of the above criteria, a joint decision is to be taken by the consortium banks. Where we are not leader, impress upon the lead bank and members to introduce the concurrent audit.

The concurrent audit to be entrusted to empanelled firm of Chartered Accountants. The Zonal Head will allot the assignment to these firms. It is to be noted that such assignment to be restricted to three accounts per firm of CA.

Wherever concurrent auditor is appointed, bimonthly stock inspection is to be carried out by the branch as per extant guidelines.

Concurrent auditor will submit his monthly report regularly. Branches to offer their comments/ action initiated etc to the respective regional offices.

The stipulation of concurrent audit, as above, is to form a part of the sanction/ review terms and conditions and to be advised to the borrowers. The fee for concurrent audit as finalized by the CID is to be borne by the borrowers.


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5. Exit policy for high risk borrowers:

(i) To identify the borrowers accounts at the right time for exit. The early warning signals, market report, Govt. policies etc. are to be studied to identify the account for exit. Followings are the list of early warning signals/resources for identifying the borrowers for exit: -

(ii) Deterioration of credit rating for last two years from ‘BOB-6’ to downwards. (iii) Financial performance is deteriorating during last two years. (iv) The borrower has started suffering from liquidity crunch. (v) Conduct of the account- poor turn over, return of cheques for financial reasons,

consistent overdue in the account ,. Financial indiscipline. (vi) The quality/value of the assets charged to the bank is deteriorating steadily(vii) The borrower is resorting to high cost borrowings to keep afloat. (viii) he regulators are scanning the borrower’s activity. (ix) Name of directors/ promoters /Company appear in the default list of RBI/ECGC

etc. (x) The revenue authorities are raising high value claims on the borrower. (xi) Top management team of the borrower is frequently changing or dispute among the

directors/ promoters. (xii) Continuously requesting for excess/ adhoc etc. (xiii) Account with us is regular but with other bank, highly irregular.

(xiv) The industry trend is sunset.

Action plan: 3. Close monitoring of such accounts. 4. No excess/adhoc to be considered. 5. Inform the borrower about banks disinclination to take any additional exposure. 6. Strategy for hand holding, cut back, take out financing etc. to be adopted. Wherever

needed, gradually to reduce our exposure. 7. The quarterly operative limits should be strictly enforced. 8. In case of consortium, no further increase to be accepted. 9. Try to recover the entire dues without any loss to the bank. 10.A compromise or OTS can also be initiated by waiver of penal interest and reduction

in rate of interest from contractual rate, up to Base Rate+4%, for last 12 months. In case if the borrower is not in a position to pay one time/ lump sum payment, a request can be considered for a maximum up to 12 months with a stipulation to pay 25% as upfront payment.

11.All sanctioning authorities would exercise the powers to exit the account up to their DLP.

The adverse observations are to be immediately reported to the sanctioning authority and measures be taken for correction of the same. Concurrent Audit is also prevalent in the Bank, as an additional support System, which takes care of reporting to the higher management directly on various areas that are to be reported as per the terms of services for which engaged, including revenue leakage, documentation, other relevant observations etc. pertaining to borrowal accounts.


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6. End Use of Funds

In view of recent spurt in capital market RBI has directed that Branches should ensure that the loans sanctioned by bank, particularly the general purpose loans are used for the purpose for which the same are sanctioned and not diverted to the capital market. The Branches should continuously monitor end use of funds and obtain certificates from the borrowers certifying that the funds have been used for the purpose for which these were obtained and not diverted to the capital market.(Ref: BCC/BR/103/22 dt. 18.01.2011)

In light of the above instructions by RBI, the following systems and procedures are advised to be followed by the branches strictly:

(i) While processing any proposal, the purpose for which the advance is given is to be clearly understood / appraised in the proposal.

(ii) After sanction and at the time of disbursement, it is to be ensured that the disbursements are made only in relation to the purpose for which the advance is sanctioned.

(iii) In respect of Working Capital accounts, a continuous monitoring is required to ascertain the nature of payments made and whether such payments are related to the purpose of advance or not

(iv)The monthly stock statements, QIS / QMR statements are to be thoroughly checked for the reasons they are submitted for and not in a routine manner.

(v) All disbursements in term loans to be directly made to the supplier after ensuring that sufficient margin is routed through the account.

(vi) The assets such acquired must be inspected at the earliest possible date and the inspection report containing the details and specifications of the asset are to be kept in records.

(vii) The original invoices / bills relating to the purchase of assets with clear details and specifications of the asset should be obtained and kept in records.

(viii) Wherever it is not possible to make direct payment and the nature of requirement is such that disbursements are to be made only to the credit of their accounts, permission from the sanctioning authorities/ competent authorities should be obtained at the time of sanction itself.

(ix) In respect of Term Loans/Demand Loan, the purpose for which the loans are requested for should be ascertained at the time of the initial application and on sanction, should be ensured that the funds are utilized for the said purpose only.

(x) In no case, the amounts are to be credited to their operative accounts and allow them to divert the funds elsewhere.

(xi) In such cases, invariably an undertaking to be obtained from the borrowers for the end use of funds and their auditor’s certificate to be obtained and kept in records.

(xii) Wherever there is specific requirement for infusion of promoters’ contribution / margin towards acquiring assets, it is to be ensured that the funds are routed through the Bank account with us, with discreetly inquiring about the source of funds brought in. An auditor’s certificate from their regular auditor may be obtained to substantiate the contribution / margin.


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The branches are also advised to strengthen their follow-up and credit monitoring activities and the post sanction supervision may be strictly adhered by the following:

(i) scrutiny of the periodical progress reports and operating / financial statements of the borrowers

(ii) visits to the assisted units and inspection of securities charged to the banks (iii) periodical scrutiny of the books of accounts of the borrowers(iv)Stock audits as per extant guidelines.(v) Obtention of certificates from the borrowers that the funds have been utilized for the

purposes approved(vi) Examination of all aspects of diversion of funds during internal audit / inspection of

the branches and at the time of periodical reviews.

7. Review

Regular Review

Credit facilities sanctioned to borrowers are subjected to annual review (except LABOD, staff loans and the accounts where facilities sanctioned are for a period less than one year etc.) as per the prevailing guidelines.

However in case of borrowal accounts enjoying credit facilities of Rs.10 crores and above and where the credit rating of the account is BOB-7 or below the account should be reviewed on half-yearly basis.

The accounts are required to be reviewed on or before the due date. The review takes a comprehensive view on various issues covering financial health, borrower’s performance and prospects, quality of the management, conduct of the account, compliance, etc. The review will also evaluate the impact of deficiencies observed during inspection / Concurrent / statutory / Credit Audit / RBI inspection and rectification thereof.

Branches have been authorized by the Board to review advances accounts with limit upto Rs. 20 lacs pending receipt of audited financial statements, provided the conduct of the account is satisfactory in terms of: -

(i) Turn over in the accounts.(ii) Fulfillment of repayment obligations (interest / installments)(iii) Adequacy of securities, drawing power, insurance coverage etc.(iv) Rectification of inspection irregularities (other than non-submission of financial

statements)(v) Compliance of all terms and conditions of previous sanction(vi) Satisfactory trend in production and / or sales as per projections.(vii) Documentation and mortgages in the account being complete, valid and

enforceable.(viii) Submission of income tax / sales tax returns filed with the statutory authorities as

per time schedule prescribed, wherever applicable. (This will also indicate about the sales and profitability of operations.)

The objective of the above system / procedure is to ensure timely review of advances accounts so that the slippage of the accounts to NPA category on technical grounds may


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be avoided. However branches should nevertheless obtain latest financial statements within a reasonable time after the review is conducted and satisfy themselves as to the financial parameters emerging out of the Balance Sheet / Profit & Loss a/c. In case any adverse features are observed in the financials of the borrower, Branches should immediately initiate appropriate action as warranted.

Short Review / Status Note:

The bank has also the practice of Short Review / Status Note, which is done when it is not possible to carry out a comprehensive Regular Review of the account within the stipulated period pending receipt of certain particulars/ information or where the account is placed under special monitoring, etc.Consecutive Short Reviews shall be restricted to two with a maximum period of six months for each short review. But in exceptional cases, the next higher authority (not below the level of Chief Manager) may do more consecutive Short Reviews after satisfying himself about the need for the same and reasons duly recorded. Relaxation is also provided to restructured accounts and accounts under rehabilitation where for a variety of reasons only, Short Reviews may have to be done till such time the unit/account becomes normal and healthy.

Where there is impairment of borrower’s quality indicated through various adverse features like default, diminution in value of security etc., suitable communication and if need be a Short Review / Status Note should be placed before competent authority for perusal, direction and necessary action.

Review of Priority Sector Advances. (ref. BCC/BR/103/248 dt. 30.08.11)

Keeping in view to cope up with rush of farmers borrowers at a time and reduce the repetitive laborious work in filling up the information which is already available in the system, a Memorandum of review for small loans under Agriculture and Government Sponsored Schemes (falling under the business line of Rural & Agri. Banking) is available for accounts where there is no need to analyze the balance sheet, in ASCROM package.

The Path for generating the review reports and forwarding letter is as below:“Reports/Reports/Rural And Agri-I/32) Memo. of Review of small Loans Under Agr. Govt. Spon. Schm.” and. “Reports/Reports/credit monitoring-I/23) List of Review of small Loans-PS.”

Advantages of this system are:(i) Branch need not to prepare a review proposal. It can be generated from ASCROM

with basic details along with balance outstanding and overdue etc. under each credit facility of the borrower. Branch only has to verify the same, insert details of inspection queries and present status as well as the decision of the branch.

(ii) All overdue proposals can be generated (iii) Branch can maintain the record in individual borrowers file which will facilitate at the

time of inspection for the review of accounts.

8. Post Sanction Reporting (PSR)


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Bank follows a Post Sanction Reporting. The features are:

(i) Covers all sanctions and credit decisions viz., Fresh / Increase /Renewal / Rejection / Adhoc / Excess / Modifications / Waivers /restructuring / rescheduling etc., excluding sanction of staff advances, LABOD (i.e. post sanction reporting of LABOD and Staff Loans is not required).

(ii) Broad parameters relating to sanction are only examined by the PSR authority whereas the sanctioning authority shall take care of all procedural details on credit appraisal, adequacy of security, documentation etc.

(iii) Observations of PSR authority are to be attended immediately, which shall also serve as guide to the sanctioning authority for future.

(iv)Disbursement of credit facility/ies is not to be withheld merely for want of observations of the competent authority on PSR.

(v) All Sanctions in respect of Fund-Based and Non Fund-Based credit limits (excluding LABOD & Staff Loans) are to be reported to PSR Authority on monthly basis in the prescribed format. However, enclosures such as Appraisal Note, latest financials, credit rating sheets etc; for sanctions up to Rs. 10 lacs, in case of rural and semi urban branches and upto Rs 25 lac in case of Metro and Urban branches (Rs. 5 lacs for Retail Loans) need not be sent with the prescribed formats for PSR.

(vi)Copies of Credit Proposals with Fund Based and Non Fund Based sanctioned limit aggregating above Rs. 10 lacs in case of rural and semi urban branches and above Rs 25 lacs in case of Metro and Urban branches (retail loans above Rs. 5 lacs) should be forwarded to PSR authority within 3 days of sanction along with Appraisal Note, latest financials with necessary comments by the sanctioning authority, latest credit rating sheet, gist of major adverse features and non-compliance of stipulated terms and conditions and the sanctioning authority’s comments there on.

(vii) The PSR authority is required to clear the proposal from PSR angle within a period of –30- days from the date of receipt of proposal. If the PSR authority has not made any observation within the said period, it will be presumed that the PSR authority has no observation to make and the proposal is cleared from PSR angle.

.9. Norms for Risk based inspection/verification of stock & BDs:

Prime Securities charged for WC limits as per BOBRAM rating

Periodicity

Latest Credit Rating is A+ for Old rating BOB 1 to BOB3 as per CRISIL

Half Yearly

Latest Credit Rating is A for Old rating, BOB4 & BOB5 as per CRISIL

Quarterly

Latest Credit Rating is B+ for Old rating, BOB-6 & Below as per CRISIL

Bi-Monthly

Fixed Assets charged against Loans Half yearly (Jan & July) Consortium Accounts As fixed by Consortium Inspection of Collateral securities Annually


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Retail Loans: Housing Loan On every disbursement & thereafter once in -3- years.

Overdraft Against Property On disbursement & then annually Two wheelers / Car loan /Traders Loan & Profess. Loans

Once in a year and the gap between two inspection should not be less than 10 months

(i) Over and above inspection as mentioned above the sanctioning authorities shall have to visit the borrowers once in a year

(ii) Inspection of collateral to be carried out preferably once in a year for all types of facilities.

(iii) To carry out compulsory annual stock audit/ book debt audit in all account having fund based working capital limits including DA Letter of Credit of over Rs. 5.00 crores. This stock audit is to be done by panelled chartered accountant once in a year.

10. Credit Rating

As per extant guidelines, Credit rating cycle is yearly in case of borrowal accounts enjoying credit facilities of Rs. 2 lacs ( Fund Based and Non- Fund Based) and above.

In case of accounts below Rs 25 lac credit rating is to be done for taking credit decision ,but pricing is delinked. For account of Rs 25 lac and above credit rating is important for taking credit decision and also for pricing.

At time of review if there is downgrading in Credit Rating, we have to ascertain the reasons and the same should be discussed with the borrower and corrective steps should be taken to improve the health of the account.

In case of accounts above Rs 5 crores , we should ask the borrower to get the account rated from approved external Credit Rating Agencies.

11. Internal Inspection (RBIA ):

Inspection is a control tool to ensure that day to day activities of the branch, its management, lending decisions, safety of the Bank’s funds are in conformity with the administrative instructions /guidelines issued from time to time & in furtherance of corporate objectives. The objectives of internal inspection are:

(i) To scrutinize the completeness & enforceability of the documents taken for advances & other facilities.

(ii) To carry out physical checking, qualitatively and quantitatively of stocks & other assets charged to the bank by pledge, hypothecation or mortgage.

(iii) To ascertain for sanction for advances(iv)To verify prompt & regular submission of periodical& statutory returns(v) To verify asset classification of advances(vi)To ascertain position of income recognition(vii) Ensure that qualitative rectification has taken place


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Besides, Statutory Audit carried by Statutory Auditor, RBIA is a comprehensive feedback to the management about the degree of compliance of Bank’s norms, classification of assets, and quality of advance portfolio. etc.The compliance is monitored through rectification certificate.

12. Branch to collect periodically details of various statutory dues paid by the borrower e.g. payment of Sales Tax/Service Tax/Excise Duty, MESB Bills ,TDS etc

13.QIS Statement

To know the estimates and performance of the borrower branch to call the QIS statements from all borrowers who are enjoying working capital limits of Rs 1 crore and above of entire banking system. Statement Periodicity Branch actionQIS I One week before

the commencement of the quarter for which it relates

Branch to compare the estimates of sales with projections. For major variance branch to discuss it with borrower. Branch to check the level of estimated current assets and current liabilities and also the operative limit. Branch to modity the operative limit in Finacle and Ascrom

QIS II Within six weeks after end of the quarter, for which it relates

Compare the performance with estimates given in QIS I and also with Projections given earlier. Check the variance . Discuss the reasons with borrower.

QIS III Within two months after close of the half year.

Compare the performance with the projections and check the variance. Discuss the reasons with borrower and take suitable corrective steps.

14. Exchange of Information in case of Consortium /Multiple Banking Accounts.

While sanctioning a loan branch should obtain details of existing facilities enjoyed by the borrower from various banks and financial institutions. Then every quarter branch should exchange the details of credit facilities with the other Banks and FIs and also ensure the exchange of information by them. In case of Consortium advances exchange of information should be done amongst the members and consortium meeting should be hold at least once in a quarter. Branch should also obtain a certificate by a professional, preferably from Company Secretary ( but if it is not possible then from Chartered Accountant or Cost Accountant )regarding compliance of various statutory prescription which are in vogue.

15. Compliance of observations of PSR authority, Statutory Auditors, Concurrent Auditors, Observations received on MMR.

16. Branch to follow following time bound schedule of follow up for prevention of slippage.


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Due Date of EMIS Action to be initiated(-7 – o days ) 7 days before System generated SME reminder

O day ( due date ) System generated SMS 2nd reminder7-30 days 0-6th day Collection of EMI

7th day System generated SMS 3rd reminder8th -9th day 1st Telephonic contact and 1st written

Reminder ( system generator )10th day Personal Meeting of Branch official

with Borrower15th day 2nd Telephone contact21st-25th day System generated 1st Registered

Reminder30th day Personal meeting of official from circle

office alongwith branch official with borrower

31-60 days 37th-40 day 3rd telephonic contact and 1st

telephonic contact with the guarantor41st – 44th day 2nd Registered Reminder with a copy

to guarantor45th day Personal Meeting of official from HO

alongwith branch/CO with the borrower

56th -60th day Personal contact with borrower/family members or guarantors at residence /work place by the incumbent

61-90 days 70th -72nd day 3rd Registered reminder with copy to guarantor.

Before 80th day Personal and /or telephonic contact with guarantor at his residence.

Before 90th day Personal contact by incumbent himself again with borrower/guarantor/family members

17. ASCROM SYSTEM

Genesis

ASCROM SYSTEM:

Asset Classification and Credit Monitoring System.Earlier ASCROM software was developed in DOS and coded in FOXPRO. It was designed to capture comprehensive profile of Advance portfolio at quarterly interval and was implemented in all Domestic branches of the Bank in September 1998.The present ASCROM SYSTEM is developed in VB DOTNET as front end for user interface and MS SQL SERVER as Back end data base. It is implemented in all domestic branches since APRIL 2007. Data is now captured at monthly interval.The ASCROM System in our bank at present is taking care of: -


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(i) Asset Classification and provisioning as per IRAC norms.(ii) Computation of Capital Charge on Credit Risk as per BASEL II Requirements

(Standardized Approach)(iii) Submission of CIBIL data.(iv) ALM Report for Advances.(v) Generation of various MIS reports.

TEST YOUR UNDERSTANDING :

01 Credit audit is based on recommendations of a) Vyas Committee

b) Kapoor committee c) Narang Committee d) Zilani Committee e) Damodaran Committee

02. Short review is carried out whena) When borrower wants additional facility before due date.b) When borrower wants to close the account within 3 months.c) When borrower wants to close the account within 6 monthsd) When it is not possible to carry out regular review on account of

pending information. e) When account becomes NPA

03. PSR in respect of advances is related to following type of advances.a) Restructured accounts.b) All types of sanctions and credit decisionsc) All types of sanctions and credit decisions except staff loans and

LABOD.d) All types of sanctions and credit decisions except staff loans and

LABOD, Loans against NSC/KVPs and LIC policies.

e) All types of sanctions and credit decisions except Gold Loan

04. Large borrowers enjoying facility of RS 10 crores and above should be reviewed

a) On yearly basis when credit rating is BOB-6 or belowb) On quarterly basis when credit rating if BOB-6 or belowc) on half yearly basis when credit rating is BOB-7 or below.d) on half yearly basis when credit rating is below BOB-8

e) On yearly basis when credit rating is BOB 5 or below

05. PSR authority is required to clear the proposal from PSR angle within period of

a) 60 days from the date of receipt of proposal.b) 30 days from the date of receipt of proposal.


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c) 90 days from the date of receipt of proposal.d) No date is fixed for such purpose.

e) 120 days from the receipt of proposal.

06. Submission of CIBIL data is done througha) ASCROM systemb) Finacle

c) a&b d) None e) Cloret

07. RBIA stands fora) Risk Before International Advisorsb) Risk Before Indian Administratorsc) Risk based Internal Auditd) None ofthe above.

e) Regular Branch Inspection and Audit 08. In case of the working capital facilities with Credit rating upto BOB3, the

prime securities charged under working capital facility will be inspected a) Half Yearly b) Quarterly c) Bi-Monthly d) Annually e) No specific periodicity

09. Stock/Book Debt Audit (i.e. covering the period 1st April to 31st March every year) is to be carried out compulsorily in all accounts having fund- based working capital limits (including DA LC limit) of over Rs ----- crores with our Bank. a) 10 crore b) 1 crore c) 25 crore d) 5 crore e) 3 crore

10. Cut off limit for the Credit Audit in respect of existing accounts with FB + NFB limit of Rs. ------ crores and above.

a) 5 crore b) 1 crore c) 10 crore d) 2 crore e) 3 crore

11. Cut off limit for the Credit Audit in respect of fresh accounts with FB + NFB limit of Rs. ------ crores and above.


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a) 5 crore b) 1 crore c) 10 crore d) 20 crore e) 25 crore

12. The credit audit requires to be carried out the audit within --- to --months from the date of sanction/ review.

a) 1 to 2 months b) 2 to 3 months c) 3 to 6 months d) 6 to 12 months e) 6 to 9 months

13. Borrowal accounts with credit rating of BOB 4 or 5 , the periodical inspection in respect of current assets is to be done , once in ________________ a) six months b) three months c) two months d) four months e) 12 months

14. Consecutive Short Reviews shall be restricted to --- with a maximum period of ---- months for each short review.

a) 1 time/ 3 months b) 2 times / 6 months c) 3 times/ 4 monthsd) 1 times onlye) 1 times /6-9 months

15. In case of Retail Lending sanctions above Rs. ---- lacs, copies of Application-cum-Appraisal Note should be sent to PSR authority within three days of sanction. a) 10 lacs b) 5 lacs c) 7 lacs d) 15 lacs e) Irrespective of loan limit

ANSWERS

Q 1 2 3 4 5 6 7 8


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A c d c c b a c a

Q 9 10 11 12 13 14 15

A d c a c b b b

RESERVE BANK OF INDIA GUIDELINES FOR RESTRUCTURING

Quick Bites

Eligibility criteria for restructuring of advances Asset classification norms Income recognition norms Provisioning norms Normal provisions Provision for diminution in the fair value of restructured advances Special Regulatory Treatment for Asset Classification

General Principles and Prudential Norms for Restructured Advances

The principles and prudential norms laid down here are applicable to all advances including the borrowers, who are eligible for special regulatory treatment for asset classification.

Eligibility criteria for restructuring of advances

1 Banks may restructure the accounts classified under 'standard', 'sub-standard' and 'doubtful' categories.


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2 Banks can not reschedule / restructure / renegotiate borrowal accounts with retrospective effect. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because restructuring proposal is under consideration. The asset classification status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring / rescheduling / renegotiation. In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of supervisory concern.

3 Normally, restructuring can not take place unless alteration / changes in the original loan agreement are made with the formal consent / application of the debtor. However, the process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions.

4 No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case. Illustratively, the parameters may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Return and Cost of Funds and the amount of provision required in lieu of the diminution in the fair value of the restructured advance. The accounts not considered viable should not be restructured and banks should accelerate the recovery measures in respect of such accounts. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects / activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns / action.

5 While the borrowers indulging in frauds and malfeasance will continue to remain ineligible for restructuring, banks may review the reasons for classification of the borrowers as willful defaulters specially in old cases where the manner of classification of a borrower as a willful defaulter was not transparent and satisfy itself that the borrower is in a position to rectify the wilful default. The restructuring of such cases may be done with Board's approval, while for such accounts the restructuring under the CDR Mechanism may be carried out with the approval of the Core Group only.

6 BIFR cases are not eligible for restructuring without their express approval. CDR Core Group in the case of advances restructured under CDR Mechanism / the lead bank in the case of SME Debt Restructuring Mechanism and the individual banks in other cases, may consider the proposals for restructuring in such cases, after ensuring that all the formalities in seeking the approval from BIFR are completed before implementing the package.

Asset classification norms

Restructuring of advances could take place in the following stages :

(a) before commencement of commercial production / operation


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(b) after commencement of commercial production / operation but before the asset has been classified as 'sub-standard'

(c) after commencement of commercial production / operation and the asset has been classified as 'sub-standard' or 'doubtful'.

1 The accounts classified as 'standard assets' should be immediately re-classified as 'sub-standard assets' upon restructuring.

2 The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule.

3 All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for up-gradation to the 'standard' category after observation of 'satisfactory performance' during the 'specified period'.

4 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.

5 Any additional finance may be treated as 'standard asset', up to a period of one year after the first interest / principal payment, whichever is earlier, falls due under the approved restructuring package. However, in the case of accounts where the prerestructuring facilities were classified as 'sub-standard' and 'doubtful', interest income on the additional finance should be recognised only on cash basis. If the restructured asset does not qualify for upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt.

6 In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as substandard. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion. However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance.

Income recognition norms

Interest income in respect of restructured accounts classified as 'standard assets' will be recognized on accrual basis and that in respect of the accounts classified as 'non-performing assets' will be recognized on cash basis.

Provisioning norms

1 Normal provisions


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Banks will hold provision against the restructured advances as per the existing provisioning norms.

2 Provision for diminution in the fair value of restructured advances

(i) Reduction in the rate of interest and / or reschedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. Such diminution in value is an economic loss for the bank and will have impact on the bank's market value of equity. It is, therefore, necessary for banks to measure such diminution in the fair value of the advance and make provisions for it by debit to Profit & Loss Account. Such provision should be held in addition to the provisions as per existing provisioning norms and in an account distinct from that for normal provisions.

For this purpose, the erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring.

The above formula moderates the swing in the diminution of present value of loans with the interest rate cycle and will have to follow consistently by banks in future. Further, it is reiterated that the provisions required as above arise due to the action of the banks resulting in change in contractual terms of the loan upon restructuring which are in the nature of financial concessions. These provisions are distinct from the provisions which are linked to the asset classification of the account classified as NPA and reflect the impairment due to deterioration in the credit quality of the loan. Thus, the two types of the provisions are not substitute for each other.

(ii) In the case of working capital facilities, the diminution in the fair value of the cash credit / overdraft component may be computed as indicated above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components (Working Capital Term Loan and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components.

(iii) In the event any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1/- till maturity of the security. This will ensure that the effect of charging off the economic sacrifice to the Profit & Loss account is not negated.


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(iv) The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower. Consequently, banks may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account.

(v) If due to lack of expertise / appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances extended by small / rural branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than rupees one crore till the financial year ending March 2013. The position would be reviewed thereafter.

3 The total provisions required against an account ( normal provisions plus provisions in lieu of diminution in the fair value of the advance) are capped at 100% of the outstanding debt amount.

Special Regulatory Treatment for Asset Classification

1 The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated, will be available to the borrowers engaged in important business activities, subject to compliance with certain conditions as enumerated below. Such treatment is not extended to the following categories of advances:

i. Consumer and personal advances;

ii. Advances classified as Capital market exposures;

iii. Advances classified as commercial real estate exposures

The asset classification of these three categories accounts as well as that of other accounts which do not comply with the conditions enumerated below, will be governed by the prudential norms in this regard described above.

Elements of special regulatory framework

The special regulatory treatment has the following two components :

(i) Incentive for quick implementation of the restructuring package.

(ii) Retention of the asset classification of the restructured account in the pre-restructuring asset classification category

Incentive for quick implementation of the restructuring package


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During the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. However, as an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell in respect of cases covered under the CDR Mechanism or when the restructuring application was received by the bank in non-CDR cases:

(i) Within 120 days from the date of approval under the CDR Mechanism.

(ii) Within 90 days from the date of receipt of application by the bank in cases other than those restructured under the CDR Mechanism.

Asset classification benefits

Subject to the compliance with the under noted conditions in addition to the adherence to the prudential framework laid down:

(i) an existing 'standard asset' will not be downgraded to the sub-standard category upon restructuring.

(ii) during the specified period, the asset classification of the sub-standard / doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period.

However, these benefits will be available subject to compliance with the following conditions:

i) The dues to the bank are 'fully secured'. The condition of being fully secured by tangible security will not be applicable in the following cases:

(a) SSI borrowers, where the outstanding is up to Rs.25 lakh.

(b) Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows.

(c) Micro Finance Institution accounts, which are standard at the time of restructuring, even if they are not fully secured. However, this relaxation is granted purely as a temporary measure and would be applicable to standard MFI accounts restructured by banks upto 31st

March 2011.

ii) The unit becomes viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units.


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iii) The repayment period of the restructured advance including the moratorium, if any, does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. The aforesaid ceiling of 10 years would not be applicable for restructured home loans; in these cases the Board of Director of the banks should prescribe the maximum period for restructured advance keeping in view the safety and soundness of the advances. Lending to individuals meant for acquiring residential property which are fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented are risk weighted as under the new capital adequacy framework, provided the LTV is not more than 75% , based on board approved valuation policy. However, the restructured housing loans should be risk weighted with an additional risk weight of 25 percentage points to the risk weight prescribed already.

iv) Promoters' sacrifice and additional funds brought by them should be a minimum of 15% of banks' sacrifice. The term 'bank's sacrifice' means the amount of "erosion in the fair value of the advance above. Further, the additional funds required to be brought in by the promoter should generally be brought in up front . However, if the banks are convinced that the promoters face genuine difficulty in bringing their share of the sacrifice immediately and need some extension of time to fulfill their commitments, the promoters could be allowed to bring in 50% of their sacrifice , i.e. 50% of 15%, upfront and the balance within a period of one year. Further, in case the promoters fail to bring in their balance share of sacrifice within the extended time limit of one year, the asset classification benefits derived by banks will cease to accrue and the they will have to revert to classifying such accounts as per the asset classification norms.

v) Personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry.

vi) The restructuring under consideration is not a 'repeated restructuring'.

Disclosure Requirements on Advances Restructured by Banks :

1. As per paragraph 16 of Reserve Bank of India Master Circular No. DBOD No. BP.BC.9/21.04.048/2012-13 dated July 2, 2012 on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances the banks should disclose in their published Annual Balance Sheets, under "Notes on Accounts', Information relating to number and amount of advances restructured, and the amount of diminution In the fair value of the restructured advances under the following categories:

I. Standard Advances Restructured;fl. Sub-Standard Advances Restructured; andiii. Doubtful Advances Restructured.

Under each of the category above, advances restructured under CDR Mechanism, SME Debt Restructuring Mechanism and other categories of restructuring are required to be shown separately.

2. The Working Group (WG) constituted by RBI to Review the existing Prudential Guidelines on Restructuring of Advances which was chaired by Shri B. Mahapatra had


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recommended that once the higher provisions and risk weights (if applicable) on restructured advances (classified as standard either ab Initio or on upgradatton from NPA category) revert back to the normal level on account of satisfactory performance during the prescribed period, such advances should no longer be required to be disclosed by banks as restructured accounts in the "Notes on Accounts" in their Annual Balance Sheets. However, the provisKHi for diminution in the fair value of restructured accounts on such restructured accounts should continue to be maintained by banks as per the existing instructions. The WG also recommended that banks may be required to disclose:

I. details of accounts restructured on a cumulative basis excluding thestandard restructured accounts which cease to attract higher provisionand risk weight (If applicable);II. provisions made on restructured accounts under various categories; andIII details of movement of restructured accounts.

3. Accordingly, Reserve Bank of India vide their circular No. DBOD.BP.BC. No.80/21.04.132/2012-13 dated 31.01.2013 has advised that the banks shouldhenceforth disclose in their published Annual Balance Sheets, under "Notes onAccounts', information relating to number and amount of advances restructured, andthe amount of diminution In the fair value of the restructured advances as per theformat given in the Annexure. Detailed instructions relating to the disclosure are alsogiven In the Annex.

4. The above disclosure requirements will be effective from the financial year2012-13.

These disclosures need to be Audited at the time of Annual dosing henceforth starting with FY ending March,2013.

Some General Principles for Restructured Advances

1) Banks may restructure the accounts classified under 'standard', 'sub-standard’ and 'doubtful' categories.

2) Banks cannot reschedule/ restructure/ renegotiate borrowal accounts with retrospective effect.

3) Normally, restructuring cannot take place unless alteration/changes in the original loan agreement are made with the formal consent/ application of the borrower.

4) No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package.

5) Borrower classified as a willful defaulter / borrower indulging in frauds and malfeasance will continue to remain ineligible for restructuring. The restructuring of such cases may be done only with Board’s approval.

6) BIFR cases are not eligible for restructuring without their express approval.7) It may be noted that while the general principles norms inter-alia stipulate that

'standard' advances should be re-classified as 'sub-standard' immediately on restructuring, all borrowers (except consumer and personal advances, advances classified as capital market and real estate exposure) will be entitled to retain the asset classification upon restructuring, subject to the conditions as enumerated by Reserved Bank of India and advised by respective functionaries from time to time like “Incentive for quick implementation of the restructuring package” etc.


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8) However, extension in repayment tenor of a floating rate loan on reset of interest rate, so as to keep the EMI unchanged provided it is applied to a class of accounts uniformly will not render the account to be classified as ‘Restructured account’.

9) All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for up-gradation to the ‘standard’ category after observation of ‘satisfactory performance’ during the ‘specified period’. Specified Period means a period of one year from the date when the first payment of interest or installment of principal falls due under the terms of restructuring package.

10)In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre restructuring payment schedule.

11)Any additional finance may be treated as ‘standard asset’, up to a period of one year after the first interest / principal payment, whichever is earlier, falls due under the approved restructuring package. If the restructured asset does not qualify for up gradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt.

12)In case a restructured asset, which is a standard asset on restructuring, if again subjected to restructuring on a subsequent occasion during period within which the concessions were extended under the terms of the first restructuring, it should be classified as substandard.

TEST OF UNDERSTADING

State whether following statements are true or false.

Restructuring can be done in advances accounts which have been classified as loss.

In case of Advance given to SME the standard account will shift to Substandard Category , after restructuring.

Standard Housing Loan account, if restructured , will go to sub standard

Category.

Additional advance given at the time of restructuring, will remain in in standard category for specific period.

Restructured account attracts additional provision of 2% even thoughit is in standard category.


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6. Once the borrower has made request for restructuring the account, the IRAC norms will not be applicable.

7. In case of sanctioning additional loan during the restructuring the NPA account, bank book interest on additional loan on cash basis.

8. While considering restructuring, bank to ensure that unit will become viable with in a period of 7 years in case of unit is not infrastructure unit.

9. At the time of restructuring borrower has to bring 15% of additional funds up front or in stages.

10. At the time of restructuring of account bank can convert of its loan into Equity.

ANSWERS

Q NO 1 2 3 4 5 6 7 8 9 10Answers

False False True True True False True True True True


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RESTRUCTURING OF ADVANCE ACCOUNTS

Quick Bites

Concept of Restructuring Causes of Sickness- Internal causes& External causes Problems Relating to Project Formulation and Implementation Problems Related to Production Problems Relating to Marketing Problems Relating to Finance Problems Relating to Management Problems Attributable to Banks Detection of Sickness Restructuring of Sick units Determining Viability of Sick Units Non-viable Units Techno Economic Viability Study Technical Appraisal Financial Aspects Marketing and Commercial Aspects Managerial Aspects Drawing up of a Restructuring Scheme General Guidelines for Drawing-up of a Restructuring Scheme Right of Recompense Co-ordination between Banks and Other Financial Institutions Monitoring & Follow-up of Restructuring Scheme Revival of Sick Units by Merger or Amalgamation of the Healthy Units Rephasement, Re-schedulement and Restructuring Cut back arrangement

Restructuring

“The basic objective of restructuring is to preserve economic value of units, not ever greening of problem accounts. This can be achieved by banks and the borrowers only by careful assessment of the viability, quick detection of weaknesses in accounts and a time-bound implementation of restructuring packages.”

Any commercial activity is undertaken with the sole objective of earning profit. In other words it can be said that any investment in a commercial activity should generate cash at a desired level. A decision to invest money in a particular activity / project shall only be made when investor is reasonably confident that it is most likely that the project shall generate cash at a desired level for a desired number of years. In the same way while financing the project the bank satisfy itself that the project shall generate enough cash for servicing the debt, interest and principal over number of years as envisaged. It is in the interest of all stakeholders that the project performs as envisaged. But some times the things do not


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move in the desired direction and the performance of the project do not match the performance as envisaged.

The word “restructuring” of a loan denotes and implies a process of modifications/variations over an existing sanction terms and conditions. The modification or variations may be necessitated due to changes in financial and economic projections and events, (which changes with financial & economic situations of the country) and as such the originally projected results may not be considered achievable in the future. These loans are presently distressed and require fresh appraisal, and sanction support. The restructuring thus involves renegotiation and reschedulement/ rephasement of existing loan components; additional sanctions; funding and modified terms and conditions. Thus the word ‘restructuring’ involves process and a detailed study.

In banks restructuring of small loans are being done, based on a letter from the borrower without a detailed process though the sanctions are done within discretionary power. In few cases, The underlying reasons though genuine, are invariably not documented.

The RBI Periodically issues circulars and guidelines on restructuring and re-schedulement on various business, agricultural segments and other sectors. The issues of such special guidelines on agriculture are prompted by natural calamities and by economic, commercial and geographical needs and requirements.

Before accepting restructuring of accounts, we should ensure that financial viability is established and there is a certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined based on acceptable viability benchmarks such as Return on Capital employed, DSCR, Gap between IRR and cost of Funds etc. as evident from future Cash Flows. No restructuring should be accepted without looking into Cash Flows of the borrower and assessing the viability of the project.

The entire process of restructuring can be divided in following three stages:

1. To eliminate the reasons/ causes attributed for under performance if the causes of sickness are not temporary but within the control of borrower/ banker nature. This part of the process is known as Business Process Re-engineering.

2. To carry out the Techno – Economic Viability study and to forecast the future cash inflows after Business Process Re-engineering.

3. To eliminate the irregularities of the existing Debt due to under performance and to keep the Debt at the level which can be serviced by the envisaged cash inflow after Debt Restructuring.

Detailed technical, economical, financial and managerial appraisal should be carried out to find out how much profit will be generated as per the Business Process Re-engineering. The future cash inflow should be established even if the sickness is being caused by external reasons and nothing can be done to improve the performance. The study so conducted should cover various aspects relating to technical, financial, commercial and managerial appraisal.


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Causes of Sickness

(i) The causes of Sickness in an Industrial Unit can be broadly classified into two categories:

Internal causes. External causes.

(ii) While ‘Internal Causes' are those causes which can be attributed to the Management of the unit, the External causes are those which are attributable to factors outside the purview/control of the Promoters/Management/Banks etc.

(iii) Both Internal and External causes can be again attributed to problems of project implementation, production, marketing, finance and management.

Problems Relating to Project Formulation and Implementation

Every Project is supposed to generate income so as to meet its obligations to debtors/banks etc. within a stipulated time. Its inability to do so may be due to reasons of faulty project formulation and project implementation. Some of the factors which lead to such a situation could be summarized below:

(i) Non-availability of the land at the selected site due to various reasons.(ii) Non-availability/difficulty in procuring materials for construction of factory etc.(iii) Delay in delivery of machines/Bankruptcy of supplier.(iv) Delay in tying up financial arrangements.(v) Inability of the promoters in bringing in their contribution.(vi) Delay in disbursement of loan etc. due to various reasons.(vii) Delay in raising of resources through Public Issues due to unfavorable market conditions etc.(viii) Delay in getting power and water connection and environmental clearance.(ix) Delay due to change of Government, Government Policies etc.(x) Diversion of funds by the promoters.

Problems Related to Production

There may be certain factors which affect the production of the desired end product. They are:

(i) Wrong mix of products. (ii) Defective/obsolete/inappropriate technology.(iii) Non-availability of raw materials.(iv) Frequent interruptions in supply of power, water, spares etc.(v) Unsatisfactory performance of certain machines or frequent break downs.(vi) Lack of preventive maintenance.(vii) Poor quality control leading to deterioration in quality of end product and rejection of end products.(viii) Transport bottlenecks.(ix) Change in Government Policies.

Problems Relating to Marketing


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Even if quality goods are produced as per expectations, unless they are sold, the unit will not be viable. As such, there are many problems relating to marketing which could be summarized as under:

Poor quality of end product.(ii) Competition from better substitute products or similar products.(iii) Unrealistic estimates of demand of the product.(iv) Inappropriate product mix.(v) Poor efforts for sales promotion.(vi) Cancellation of bulk orders.(vii) Non-adherence to delivery schedule.(viii) Improper costing and pricing system.(ix) Booking large orders with longer delivery schedule without escalation clause etc.

Problems Relating to Finance

There are many problems relating to finance for meeting the resources need of the project. They are:

(i) Defective financial planning. (ii) Cost overrun due to delay in implementation of project.(iii) Inability of promoters to raise their level of contribution.(iv) High interest burden due to high cost of Debt/Equity.(v) Inadequate Working Capital Finance.(vi) Inefficient receivables Management.(vii) Diversion of funds to other projects.(viii) Blockade of funds in unproductive assets.(ix) Lack of credit facilities from suppliers.(x) Drawings by Directors/Partners etc.

Problems Relating to Management

There are many problems relating to Internal Management and Administration which lead to sickness of units. They are:

(i) Dispute among partners/promoters. (ii) Lack of managerial skills, trained manpower etc. for specialized functions. (iii) Lack of co-ordination between various departments. (iv) Poor industrial relations. (v) Poor discipline among staff/workers. (vi) Non-availability of skilled manpower. (vii) No succession planning. (viii) Absence of Policy on Human Resources Development.

Problems Attributable to Banks

Not all the problems can be attributed to the Management and other agencies for the sickness of the unit. There could be reasons attributable to the Banks also. Such as:(i) Undue delay in appraising and sanctioning of Credit Facilities for no fault of the borrowers.(ii) Inadequate sanction of credit facilities.(iii) Lack of understanding of the Production and Marketing need of the unit leading to inadequate financing.(iv) Rigid attitudes and policies of the bank.(v) Lack of understanding and co-ordination between the partners / promoters and bank officials.

Detection of Sickness

(i) An early detection of 'Sickness' in an industrial unit can lead to taking appropriate steps to arrest the tendency and revive the unit to normal health.


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(ii) For this, proper noting of various symptoms/signals emanating from various sources is most essential.

(iii) Following is illustrative list of symptoms/signals that indicate sickness:

(a) Continuous irregularity in bank account of borrower.

(b) Low capacity utilization.

(c) Stagnation or downward trend in sales.

(d) High rate of rejection of goods.

(e) Reduction in credit turnover.

(f) Default in honoring statutory liabilities.

(g) Longer and larger outstanding in bills receivable a/c.

(h) Frequent requests for excess/adhoc facilities.

(i) Frequent requests for reduction in margin and attempts at over-valuation of stocks.

(j) Continuous full utilization of cash credit limit with little turnover.

(k) Failure/delay in submitting stock statements and other operational data.

(l) Slow turnover/over stocking of Inventory.

(m) Alarming increase in Debtors and Creditors levels.

(n) Diversion of short term funds for long term uses.

(o) Rapid turnover of key personnel.

(p) Spate of litigations against the borrower.

(q) Frequent changes in management.

(r) Continuing cash losses resulting in erosion of Net worth.

(s) Frequent return of cheques due to financial reasons.

(t) Frequent requests for 'Stop payment' of cheques.

(u) Irregularities pointed out in Inspection, Audit Reports.


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The above are only illustrative and not exhaustive.

(iv) A vigilant Branch Manager/officer can sense the trouble brewing due to one or more of the above incidents and relate them properly. For this, a constant dialogue with the borrower should be established and the account should be put under close monitoring and scrutiny.

(v) Branch should immediately take a view as to whether such symptoms are temporary or they are indicators of deteriorating health.

(vi) Based on the above, branch should decide whether to rehabilitate the unit or to recall the facility and start recovery proceedings.

(vii) If the unit is likely to be viable, then a viability study should be undertaken for formulating a nursing programme.

(viii) Guidelines on viability study and Restructuring of Sick Units should be followed.

(ix) If the account is to be recalled and recovery proceedings are to be initiated, branch may resort to any of the following strategies:

(a) Negotiating a compromise settlement.

(b) Filing of suit for decree.

(c) Writing-off the account.

Restructuring of Sick units

Determining Viability of Sick Units

(i) Once the branch forms an opinion that the sick unit can be made viable if some special measures for rehabilitating the unit are taken up in time. Such measures will involve close co-operation between the bank, the borrower and other Agencies.

(ii) For determining viability both the borrowers and the bank may have to forego certain rights and grant some concessions within the overall guidelines of RBI. The viability of the unit should be expected within a definite time period. Further, time and efforts can be spared only to those units which have definite/reasonably good chances of recovery.

Non-viable Units

(i) Units which do not fulfill the criteria for viability as above will be classified as Non-viable units.

(ii) Further, units which, in the opinion of the bank, are perceived to be non-viable even without undertaking a viability study are to be treated as non-viable.


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(iii) Units becoming sick on account of willful mismanagement, willful default, unauthorized diversion of funds, disputes among partners / promoters etc. should not be considered for Restructuring and steps should be taken for recovery of bank dues.

Techno Economic Viability Study

(i) To ascertain the viability of a sick unit, detailed technical, economical, financial and managerial appraisal should be carried out to find out whether sufficient profit will be generated within the period of Restructuring and whether the unit will be able to achieve positive 'Net worth'.

(ii) The study so conducted should cover various aspects relating to technical, financial, commercial and managerial appraisal. Salient features of each of the above aspects are given below.

Technical Appraisal

The detailed technical appraisal may cover following points:

(i) Whether the existing manufacturing process needs any up gradation or whether any new process should replace the existing one. If so, a detailed cost benefit analysis may be given.

(ii) Keeping in view the market demand of the product, whether there is a need to increase production capacity to make the unit viable.

(iii) Whether there is any need to change the product mix and whether the existing machinery needs modification/up gradation to meet the demands of changed product mix.

(iv) If the sickness is due to frequent breakdown of machinery, whether any replacement/additional machinery is required to optimize production.

(v) Whether the production time can be reduced by change in layout, increasing production time, etc.

(vi) Whether any change in the location of plant is required keeping in view the availability of Raw Material, Power, Water, Market, Loading Ports, Fiscal Incentives offered by Government & Environmental aspect.

Financial Aspects

Following aspects may be considered while undertaking a Financial Appraisal:


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(i) Undertake a critical assessment of the various financial parameters like Current Ratio, Debt-Equity Ratio, Liquidity Position, Composition of Current Assets and Current Liabilities, Cash Flow, Funds Flow, Receivable Management, Inventory Management etc.

(ii) Wherever required, valuation of assets may be carried out to ascertain the true position.

(iii) Ascertain the funds required for modernization /expansion/ upgradation of fixed assets including Plant and Machinery.

(iv) Ascertain the level of Working Capital required for sustaining the level of production required for achieving viability.

(v) Estimate the margin required to be brought in by promoters for meeting additional funds requirement.

(vi) Ascertain the sources of funds required for the above, keeping in view the guidelines of RBI, Government of India, Financial Institutions, Banks etc. in respect of Promoter's contribution, Debt Equity Ratio, Margin requirement etc.

(vii) Ascertain the repayment capacity of the unit keeping in view the existing and proposed cash flow estimates.

(viii) Ensure that the assumptions on reliefs and concessions are in tune with the guidelines of RBI etc.

(ix) If any merger or amalgamation of the unit with some other unit is envisaged, its feasibility should be examined from all angles.

Marketing and Commercial Aspects

(i) Estimate the future demand for the product line of the unit and suggest whether diversification in product line is required and if so, whether the existing machinery and its capacity can absorb the new products easily.

(ii) Whether any change in the configuration i.e. packing, pricing, publicity etc. of the product is necessary to meet the market demand.

(iii) Consider changing the product mix keeping in view the profit margins and necessity for optimizing the profitability.

(iv) Consider whether any tie-up is required with any external agency for marketing and its cost benefit analysis may be worked out.

Managerial Aspects

The following issues may be considered while appraising the Managerial and Administrative dimensions:


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(i) Whether the existing management is competent to continue the operation and revive the unit as per the scheme. If not, whether a change in the management group is proposed. If so, the nature of new group should be identified.

(ii) Whether the managerial staff leading important functions like Finance, Purchase, Production, Marketing and Personnel are competent, capable and efficient to turn around the unit. If not, identify the personnel that need to be changed, and the department that needs to be strengthened.

(iii) Whether delegation of authority, reporting relationship etc. are in tune with the objective of turnaround. If not, a functional managerial set-up is to be suggested.

(iv) Whether Industrial Relations Management is effective and is efficient. If not whether the unit's Labour Policy, Personnel Policy, HRM Policy etc. needs a review.

(v) Whether the systems, procedure, MIS etc. are functional and efficient.

Drawing up of a Restructuring Scheme

(i) Based on the various aspects of viability as above, a Restructuring scheme is to be prepared which gives inter-alia Profitability Estimates, Cash Flow Estimates, Projected Balance Sheet, Projected Internal Rate of Return etc.

(ii) The above scheme should be prepared based on the various guidelines of RBI, BIFR, Bank etc.

(iii) For Industries falling under the purview of BIFR, the Restructuring package is to be prepared by an 'Operating Agency' to be appointed by the BIFR.

(iv) For other units, the Restructuring Schemes are to be drawn up by the financing banks and financial institutions.

(v) In the case of consortium finance, the lead bank and the bank having the next largest share in the limits may associate in preparing the Restructuring proposal.

(vi) In the case of multiple banking, two major banks having majority share may prepare the package.

(vii) As per directives of RBI, the decision of the Lead Bank or the major banks in preparing the scheme should be binding on all other participating institutions and accepted by them.

(viii) In order to sort out any problem that may arise in respect of co-ordination or other issues relating to formulation and implementation of the Restructuring package in respect of SSI/MSE units, State level Inter-Institutional Committees (SLIIC) have been set-up in all states. The committee is represented by State Industries Department, State Financial Corporations, State Industrial Development Corporations, major banks operating in the State, IDBI, SIDBI, ICICI, IFCI, RBI etc. The convener is RBI and its periodicity is generally quarterly.


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General Guidelines for Drawing-up of a Restructuring Scheme

(i) The important objective that is to be kept in mind while drawing up a Restructuring Scheme is that the unit should be viable at the end of the Restructuring period. Viability will mean adequate cash flow to meet its obligations and attaining positive net worth.

(ii) The scheme should be prepared complying with all the guidelines of RBI, State Government, Central Government in respect of Reliefs, Concessions, Sacrifices, Promoters Contribution, IRR, DSCR, Debt Equity Ratio etc.

(iii) All the institutions participating should agree to the schemes in toto.

(iv) The institutions should obtain necessary authority/permission from their competent authority for granting of reliefs/ concessions etc.

Funded Interest Term Loan

(i) Interest debited to the cash credit account and not recovered so far should be segregated and transferred to a separate Term Loan account called Funded Interest Term Loan (FITL).(ii) Normally repayment of such interest should be ensured between 3 to 7 years.(iii) Normally there should be no writing off of funded interest. However, in exceptional cases where writing off is considered absolutely unavoidable, no prior approval of the RBI would be necessary.

Working Capital Term Loan

The irregular portion in the cash credit account other than the unpaid interest, penal interest/damages should be converted into a Working Capital Term Loan with a definite repayment schedule.

Sharing of Cash Losses

(i) Cash losses would normally be reflected not only by irregularity in cash credit accounts with the banks, but also in non-payment of statutory dues, workers' dues and overdue creditors. Further, cash losses are also likely to be incurred during the initial period of implementation of the Restructuring programme till the unit reaches the break-even level.

(ii) The cash input required for meeting a part of overdue statutory liabilities, workers' dues and pressing creditors forming part of the package may be shared between the participating banks and institutions on 50:50 basis. Further, cash losses, i.e. losses from the time of implementation of the package upto the point of break-even as projected, would be borne by the financial institutions which will also provide the margin money for additional working capital limits.

(iii) Where no term lending institution is involved, the cash inputs mentioned above as also the projected cash losses would be borne/shared by Industrial Reconstruction Bank of India.


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(iv) Penal Interest/damages charged to the Term Loan account can be waived from the accounting year the unit started incurring cash losses continuously. Penalty/damages charged in cash credit account are to be waived.

Right of Recompense

This is the Right available to the creditor to recover the amount of interest and installment sacrificed while accepting a Restructuring proposal after the unit has been revived fully. This is only a Right and it is left to the option of the individual Banks/Financial Institutions etc. whether to exercise this right or not. However, branches should incorporate this clause in the package and in case of any difficulty refer the matter to Corporate Centre.

Co-ordination between Banks and Other Financial Institutions

(i) For sanctioning and implementation of a viable Restructuring scheme, it is essential that there should be proper co-ordination and co-operation between various banks and financial institutions.

(ii) All the participating banks and financial institutions should endeavour to take a positive approach towards the process of Restructuring.

(iii) They should ensure that the scheme once approved by the Lead Bank must be got approved by the competent authority of each bank and reliefs and concessions granted thereafter.

(iv) Usually all participating banks and financial institutions fall in line with the scheme.

(v) With a view to avoiding delays in finalization of the Restructuring programme, the Reserve Bank of India has advised the term lending institutions to associate with major financing banks or at least the lead bank, where there is a formal consortium arrangement, in the exercise right from the stage of taking up the viability study. This will give the financing banks an opportunity to express their views about the various deficiencies in the management and conduct of accounts etc. The financing banks will also be able to give their reactions to the various concessions proposed in the Restructuring package. This would also facilitate to ensure that the working capital requirements indicated in the package are need-based and conform to the inventory and receivable norms as per the first method of lending permitted in such cases. This would further ensure that the concessions/reliefs required to be provided by the banks as part of the package are equitable vis-à-vis those from the institutions and other agencies involved and also facilitate prompt compliance/implementation of the Restructuring programme, once it has been agreed upon in a joint meeting.

(vi) Whenever a term lending institution calls a joint meeting for the above purpose, the following guidelines should be adhered to:


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(a) An experienced official should be deputed to participate as and when the term lending institutions take up the viability study and work out a package for the grant of assistance/reliefs.

(b) The Bank should be represented at a sufficiently senior level whenever a joint meeting is convened, so that the decisions taken therein could be implemented quickly by all the concerned banks after obtaining the clearance from the competent authority, where required.

(vii) Reserve Bank of India has further advised the term lending institutions that wherever the proposed Restructuring package involves reduction of interest, margin etc., which will need its prior approval, full details of such reliefs/concessions should be submitted to it at least one month in advance to the joint meeting.

Sanctioning of Restructuring Proposals(i) All Restructuring schemes involving certain reliefs / concessions / waivers / write-off should be sanctioned by a competent authority in the bank irrespective of the fact that it is approved by BIFR/consortium etc.

(ii) The sanction should specifically authorise the granting of proposed concessions /reliefs and also granting of further financial assistance in the form of Term Loans & Working Capital requirements.

Requirements of Sick/Weak Units

As per Reserve Bank of India guidelines Working Capital requirements of sick/weak units may be assessed on the basis of First Method of Lending.

Monitoring & Follow-up of Restructuring Scheme

(a) Mere sanctioning of a Restructuring package would not revive a sick unit. It should be ensured by all parties that the scheme is implemented both in letter and spirit.

(b) The financing banks should ensure that the reliefs / concessions are granted expeditiously and additional financial assistance, if any, is sanctioned at the earliest.

(c) On their part the management of the sick unit, should extend fullest co-operation in executing of documents, getting the various sanctions etc. from the Board and other Financial Institutions, bringing of margin money, providing corporate guarantee wherever required etc.

Wherever personal guarantee of Directors is stipulated it must be obtained without fail.

(d) If our bank is the Lead Bank, we should call a meeting of the participating banks for finalizing modalities of implementation of the scheme.

(e) All relevant documents properly stamped and executed are obtained and verified by Legal Department.


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(f) The mortgages, wherever applicable, have been properly created and are valid and enforceable.

(g) Wherever required, registration with Registrar of Companies etc. are done and certificates are kept on record.

(h) The disbursements are made as per the scheme and as per progress in implementation of the scheme.

(i) Quarterly progress report on the progress of implementation of the scheme should be submitted to Central Office as per guidelines issued from time to time.

(j) Branches should conduct regular Stock Inspection etc. and maintain a close monitoring on the conduct of the account. All usual guidelines issued by the bank from time to time regarding control, follow-up and monitoring of such accounts should be adhered to.

(k) Branches should obtain from the units monthly information covering the following points; i) Production - quantity / values (product wise) ii) Sales - quantity / value. iii) Profitability and Internal surplus. iv) Working Capital Management e.g. collection of debts, maintenance of inventory, creditors etc. This information may be called at regular intervals.v) Position of Bank borrowings.vi) Industrial relations.vii) Power supply position.

(l) The units should submit other usual statements as per our requirements. The information so obtained should be studied carefully and critically. The Regional/Zonal Office should be kept informed of the progress made since implementation of the nursing programme. Wherever variance is observed, comments should be furnished and modifications, if any, in the nursing programme suggested.

(m) Branches should have continuous rapport with the borrower and understand the difficulties, if any. They should particularly keep a watch on the factors which were responsible for the sickness of the unit. Wherever felt necessary, branches should approach Regional Office for arranging on the spot study of the working of the unit.

Revival of Sick Units by Merger or Amalgamation of the Healthy Units

In some cases it is possible that some healthy unit may show an interest in taking over the management of the sick unit, either by way of merger or by amalgamation.

Identification of experts to manage sick units:

1. There are units in small, medium and large sectors which become sick due to inefficient management or other management deficiencies/ weaknesses. Such units can be rehabilitated by handing over their management to persons who are experts in management, finance and/or technical areas. There are also turn-around specialists available today. Bank may in suitable cases hand over the management of sick units to management experts or turn-around specialists with the consent of the borrowers or under the provisions of Securitization Act 2002. Bank may prepare a list of turn-around specialists


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and management experts who would be willing to manage the sick units financed by the Bank with a view to rehabilitate them.

2. Zonal Managers shall prepare lists of turn-around specialists and management experts and make suggestions to the corporate centre in the case of individual accounts. The specialists / experts will charge their professional fees which may be substantial. The fee will have to be borne by the borrower till the unit generates surplus after meeting the current dues. No ownership right of / lien on the unit will vest with the specialist/ expert.

3. Accounts with exposure below Rs. 25 lakhs may not be considered for rehabilitation with the involvement of outside experts.

Rephasement

Rephasement is rescheduling with enhancing the repayment period only.

In genuine cases of Retail loans granted to individuals, the rephasement can be considered by Regional Authority provided repayment period shall not exceed 60 years of the age of borrower in respect of salaried individuals and 65 years of age in respect of others.

Rephasement can be considered for Term Loan and Demand Loan for a maximum of 6 months. Other terms and conditions shall not be changed / modified.

Re-schedulement

It is changing the Pattern of debt service obligation from equated monthly installment to ballooning schedule or descending schedule without considering any enhancement in repayment period and quantum of outstanding.

1. Retaining existing repayment period.2. Not exceeding the existing outstanding exposure.3. Without changing the nature and quantum of existing credit facilities.4. Without sanctioning any fresh credit facility or additional limit whether within the

existing outstanding exposure.

Restructuring

In Restructuring following may be considered –

1. Changing existing repayment period and /or2. Changing existing outstanding exposure and/ or3. Changing the nature and quantum of existing credit facilities4. Sanctioning any fresh credit facility or additional limit whether within the existing

outstanding exposure or beyond.5. Potentially viable units may be assisted by restructuring or sanctioning additional

finance after satisfying about the viability of the unit.6. Fresh credit requirements shall be done after critically analyzing funds flow in

conjunction with cash flow of the unit / borrower.


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7. ‘Special Investigative Audit’ to ensure that there is no diversion of funds.

A restructuring of an account may involve –

1. Refund of penal interest.2. Reduction in rate of interest (with or without retrospective effect).3. Funding of core irregularity as working capital term loan (WCTL).4. Funding of unpaid interest as funded interest term loan (FITL).5. Reschedulement of installments in existing term loan and / or,6. Fresh / additional term loan / working capital facilities.7. No restructuring of willful defaulters accounts or accounts where frauds are

committed shall be attempted.8. All C&I / SME / Priority Sector and Retail borrowal accounts may be restructured.The restructuring / rescheduling with or without sacrifice in respect of principal and / or interest, may be considered either –

Before commencement of commercial production,After commencement of commercial production but before the asset has been classified as sub standard, After commencement of commercial production and after the assets has been classified as sub standard.

Cut Back Arrangement

A borrower's account may have become NPA due to unserviced interest, L.C. devolvement, excess allowed to meet statutory dues, wages, insurance premium etc. or reduction in drawing power. Any credit coming into the account will, in the routine course, be appropriated completely towards the over-dues. The borrower under such circumstances opens a current account with another bank and routes all sales proceeds through that account. Consequently, the bank not only fails to recover its legitimate dues but also faces the problem of erosion of security. Under this circumstance, the bank can consider allowing operations, on merits, till a revival package is prepared and sanctioned or an acceptable compromise proposal is submitted by the borrower, upto sanctioned amount or outstanding with a suitable cut-back, say, ranging from 5 to 10% (or more) of the credits in the account to reduce/wipe-out the excess/ overdues in the account. Experience shows that substantial amount can be recovered by allowing operations with cut-back arrangement. All Regional Managers are authorised to allow operations in the account up to sanctioned limit or the outstanding with suitable cut back arrangement which would eventually lead to reduction in the outstanding in the account. Branch Managers are allowed to permit operations in such account with a cut back arrangements for period upto 3 months from the date of such cut back arrangement permitted by them.

Hand Holding OperationsWhile identifying and implementing Restructuring package, 'holding operation' for a period of six months may be considered. This will allow small scale units to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds during the period of such 'holding operation'. This w i l l f ac i l i t a te the smooth runn ing o f the bus iness


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TEST OF UNDERSTANDING

STATE FOLLOWING STATEMENT TRUE OR FALSE

1. In case of reschedulement of loan account, total repayment period is extended.

2 .In case of rephasement of loan account, the repayment period is enhanced .

3. Restructuring of Loan account is a combination of rephasement and reschedulement along with additional exposure, acceptance of sacrifice , segregation of limits into WCTL, FITL .

4 .In case of cut back arrangement entire amount deposited by borrower is allowed to be withdrawn for business purpose

5 .Cut Bank arrangement is a long term measure for recovery in NPA account.

6 .In case of Retail Loan, account must be classified as NPA , immediately after reschedulement / rephasement.

7. Restructuring/Rephasement/ Reschedulement can be done only in Standard category accounts.

8. If restructuring/rephasement/reschedulement is done in NPA account, account will become standard provided there is satisfactory performance of recovery for a period of 12 months from the date when first installment /interest has become due as per revise repayment schedule.

9. To get benefit of special treatment and to keep the account in same category, restructuring of dues must be done before commencement of production.


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10. Rephasement/reschedulement etc can be considered in case of NPA accounts where activity has become non-viable. Q No 1 2 3 4 5 6 7 8 9 10Ans False True True False False True False True False False


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SME DEBT RESTRUCTURING

Quick Bites Concept of Restructuring Causes of Sickness- Internal causes& External causes Determining Viability of Sick Units

DEBT RESTRUCTURING MECHANISM FOR MICRO SMALL AND MEDIUM ENTERPRISES

Bank has come out with a policy on Debt Restructuring Mechanism for Micro Small and Medium Enterprises on 24.12.2012. Broad parameters for restructuring are as under:

1. Objective

The objective of this Policy is to ensure timely and transparent Debt Restructuring Mechanism ( DRM ) for restructuring the debts of viable MSMEs facing problems, outside the purview of BIFR, DRT, CDR and other legal proceedings. In particular, the framework will aim at preserving viable MSMEs that are affected by certain internal and external factors and minimize the losses to the creditors (the Bank) and other stakeholders through an orderly and coordinated debt restructuring mechanism or rehabilitation package.

2. Scope & Applicability

The Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 which has come into effect from 2nd October, 2006 classifies enterprises into three categories viz., Micro, Small and Medium based on investment levels ,are covered. This policy intends to cover basically Viable or Potentially Viable MSME units (both manufacturing and non-manufacturing ) that are facing problems which can be overcome with timely remedial /corrective action. These problems may be due to cost/time overrun before commercial production, mismatch in cash flows resulting in temporary liquidity crunch, external factors etc. The guidelines enumerated below may generally be made applicable to accounts which are showing signs of slippage or have slipped to NPA category but have not become “unviable”. In such accounts, timely decision on restructuring would be helpful. These accounts are more likely to be Standard and Sub Standard accounts but instances of even doubtful accounts having potential viability cannot be ruled out. Restructuring may or not involve additional funding. In such accounts, we may be required to permit “Holding on operations” in the account till decision is taken on the restructuring proposal.

• For eligible MSMEs under Consortium/Multiple Banking Arrangement the Bank with the maximum outstanding may work out the restructuring package along with the Bank having the second largest share.


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• In case of multiple banking/syndicate/consortium accounts where restructuring can be considered under Corporate Debt Restructuring Scheme (CDRS), we may make effective use of CDR mechanism. In such cases restructuring may be considered on the basis ofrehabilitation scheme worked out and approved by CDR Empowered Group.• Suit filed cases are eligible if a minimum of 75% of the lenders (by value) in case of multiple banking/ syndicate/consortium accounts consent for such restructuring.• Borrowers who have been identified as willful defaulters in terms of RBI directives (Annexure I) may generally not be considered for restructuring where the default is due to diversion of funds. Restructuring may be however considered when the funds divertedhave been brought back and/or there is a change in management and/or where the diversion is intra Company. However, restructuring need not be withheld where even inter-Company diversion had taken place. However, in such instances, the restructuring would be subject to such diversion being brought back within a reasonable time and thesame will be decided on a case to case basis. It shall also be our endeavour to address this issue by stipulation of additional margin/contribution, security etc. and wherever possible & feasible and placing suitable covenants to ensure non-recurrence in future keeping in mind safety of bank’s funds. Viability and the ability to service after restructuring shall be the important criteria for determining eligible cases.

3. Definition of Sick Micro & Small Enterprises and Medium Enterprises.

Medium Sector Enterprises:

As per extant RBI guidelines, a Medium Sector Enterprise may be classifiedas sick if:

i) any of the borrower accounts of the unit remains sub-standard for more than 6 months i.e., principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding one year. The requirement of overdue period exceeding one year will remain unchanged even if the present period for classification of an account as sub-standard, is reduced in due course: orii) there is erosion in the net worth of the borrower due to accumulated cash losses to the extent of 50 per cent of its net worth during the previous accounting year:

and

iii) the unit has been in commercial production for at least 2 years

A Micro and Small Enterprise ( MSE) unit may be classified as sick when:

a) any of the borrowal account of the enterprise remains NPA for three months or more orb) there is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year.

The decision on viability of the unit should be taken at the earliest but not later than 3 months of unit becoming sick under any circumstances.


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4. Eligibility criteria

The following entities would be eligible for Debt Restructuring Mechanism (DRM):

(i) All non-corporate MSMEs irrespective of the level of dues to the Bank.(ii) All Corporate MSMEs enjoying banking facilities solely from our Bank irrespective of

the level of dues to the bank.(iii) All corporate MSMEs, which have funded and non-funded outstanding up to Rs. 10

Crore under multiple / consortium banking arrangement with our Bank and other Banks.

(iv)Accounts classified as Sub-Standard or Doubtful would also be eligible but accounts classified as “ Loss Assets” will not be eligible for DRM.

(v) Cases where Operating Agency has been appointed, restructuring may be considered on the basis of the Rehabilitation Scheme worked out by the Operating Agency.

(vi)Accounts where recovery suits have been filed or action under SARFAESI Act has been initiated will generally not be considered eligible for restructuring under DRM for MSMEs. However, in exceptional cases General Manager of the Zone / Corporate Office may permit restructuring in such cases.

(vii) In respect of units referred to CDR mechanism, restructuring may be considered on the basis of scheme worked out and approved by CDR Empowered Group.

(viii) Accounts involving willful defaults, fraud and malfeasance will not be eligible for restructuring under these guidelines.

(ix)Where funds diverted earlier have been brought back into thebusiness and/or there is change of management and/or where the diversion is intra company, restructuring may be undertaken on a case to case basis. However, restructuring/rehabilitation need not be withheld where intra company or even inter-company diversions have taken place, provided the amount diverted is brought back within a reasonable time. Such restructuring would be decided on a case to case basis, at the sole discretion of the bank. But additional margin/ contribution, security etc. wherever possible & feasible and suitable covenants may be considered as per Bank’s discretion to ensure both safety of Bank’s funds and non-recurrence in future.

5. Viability Criteria for Small and Micro Enterprises

Viability and the ability to service the debt after restructuring shall be the important criteria for determining eligible cases. Potentially Viable Sick MSME Unit.

a. A unit may be regarded as potentially viable if it would be in a position to continue to service its repayment obligations as agreed upon including those forming part of the package, after implementing a relief package spread over a period not exceeding 10 years if it is engaged in infrastructure activities and – 7- years in case of other Units from the commencement of the package from Banks/ Financial Institutions/ Government (Central/State) and other concerned agencies, as may be necessary, without the help of the concessions after the aforesaid period.


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b. The repayment period for restructured (past) debts including moratorium period if any should not exceed 15 years in case of infrastructure Advances and 10 years in case of other Advances from the date of implementation of the package.

c. Financial Parameters applicable for DRM are given in d. Based on the norms specified above, it will be for the banks/financial institutions to

decide whether a sick MSME unit is potentially viable or not.

i) For Medium Sector Enterprises:

The decision on viability of a unit should be decided quickly but not later than -04- months and made known to the unit and others concerned at the earliest.

ii) For Micro & Small Enterprises (MSEs)

The decision on viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any circumstances and made known to the unit and others concerned at the earliest.

e. Restructuring/Rehabilitation scheme for MSME sector to be implemented within three months from date of receipt of full fledged applications alongwith copies of Audited Balance sheets for the last -3- years and all the necessary relevant papers required to prepare the scheme.

f. Particulars DRM for SMEsMinimum Average DSCR 1.25 Maximum period within which the unit should become Viable 7 years Maximum repayment period of all term loans / FITL /WCTL 10 years Minimum Promoters’ Contribution 15% of the long term requirement of funds plus the monetary value of the sacrifices made by the lenders,out of this at least 50% to be braught in up front and balance in a period of 12 months.

g. A unit should be declared unviable only if the viability status is evidenced by a viability study. However, it may not be feasible to conduct viability study in very small units and will only increase paper work. As such for micro (manufacturing) enterprises, having investment in plant and machinery upto Rs.5 lakh and micro (service) enterprises having investment in equipment upto Rs. 2 lakh, the Branch Manager may take a decision on viability and record the same, alongwith the justification. The declaration of the unit as unviable, as evidenced by the viability study, should have the approval of the next higher authority/ present sanctioning authority for both micro and small units. In case such a unit is declared unviable, an opportunity should be given to the unit to present the case before the next higher authority.

The Authority for presenting the case to the next higher authority is as under:

The Authority empowered to sanction the loans and advances to the units including additional amount proposed under restructuring package shall have the powers for presenting the case to the next Higher Authority. However, the Authority who have sanctioned the original proposal or proposal for increase in limits will not sanction the


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rehabilitation/restructuring proposal.In such cases, restructuring / rehabilitation proposals will be approved by immediate next Higher Authority and in case of Zonal Office Level Credit Committee (ZOCC) such restructuring / rehabilitation proposal will be sanctioned by the Corporate Office Level Credit Committee headed by the Executive Director or asthe case may be at BCC, Mumbai.

The next authority should take such decision only after giving an opportunity to the promoters of the unit to present their case. For sick units declared unviable, with credit facilities of Rs. 1crore and above, a Committee approach as detailed above are to be adopted as the Committee approach will improve the quality of decision as collective wisdom of the members shall be utilized, especially while taking decision on rehabilitationproposals. Decision of the above higher authority should be informed to the promoters in writing. The above process should be completed in a time bound manner not later than – 03 – months. The concerned Regional Head may, however, take decision in cases of malfeasance or fraud without following the above procedure.

6. Need for Restructuring / RehabilitationA need for restructuring of an asset could arise due to any one of the following internal / external problems faced by the unit resulting in incipient sickness and borrower’s inability to meet his financial commitments to the Bank

Internal /External problems:• Technical problems in production / temporary break down of plant• Commercial compulsions caused by demand and supply position, pricing and market.• Managerial inadequacies such as delay in appointing technical/professional staff.• Economic factors – external in nature caused by changes in Government policies.• Financial factors such as cost-over run in project implementation resulting in liquidity crunch, unexpected payments, delay in release of Bank finance etc.• Delay in commencement of commercial production.

Temporary cash flow aberration:

Temporary cash flow aberration may also arise due to any of the following aspects:a. Non-release of subsidies/grants by Government;b. Inadequacy of own funds/long term funds;c. Increase in credit on receivables;d. Decrease in trade credit;e. Spurt in prices of raw materials, other inputs;f. Decrease in selling price of finished goods;g. Disturbance in production due to strike;h. Power cuts, major repairs, etc.;i. Accumulation of inventories due to bulk purchases, temporary demand constraints, transport bottlenecks; etc.Due to any of the above problems, the borrowers may not be in a position to service interest or installments or meet their commitments under Letters of Credit or Guarantees issued.

7. Identification of accounts for Debt Restructuring Mechanism (DRM)


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Sickness should be arrested at the incipient stage itself. Appropriate measures should be taken by the branches to ensure this. A close watch should be kept on the account operations. Borrowers should be advised about their primary responsibility to inform the Bank of any problems faced by them which could result in the unit’s sickness so as to restore the unit to normal health at the earliest. Early detection of sickness and prompt remedial action are very crucial. Effective monitoring of the operations of the unit as well as the borrowal account(s) with the Bank is essential to identify the units showing symptoms of sickness.

Deteriorating quality of an asset is detectable well in time through a proper system of asset classification. Slippage of a standard account into watch category or substandard asset or any of the early warning signals should immediately be followed up with the borrower/unit. Necessary corrective/remedial action should be initiated immediately. The action needs to be pre-emptive for an early and effective restoration of health to a unit turning sick or showing signs of incipient sickness.

8. Restructuring / Rehabilitation Methods Restructuring may involve: • Re-phasement of recovery schedule in term loan accounts for both interest and

installment(s). • Waiver/concessions in interest charged with or without recompense. • Funding the un-serviced interest/irregular portion in the working capital facilities /term

loan facilities (WCTL/FITL). • Reduction in margin for funded and non-funded limits. • Realignment of limits from pre-sale to post-sale and vice versa or from funded to non- funded limits.• Reassessment of the credit facilities including the working capital.

Such a restructuring may be:

• For a short or medium term• With or without additional term or working capital funding normally with additional financing in genuine cases for Balancing Equipment, Modernisation, Critical Capital Expenditure (CAPEX) essential to make business Unit viable /operationalise etc. Working Capital may be required over short/medium/long term basis within the restructuring/rehabilitation frame work.

9.1 Rescheduling:

It is changing the Pattern of debt service obligation from equated monthly installment to ballooning schedule or descending schedule without considering any enhancement in repayment period and quantum of outstanding:i) Retaining the existing repayment period.ii) Not exceeding the existing outstanding exposure.iii) Without changing the nature and quantum of existing credit facilities.iv) Without sanctioning any fresh credit facility or additional limit beyond the existing outstanding exposure.


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9.2 Rephasement:

Rephasement is rescheduling with enhancing the repayment period only.

9.3 Restructuring:

In Restructuring following may be considered:a. Rephasement and / or Rescheduling.b. Changing existing outstanding exposure, and / orc. Changing the nature and quantum of existing credit facilitiesd. Sanctioning any fresh credit facility or additional limit whetherwithin the existing outstanding exposure or beyond.

9.4 Repeated Re-structuring:

The account is expected to revert to normal health during the stipulated time-frame when the Restructuring is done for the first time.However, further restructuring may be necessitated in some cases of genuine difficulties beyond the comprehension of the borrower like change in Govt. policies, shift in supply/demand, etc.However, the special dispensation for asset classification would be available only when the restructuring is done for the first time.

9.5 Holding on Operations

For Medium Sector Enterprises:

While identifying and implementing the restructuring/rehabilitation package, “holding operation” may be considered for a period of 06 months. This will allow small-scale units to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds during the period of such “holding operation” less pre-agreed cutbacks to reduce overdues.

• Holding on Operations essentially implies:- Continuous operations in the account, like opening fresh LCs to the extent of reduction in devolvement, even if devolvement is not fully cleared.- Roll over of LC opened by the Bank.- Allowing operations in the cash credit account despite interest/forced debits not being cleared.- Fall in drawing power etc.• Such Holding on Operations may generally be permitted with a cut back of say about 10-15% towards reduction in overdues.

Holding on Operations can also be permitted even without cut back arrangement on case to case basis and merits of the case.


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For Micro and Small Units:

A. Handholding stage:

1. Timely and adequate assistance to MSEs and rehabilitation effort should begin on a proactive basis when early signs of sickness are detected. This stage would be termed as ‘handholding stage’ as defined below. This will ensure intervention by banks immediately after detecting early symptoms of sickness so that sickness can be arrested at an early stage. An account may be treated to have reached the ‘handholding stage’; if anyof the following events are triggered:

a. There is delay in commencement of commercial production by more than six months for reasons beyond the control of the promoters.

b. The Company incurs losses for two years or cash loss for one year, beyond the accepted timeframe;c. The capacity utilization is less than 50% of the projectedlevel in terms of quantity or the sales are less than 50% of the projected level in terms of value during a year.

2. The bank branches should take timely remedial action which includes an enquiry into the operations of the unit and proper scrutiny of accounts, providing guidance / counselling services, timely financial assistance as per established need and also helping the unit in sorting out difficulties which are non –financial in nature or requiring assistance from other agencies.

In order to ensure timeliness for banks for taking remedial action / measures in ‘handholding stage’, the handholding support to such units should be undertaken within a maximum period of two months of identification of such units.

10. Techno Economic Viability Study

(i) To ascertain the viability of a sick unit, detailed technical,economical, financial and managerial appraisal should be carried out to find out whether sufficient profit will be generated within the period of rehabilitation and whether the unit will be able to achieve positive ‘Networth’.(ii) In Accounts where aggregate exposure (existing/proposed)exceeds Rs. One Crore, TEV study to be carried out by outside empanelled Agency with our Bank/Member Banks or our Bank’s Project Finance Department, BCC, Mumbai. In respect of Accounts where such exposure exceeds Rs. Five Crores such TEV report to be vetted by our Bank’s / Member Bank’s Project Finance Division. In respect of Accounts with exposure upto Rs. One Crore, In House report submitted by the Borrower can be accepted subject to our usual scrutiny and if necessary the same may be vetted by our Project Finance Division.(iii) The study so conducted should cover various aspects relating to technical, financial, commercial and managerial appraisal.

11. Eligibility criteria for restructuring of advances

11.1.1 Bank may restructure the accounts classified under 'standard','sub-standard' and


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'doubtful' categories.

11.1.2 Bank can not reschedule / restructure / renegotiate borrowal accounts with retrospective effect. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The process of re-classification of an asset should not stop merely because restructuring proposal is under consideration. In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of regulatory concern.

11.1.3 Restructuring of debt can take place only with the formal consent/ application of the debtor. However, the process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions.

11.1.4 No account will be taken up for restructuring by the bank unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the bank based on the acceptable viability benchmarks as mentioned above. The accounts not considered viable should not be restructured and bank should accelerate the recovery measures in respect of such accounts. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects / activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite regulatory concerns/action.

11. 2 Asset classification norms

Restructuring of advances could take place in the following stages :(a) before commencement of commercial production/operation;(b) after commencement of commercial production/operation but before the asset has been classified as ‘sub-standard’;(c) after commencement of commercial production/operation and the asset has been classified as ‘sub-standard’ or ‘doubtful’.

11.2.1 The accounts classified as ‘standard assets’ should be immediately reclassified as ‘sub-standard assets’ upon restructuring (subject to provisions contained at Para No 11.3 ).

11.2.2 The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule.

11.2.3 All restructured accounts which have been classified as nonperforming assets upon restructuring, would be eligible for up-gradation to the ‘standard’ category after observation of ‘satisfactory performance’during one year period from the date of first payment of interest or installments in terms of the restructuring package (‘specified period’). Satisfactory performance during the specified period means that i) in case


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of cash credit accounts, the account should not be out of order for more than 90 days during the specified period and there should not be any over dues at the end of the specified period. ii) in case of term loans no payments should remain overdue for more than 90 days during the specified period and there should be no over dues at the end of the specified period.

11.2.4 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured accountwould be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.

11.2.5 Any additional finance may be treated as ‘standard asset’, during the specified period. However, in the case of accounts where the pre restructuring facilities were classified as ‘sub-standard’ and ‘doubtful’ ,interest income on the additional finance should be recognized only on cash basis. If the restructured asset does not qualify for upgradation at the end of the above specified period, the additional finance shall be placed in the same asset classification category as the restructured debt.

11.2.6 In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as substandard. If the restructured asset is a substandard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion. However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance.

11.3 Special Regulatory Treatment for Asset Classification

The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated in Para 11.2 above , will be available to the borrowers engaged in important business activities, subject to compliance with certain conditions as enumerated in Para 11.3.1 below. Such treatment is not extended to the following categories of advances:i) Consumer and personal advances;ii) Advances classified as Capital market exposures;iii) Advances classified as commercial real estate exposures

The asset classification of these three categories accounts as well as that of other accounts which do not comply with the conditions enumerated in para 11.3.1 will be governed by the prudential norms in this regard described in Para 12 herein below.

11.3.1 Elements of Special regulatory framework

The special regulatory treatment has the following two components:i) Incentive for quick implementation of restructuring package.


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ii) Retention of the asset classification of the restructured account in the pre-restructuring asset classification category.

11.3.1.1 Incentive for quick implementation of the restructuring package

As stated in para 11.1.2, during the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. However, as an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell in respect of cases covered under the CDR Mechanism or when the restructuring application was received by the bank in non-CDR cases.i) Within 120 days from the date of approval under the CDR mechanism.ii) Within 90 days from the date of receipt of application by the bank in cases other than those restructured under the CDR Mechanism.

11.3.1.2 Asset classification benefits

Subject to the compliance with the undernoted conditions in addition to the adherence to the prudential framework laid down in para 11.2i) In modification to para 11.2.1, an existing ‘standard asset’ will not be downgraded to the sub-standard category upon restructuring.ii) in modification to para 11.2.2, during the specified period, the asset classification of the sub-standard / doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period.

However, these benefits will be available subject to compliance with the following conditions:i) The dues to the bank are ‘fully secured’ by tangible security. The condition of being fully secured by tangible security will not be applicable in the following cases:a) MSE borrowers, where the outstanding is upto Rs. 25 lac.b) Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows.c) Dues of Micro Finance Institutions (MFIs) restructured up to March 31, 2011.ii) The unit becomes viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units.iii) Promoters’ sacrifice and additional funds brought by them should be a minimum of 15% of banks’ sacrifice.iv) However, based on the representations received from Banks and Indian Banks’ Association that corporate under stress find it difficult to bring in the promoters share of sacrifice and additional funds upfront on some occasions, it was decided by RBI that :

a) The promoter’s sacrifice and additional funds required to be brought in by the promoters should generally be brought in upfront. However, if banks are convinced that the promoters


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face genuine difficulty in bringing their share of the sacrifice immediately and need some extension of time to fulfill their commitments, the promoters could be allowed to bring in50% of their sacrifice, i.e., 50% of 15%, upfront and the balance within a period of one year.

b) However, in case the promoters fail to bring in their balance share of sacrifice within the extended time limit of one year, the asset classification benefits derived by banks will cease to accrue and the banks will have to revert to classifying such accounts as per the asset classification norms specified under Para No. 11.2 of this policy document.

c) Promoter’s contribution need not necessarily be brought in cash and can be brought in the form of de-rating of equity, conversion of unsecured loan brought by the promoter intoequity and interest free loans.

d) Personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry. e) The restructuring under consideration is not a ‘repeated restructuring’ as defined in Para 9.4 of this policy document.

11.4 Income recognition norms

Interest income in respect of restructured accounts classified as 'standard assets' will be recognized on accrual basis and that in respect of the accounts classified as 'non-performing assets' will be recognized on cash basis.

11.5 Provisioning norms

11.5.1 Normal provisions

Bank will hold provision against the restructured advances as per the existing IRAC norms.

11.5.2 Provision for diminution in the fair value of restructured advances

(i) Reduction in the rate of interest and /or reschedulement or rephasement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. Such diminution in value is an economic loss for the bank and will have impact on the bank’s market value of equity. It is, therefore, necessary for the bank to measure such diminution in the fair value of the advance and make provisions for it by debit to Profit & Loss Account. Such provision should be held in addition to the provisions as per existing provisioning norms as indicated in para 8.4.1 above, and in an account distinct from that for normal provisions.

For this purpose, “The erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank’s BPLR or base rate (whichever is applicable to the borrower) as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category


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on the date of restructuring". Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank’s BPLR or base rate (whichever is applicable to the borrower) as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring".

(ii) In the case of working capital facilities, the diminution in the fair value of the cash credit /overdraft component may be computed as indicated in para (i) above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components( Working Capital Term Loan and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components.

(iii) In the event any security instrument is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1/- till maturity of the security. This will ensure that the effect of charging the economic sacrifice to the Profit & Loss account is not negated.

(iv)The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR or base rate (whichever is applicable to the borrower), term premium and the credit category of the borrower. Consequently, bank will have to provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account.

(v) Due to lack of expertise it would be difficult to ensure computation of diminution in the fair value of advances by the branches. The bank has the option of notionally computing the amount of diminution in the fair value and providing there for, at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank are less than rupees one crore till the financial year ending March 2013. The bank has decided to opt for the simplified system for making provision in small accounts (less than Rs.1 crore i.e. making provision of 5% of total exposure in restructured accounts. The position would be reviewed thereafter).

12. Prudential Norms for Restructured Non-Manufacturing Units.

Units other than manufacturing can also be restructured/rescheduled subject to their satisfying the basic test of viability.Important Note

Reserve Bank of India directives / guidelines issued from time to time will be applicable and operative and will have overriding status over any other instructions.


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13. Reliefs / Concessions to be extended and Sacrifice

Norms for grant of Reliefs/Concessions are furnished below and are common for MSMEs under Restructuring as well as Rehabilitation. For the sake of clarity we state here that the term Restructuring refers to the borrowal facilities (Fund Based as well as Non-Fund Based) of the unit with us/other Financial Institutions whereas the term Rehabilitation refers to the progress of the unit on its way to recovery through restructuring of its liabilities/repayment obligations. Rehabilitation should result in the unit becoming viable again so as to meet such liabilities/repayment obligations.The viability and the rehabilitation of a unit would depend primarily on the unit’s ability to continue to service its repayment obligations including the past restructured debts. It is, therefore, essential to ensure that ordinarily there is no write-off or scaling down of debt such as by reduction in rate of interest with retrospective effect except to the extent indicated in the guidelines. Interest concessions granted, if any, may be subject to annualreview depending on the performance of the units. The reliefs and concessions specified are not to be given in a routine manner and have to be decided based on the commercial judgement and merits of each case. Reliefs and concessions may be extended beyond theparameters in deserving cases. Only in exceptional cases, concessions/reliefs beyond the parameters would be considered. In fact, the viability study itself should contain a sensitivity analysis in respect of the risks involved that in turn will enable firming up of the correction action matrix.

14. Delegation of Powers for sanctioning proposals under DRM for MSMEs and approving concessions

The Authority empowered to sanction the loans and advances to the units including additional amount proposed under restructuring package shall have the powers to sanction the restructuring / rehabilitation package. However,the Authority who have sanctioned the original proposal or proposal for increase in limits will not sanction the rehabilitation/restructuring proposal. In such cases, restructuring / rehabilitation proposals will be approved by immediate next Higher Authority and in case of Zonal Office Level Credit Committee (ZOCC) such restructuring / rehabilitation proposal will be sanctioned by the Corporate Office Level Credit Committee headed by the Executive Director or as the case may be at BCC, Mumbai.Reliefs and concessions proposed under the DRM for MSMEs will be approved by immediate next Higher Authority in whose power proposal falls. In case of proposal within the powers of Zonal Office Level Credit Committee (ZOCC)such reliefs and concessions will be approved by the Executive Director.

i) In case of default – 2% penal interest would be charged over and above prevailing normal rate, which would be applied on the amount of default for the period of default in the event of the unit achieving the projections but defaulting in payment of principal / interest.ii) According to RBI guidelines small and medium enterprises engaged in service sector are also eligible for relief and concessions for rehabilitation / restructuring.iii) Relief and concessions in services charges permissible under extant guidelines may also be permitted to accounts under restructuring / rehabilitation package.iv) The bank shall have the right to recompense i.e., recovery of the sacrifice made by it after the unit becomes profitable and all the term loans outstanding at the time of restructuring and sanctioned as a part of restructuring package have been repaid.


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v) It should be ensured that relief and concessions are not granted to the maximum permissible extent in all the cases as a matter of routine.

15. Right of Recompense

Normally, every Rehabilitation/Restructuring package involves some waivers and concessions extended by the lenders to deserving borrowers during their difficult times in order to keep them afloat. When the borrower stops incurring losses and starts earning profit, the lenders have right to recoup the sacrifice. Technically, 100% of such waivers/ concessions result in sacrifice of past dues or future dues can be recovered by the lenders at the time of enforcing the right of recompense. But, in practice the entire amount is not demanded from the borrower for the reason that the amounts involved would be high which, if paid in full, would again cause stress on the asset which has just come out of past difficulties. Therefore only certain elements of sacrifice are considered for exercising Right of Recompense.

It may be noted that the Bank will not entertain proposals with a request to waive the stipulation of right of Recompense. However in exceptional cases, reference may be made to BCC with views/recommendations of the Branch/Regional/Zonal Heads. The authority to waive this condition rests only with the Executive Director/Chairman and Managing Director.

16. Methodology to be followed for

SCENARIO A

WHERE WE ARE THE SOLE LENDER

1. The borrower will make request for restructuring under DRM for MSMEs to the branch along with Proforma Package (PP, the application form for making request for restructuring under DRM for MSMEs – format of which is placed at annexure I) and its enclosures/ documents. Three sets of documents shall be provided by the borrower. The request should be entered in the Proposal Receipt Register and acknowledgement given to the borrower.

2. The branch shall examine the eligibility of the reference for restructuring under DRM for MSMEs. The branch shall send one set each to its controlling office & the sanctioning authority, where necessary, along with its views/ recommendations.

3. Techno-economic Viability needs to be established before proceeding with the restructuring. All cases shall be forwarded to the controlling office for assessment of viability and further action.

4. If the unit is found viable, the branch should prepare the Final Restructuring Package based on the TEV study report and submit the same to the appropriate authority of the Bank.

SCENARIO B

(i) WE ARE THE LARGEST LENDER


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1. The borrower will make request for restructuring under DRM for MSMEs to the branch along with Proposal Papers (PP) and its enclosures/ documents. The request should be entered in the Proposal Receipt Register and acknowledgement given to the borrower.

2. The branch shall examine the eligibility of the reference for restructuring under DRM for MSMEs.

3. The branch shall send a copy each of the PP to other lenders, informing the date of joint meeting of the lenders which shall not be later than 15 days from the date of the receipt of the request.

4. Our stand on the restructuring proposal should be finalized before the Joint meeting. The views of other lenders may be obtained in the Joint meeting.

5. The lenders shall discuss the admissibility of the reference, the reasonableness of the relief and concessions sought, the system to be adopted for establishing viability and major issues to be addressed in the same, the terms and conditions to be stipulated [in case the account is restructured

6. Techno-Economic Viability needs to be established before proceeding with the restructuring. Whether the TEV study is to be done by the largest lender along with the second largest lender in-house or through an outside agency may be decided in the joint meeting itself.

7. The branch along with the second largest lender should prepare the Final Restructuring Package based on the TEV study report and circulate the same to other lenders. Before circulating the Final Package, the branch should obtain the approval of the stand from the sanctioning authority. The other lenders should obtain the approval of their competent authority and implement the restructuring package.

8. Package would be implemented simultaneously by all the lenders after it is sanctioned by their respective competent authorities.

9. 75% Lenders by value should agree for restructuring scheme approved.

(ii) WE ARE THE SECOND LARGEST LENDER

1. The branch shall examine the eligibility of the reference for restructuring under DRM for MSMEs.

2. Our stand on the restructuring proposal should be crystallized before the Joint meeting. Our views may be conveyed in the Joint Meeting.

5. Techno-Economic Viability needs to be established before proceeding with the restructuring.

3. The Final Package circulated by the largest lender should be put up to the competent authority, after the joint meeting, for sanction of the restructuring package.

(iii) WE ARE NEITHER THE LARGEST NOR THE SECOND LARGEST LENDER

1. The branch shall examine the eligibility of the reference for restructuring under DRM for MSMEs. The branch shall, immediately thereafter, send one copy each to its Regional Office & the sanctioning authority, where necessary.

2. Our stand on the restructuring proposal should be crystallized before the Joint meeting. Our views may be conveyed in the Joint meeting.


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3. The Final Package circulated by the largest lender should be put up to the competent authority for sanction of the restructuring package and implemented within the prescribed time frame.

17. Date of Commencement of Commercial Operations (DCCO)

Guidelines on DCCO as per Master Circular No. DBOD No. BP:BC:9/21.04.048/2012-13 dated 02.07.2012 are as under:Project Loans for Infrastructure Sector

(i) A loan for an infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as ‘standard asset’ in terms of paras (iii) to (v) below.(ii) A loan for an infrastructure project will be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as ‘standard asset’ in terms of paras (iii) to (v) below.(iii) If a project loan classified as ‘standard asset’ is restructured any time during the period upto two years from the original date of commencement of commercial operations (DCCO), in accordance with the provisions of Part B of the above referred RBI Master Circular, it can be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms.(a) Infrastructure Projects involving court cases Upto another 2 years (beyond the existing extended period of 2 years i.e. total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.(b) Infrastructure Projects delayed for other reasons beyond the control of promoters: Upto another 1 year (beyond the existing extended period of 2 years i.e., total extension of 3 years), in other than court cases.(iv) It is re-iterated that the dispensation in para (iii) above is subject to adherence to the provisions regarding restructuring of accounts as contained in the RBI Master Circular DBOD No.BP:BC:9/21.04.048/2012-13 dated 02.07.2012 which would inter alia require that the application for restructuring should be received before the expiry of period of two years from the original DCCO and when the account is still standard as per record of recovery.

The other conditions applicable would be:(a) In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years from the original DCCO, considering the high risk involved in such restructured accounts.(b) Banks should maintain provisions on such accounts as long as these are classified as standard assets as under: Until two years from the original DCCO 0.40% During the third and the fourth years after the original DCCO 2.75%(v) For the purpose of these guidelines, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.


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Project Loans for Non – Infrastructure Sector:

(i) A loan for a non-infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as ‘standard asset’ in terms of paras (iii) to (v) below.(ii) A loan for a non-infrastructure project will be classified as NPA if it fails to commence commercial operations within six months from the original DCCO, even if it is regular as per record of recovery,unless it is restructured and becomes eligible for classification as ‘standard asset’ in terms of paras (iii) to (v) below.(iii) In case of non-infrastructure projects, if the delay in commencement of commercial operations extends beyond the period of six months from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO, and retain the “standard” classification by undertaking restructuring of accounts in accordance with the provisions contained in the RBI Master Circular DBOD No. BP:BC:9/21.04.048/2012-13 dated 02.07.2012 provided the fresh DCCO does not extend beyond a period of twelve months from the original DCCO. This would among others also imply that the restructuring application is received before the expiry of six months from the original DCCO, and when the account is still “standard” as per the record of recovery.

The other conditions applicable would be:

a. In cases where there is moratorium for payment of interest,banks should not book income on accrual basis beyond six months from the original DCCO, considering the high risk involved in such restructured accounts.

b. Banks should maintain provisions on such accounts as long as these are classified as standard assets as under:

Until the first six months from the original DCCO 0.40% During the next six months 2.75%(iv) For this purpose, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.

Other issues:

(i) All other aspects of restructuring of project loans before commencement of commercial operations would be governed by the provisions of Part B of Master Circular No. DBOD No.BP:BC:9/21.04.048/2012-13 dated 02.07.2012 on Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances. Restructuring of project loans after commencement of commercial operations will also be governed by these instructions.(ii) Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if:

(a) The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.


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(b) The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay. (c) The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO. (d) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.(iii) These quidelines would apply to those cases where the modification to terms of existing loans, as indicated above, are approved by banks from the date of this circular.

18. Standard terms and conditions

The need for restructuring would arise in stressed assets. The reasons for stress may be internal to the Company like diversion of funds, non-induction of promoters contribution, poor vision and mismanagement or external to the Company/ management like sudden downturn in the market, technology changes, policy changes etc. An indicative list of standard terms and conditions that may be imposed by the lenders is given at Annexure V. of the policy.The branches may be guided by the reasons for the stress in the account while stipulating the conditions. The list given at the annexure is only indicative and the branch may impose conditions as may be necessary to safeguard bank’s interest.

19. Disclosure

Bank is required to disclose in its published Annual Balance Sheet, under "Noteson Accounts", information relating to number and amount of advances restructured under DRM for MSMEs and the amount of diminution in the fair value of the restructured advances. Bank is required to disclose the total amount outstanding in all the accounts/facilities of borrowers whose accounts have been restructured along with the restructured part or facility. This means even if only one of the facilities/accounts of a borrower has been restructured, the bank should also disclose the entire outstanding amount pertaining to all the facilities/ accounts of that particular borrower.

Annexures to the Policy

Annexure I : Willful DefaultersAnnexure-II : Early Warning SignalsAnnexure-III : Reliefs & Concession which can be extendedby the Bank to potentially viable SickMMSME unitsAnnexure-IV : Financial Parameters applicable for DRMAnnexure-V : Standard Terms & ConditionsAnnexure-VI : Guidelines on Right of Recompense


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STATE FOLLOWING STATEMENT TRUE OR FALSE

1. In case of reschedulement of loan account , total repayment period is extended.

2 .In case of rephasement of loan account, the repayment period is enhanced.

3. Restructuring of Loan account is a combination of rephasement and reschedulement along with additional exposure, acceptance of sacrifice , segregation of limits into WCTL, FITL .

4 .In case of cut back arrangement entire amount deposited by borrower is allowed to be withdrawn for business purpose

5 .Cut Bank arrangement is a long term measure for recovery in NPA account.

6 .In case of Retail Loan, account must be classified as NPA , immediately after reschedulement / rephasement.

7. Restructuring/Rephasement/ Reschedulement can be done only in Standard category accounts.

8. If restructuring/rephasement/reschedulement is done in NPA account, account will become standard provided there is satisfactory performance of recovery for a period of 12 months from the date when first installment /interest has become due as per revise repayment schedule.


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9. To get benefit of special treatment and to keep the account in same category, restructuring of dues must be done before commencement of production.

10. Rephasement/reschedulement etc can be considered in case of NPA accounts where activity has become non-viable.

ANSWER: Q No 1 2 3 4 5 6 7 8 9 10Ans False True True False False True False True False False

CORPORATE DEBT RESTRUCTURING (CDR)

Quick Bites

Definition Which types of borrowers can go for CDR? What types of account can be referred to CDR ? What is the structure of CDR system Who can make a reference to CDR How does the system operate legal basis for the CDR System Category I and Category II Restructuring Viability Parameters Standstill Clause? general concessions Asset Classification during and after CDR

Corporate Debt Restructuring (CDR ), is a mechanism for restructuring the debts of a corporate borrower, which is facing difficulties in servicing its debts due to certain internal, external factors, but which is otherwise viable. The aim of this mechanism is to preserve viable corporate which are affected by certain internal and external factors and thereby minimize losses to the creditors and other stake holders through an orderly and coordinated restructuring programme.


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This mechanism which is in vogue in other countries like U.K., Thailand, Korea, etc. helps the borrower and the lenders to come together and restructure the debts in time and help the corporate to remain viable.

In other words we can define: Corporate Debt Restructuring is a mechanism which provides for timely and transparent action for restructuring the debts of viable corporates which are affected by internal and external factors for the benefits of all concerned.

The Reserve Bank of India first issued the guidelines on CDR in August 2001. It issued revised guidelines in February 2004 which has been further revised in November 2005. The important features of the revised guidelines are as under:

Which types of borrowers can go for CDR?

CDR can be taken up only in case of corporate borrowers. The borrower should have been assisted under consortium arrangement, multiple banking arrangement or syndication arrangement. i.e. when more than one Bank/F.I are involved.The outstanding of fund based and non fund based exposure should not be less than Rs. 10 crore.The borrowing company should not be a willful defaulter to any of the banks.This mechanism is available for both industrial and any other type of activity.

Which types of account can be referred to CDR ?

In order to refer the account to CDR, it is not necessary that it should have been classified under Non-performing asset. The account can belong to Standard category, Substandard or Doubtful category. In certain cases suit filed accounts can also be referred provided, the initiative to resolve the case under the CDR system is taken by at least 75% of the creditors (by Value) and 60% of creditors( by number). BIFR cases are not eligible for restructuring under the CDR system. However, large value BIFR cases may be eligible for restructuring under the CDR system if specifically recommended by the CDR Core Group. The Core Group shall recommend exceptional BIFR cases on a case-to- case basis for consideration under the CDR system. It should be ensured that the lending institutions complete all the formalities in seeking the approval from BIFR before implementing the package.

What is the structure of CDR system ?

The CDR consists of a three tier structure namely (i) CDR Standing Forum and its Core Group, (ii) CDR Empowered Group and (iii) CDR Cell.

Standing Forum

The Standing Forum consists of the Chairman and Managing Director of all banks/financial institutions who have joined the CDR system and Chairman of Indian Banks Association. This is a self-empowered body, which lays down the policies and guidelines to be followed up by the CDR system. It also monitors the progress of CDR from time to time.RBI is not a member of the forum and core group. It only provides the broad guidelines.


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The Standing Forum is required to elect its Chairman for a period of one year. It should meet at least once in every six months.

Core Group of the Standing Forum

It is a small group of eight members, which is carved out of the Standing Forum. It consists of CMDs/CEOs of IDBI, SBI, ICICI Bank, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks Association and Deputy Chairman of IBA to represent foreign banks in India.

The Core Group oversees the functioning of the CDR empowered Group and the CDR Cell. It lays down the policies and guidelines to be followed by them. It provides for the Programme Evaluation Techniques Chart for processing of cases referred to CDR and decides the modalities for enforcement of the time frame. This group has to decide all policy issues without reference to RBI.

Empowered Group

This consists of three standing members namely ED level Representative of IDBI, ICICI, SBI and also the ED level representative of the Banks/FIs who have exposure to the company concerned. The latter should have the authority from their respective Boards to decide cases referred to the CDR. This group takes the decision for corporate restructuring of individual companies. It decides on the acceptable viability bench mark levels on parameters like DSCR, ROCE (Return on Capital Employed), IRR (Internal Rate of Return), Break Even Points, etc.

CDR Cell

The CDR Cell is presently functioning in the head office of IDBI Ltd. [Note : The CDR Standing Forum, the CDR Empowered Group are also housed in this office.].It will be staffed by members of staff deputed from banks and FIs. The administrative and other costs will be shared by all member banks and FIs. The banks and FIs who are in core group will contribute Rs. 50 lakh each while others will contribute Rs. 5 lakh each per annum for the purpose.

All references by creditors or borrowers for Corporate Debt Restructuring will be made to the CDR Cell. The CDR Cell will examine the acceptability of the proposal and after getting clearance from the Empowered Group will prepare the Restructuring package.The cost of operating the CDR mechanism including the cost of the CDR Cell will be borne by the banks and FIs.

Who can make a reference to CDR ?

One or more creditors having at least 20% stake in the credit facility can make a reference for CDR.The borrowing company can also make the reference, if it is supported by a Bank/FI having not less than 20% stake in credit facility.


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How does the system operate?

The Lead Institution/Major stake holders work out a preliminary Restructuring plan in consultation with other stake holders and submit the same to CDR Cell.

Then the CDR Cell prepares a Preliminary Restructuring Scheme (Flash Report) within 30 days and submits the same to the Empowered Group to take a decision on the admissibility of the case. It also sends copies of flash report to all member banks at least 10 days in advance of the Empowered Group meeting so that the member banks can effectively participate in the deliberation.

Once the Flash Report is cleared by the Empowered Group, the CDR Cell along with the lead institution prepares the detailed restructuring package and submits the same for approval by the Empowered Group. The CDR Cell should submit the same to the Empowered Group within a period of 60 days (in exceptional cases 90 days) from the date of clearance of Flash Report by the Empowered Group

Then the Empowered group approves the package with modifications if any. It should take a final decision within a period of 90 days. (extendable upto a maximum period of 180 days from the date of reference to CDR Cell). Once the proposal is approved, it is sent to the individual Bank/FIs for their sanction.

What is legal basis for the CDR System ?

The legal basis for the CDR system is provided by two documents Namely - Inter Creditor Agreement (ICA) and Debtor-Creditor Agreement. (DCA).

All the participants of the Standing Forum execute the ICA. It is a legally binding agreement with necessary enforcement and penal clauses. The agreement remains valid initially for a period of 3 years which can be extended for further period of three years.

The Debtor-Creditor Agreement will be executed by the borrower company and the lender banks.

What is meant by Category I and Category II Restructuring?

Category I restructuring is applicable to standard and sub-standard assets/loans. In case of 90% or more of the outstanding is classified as standard/substandard the balance 10% in the books of other banks will be considered as standard/substandard for the purpose of reference to CDR system under category I.

Under Category I CDR System the creditors have to agree that if 75% of the creditors by value or 60% of creditors by number agree to a restructuring package the same should be binding on the remaining creditors. This condition must be clearly mentioned in the Inter-Creditor Agreement. Once this condition is satisfied, all the creditors have to agree to the package including additional finance, if any. However, if a Creditor (outside the minimum


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75% and 60%) does not wish to commit additional finance, it will have option either (a) to arrange for its share from the existing or new creditor or (b) agree to defer the first year’s interest due to it after the CDR package becomes effective which will be payable by the borrower company without compounding along with the last instalment of the principal due to the Creditor.

The existing lenders within minimum 75% and 60% can exit provided they arrange with either the existing lenders or new lenders to purchase their shares and also agree to the approved restructuring package. Further, they need not provide additional finance provided they tie up with existing lenders or new lenders for their share of the additional finance.

Category II CDR System is applicable to accounts which are classified as doubtful assets and if a minimum of 75% of the creditors by value and 60% of the creditors by number agree for the restructuring. Here the creditors are not bound to take up additional financing and the decision to lend or not depends upon each creditor bank/ FI separately. In case the existing creditor denies for participation in the additional finance the borrower has to make financing arrangements with the existing or new creditors.

What are the illustrative parameters, which are to be taken into account by the Empowered group to decide the viability of the proposal after restructuring?

ROCE: A minimum ROCE of 5 year G-sec plus 2% may be considered as adequate.( Net profit before Interest & Tax/ Average Capital Employed *100)

DSCR: Average DSCR of more than 1.25 while with DSCR of not less than1 for more than year is acceptable.(PAT+ Depreciation +interest on Loan/Installment of TL+ Interest on Loan)

IRR : The benchmark gap between the IRR and the cost of funds should be at least 1%. IRR is the rate of discount that makes the discounted value of the net cash flow from a project just equal to the amount which has to be invested to obtain that net cash flow.

Extent of sacrifice

What are the parameters which must be satisfied to be eligible under CDR?

Restructuring under the CDR is done for the first time.The unit becomes viable in 7 years and the repayment period of the restructured debt does not exceed 10 years.Promoters sacrifice and additional funds brought by him should be a minimum of 15% of the creditors’ sacrifice.Personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry.

What is meant by Standstill Clause?

This is a clause in the Debtor-Creditor Agreement under which the debtors and creditors agree to a standstill whereby all the parties agree not to take legal action during the


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standstill period. The standstill provision is applicable as long as reference made to CDR is pending or restructuring scheme is under preparation and not during implementation of the package.

One of the most important elements of Debtor- Creditor Agreement would be “Stand Still Clause” binding for 90 days, or 180 days by both sides. Both the parties commit themselves not to take recourse to any other legal action during the “Stand Still” period.

Once restructuring under the CDR system takes place, the asset classification status should be restored to the position, which existed when the reference to the Cell was made and accordingly any additional provisioning made can be reversed.

Is it possible to go for a second restructuring package?

In normal course restructuring under CDR mechanism should be done only once. Any reworking on the package should be an exception and should be done only with the approval of the Core Group.

What are the general concessions given in the package?

The CDR mechanism does not provide for any special guidelines for the relief to be extended to the company. The Empowered Group can consider giving the following types of relief or any other relief as it may deem fit.

(a)Convert a part of the assistance to equity. [Note : Exemptions from the Capital market exposure norm can be obtained from a case to case from RBI.](b)Waiver of liquidated damages and compounding of interest.(c)Waiver of Principal and interest in deserving cases.

What is the disclosure requirement?

As per RBI guidelines, banks are required to disclose the details of the CDR as notes to accounts in their published annual Balance Sheet.

What about Asset Classification during and after CDR?

During the pendency of the case with the CDR system, the usual classification will continue to apply and there should not be any improvement of the asset classification just because the case has been referred to the CDR system.

Where a Standard asset is restructured the asset has to be classified as substandard asset immediately.

In case a Non-performing asset is restructured the asset classification would continue in the same category as prior to restructuring.

However, if restructuring package is approved by the Empowered Group and the same is implemented within -120-days from the date of the approval, the asset classification is


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restored to the position which existed when reference was made to the CDR Cell. Additional provision, if any, made during the pendency of the case will be reversed.

Any additional finance, if any, will be treated as 'standard asset' upto a period of one year after the first interest or instalment whichever is earlier falls due under the approved restructuring package.


State whether the following statements are true or false.

1. CDR mechanism is applicable to all types of borrowers.

2. CDR can be considered in accounts where total exposure RS 10 crores and above which is financed either in consortium or through multiple banking facility.

3. CDR can be considered in case of suit filed accounts, subject to certain conditions.

4. In case of CDR I account must be in standard category.

5. In CDR Empowered Group, Chairman and Managing Directors of Banks are members.

6. Under CDR, even loss accounts are also covered

7. CDR is a legal frame work.

8. In case of CDR II it is not binding on members to take share in additional exposure.

9. Once the CDR is approved, it must be implemented within a period of 120 days to get benefit of restoration of assets classification status of the account as on the date of reference for CDR.

10. Borrower can independently make reference for CDR.

Answers

Q No 1 2 3 4 5 6 7 8 9 10

ANS False Ture True False False False False True True False


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SICK UNITS – CAUSES OF SICKNESS, DETECTION AND REHABILITATION ISSUES (UNDER SICA 1985 – BIFR CASES)

Quick Bites

Definition of Sick Units under SICA Rehabilitation of Sick Units Reference to BIFR Effect of Reference Bank's Position Stages in BIFR referred accounts BIFR proceedings Operating Agency When our Bank is NOT the Operating Agency When our Bank is the Operating Agency AAIFR Authority for sanctioning Rehabilitation Packages Potential Sick Units

Rehabilitation of sick units under BIFR

A Committee was appointed in 1984, under the Chairmanship of Shri T. Tiwari to look into the causes of sickness and to suggest measures to deal with sickness. This committee which is known as Tiwari Committee recommended the following important measures.

1. To pass a special legislation for dealing with the problems of sickness.

2. To set-up a quasi judicial body through the special legislation to deal expeditiously and exclusively with matters relating to rehabilitation of sick industrial units.

To define sickness and potential viability in unambiguous terms.

Sick [sick industrial companies (special provisions) Act, 1985 was introduced on the recommendations of Tiwari Committee, which came into effect from 12th January 1987.

- It is applicable to Industrial Companies engaged in industries specified in Schedule I of the Industries (Development and Regulation) Act, 1951 with exception of shipping industries. It is not applicable to small scale industries.

- It defines a Sick Industrial Company.

- It provides for the formation of BIFR and AAIFR and deals with their powers.

- It compels industrial companies to refer to BIFR when they turn sick or weak.


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It also deals with the appointment of operating agency and the sanction of rehabilitation package.

Bank undertakes rehabilitation of viable sick industrial units in medium and large sector. In the case of sick units coming under the purview of Sick Industrial Companies (Special Provisions) Act 1985, (SICA), and Rehabilitation will be under the sanctioned scheme of the Board for Industrial and Financial Reconstruction (BIFR).Board for Industrial and Financial Reconstruction is a body constituted under Sick Industries Companies (Special Provision) Act (SICA) 1985. It is a quasi judicial body with powers to initiate legal steps against erring promoters who fail to abide by the regulations of SICA. It has the powers to summon and record evidence and override some of the provisions of Company's Act.

Definition of Sick Industrial Company: [sec. 3 (O) of SICA]

- A company will be defined as a Sick Industrial Company when it satisfies the following conditions.

It is registered for a period not less than five years.

It has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.

Notes: Net Worth is sum total of the paid-up capital and free reserves. Free reserves include all reserves created out of Profit and Share Premium Account but does not include reserves created out of revaluation of assets, write back of depreciation provision or on account of amalgamation.

Definition of weak industrial company / Potentially Sick Industrial Company (Sec. 23) : An industrial company which has, at the end of any financial year, accumulated loss equal to or exceeding 50% of its peak net worth during the immediately preceding four financial years is known as a Weak Company.

BIFR (Board for Industrial & Financial Reconstruction): BIFR came into existence from 12th January, 1987 as per Section 4 of SICA and became operational from 15 th May, 1987. It has a Chairman and not less than two and not more than 14 members who are appointed by the Central Government. Persons qualified to be High Court Judges or persons having professional experience of not less than 15 years can be appointed as member or chairman of the Board.Reference to BIFR:

A. When a company can make Reference:An industrial company, which is registered under Companies Act for not less than 5 years and which has accumulated losses, at the end of any financial year, equal to or exceeding its entire net worth, is a sick industrial company. Net worth means sum total of the paid up capital and free reserves. Free reserves means all reserves credited out of the profits and Share Premium Account but do not include reserves credited out of revaluation of assets, write back of depreciation provision and amalgamation.


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All the Sick Industrial companies which are –a) engaged in manufacturing/processing activity, employing –50- workers or more,b) registered for 5 years or more,c) whose net worth has completely been eroded as at the end of any financial year, are required to make Reference to BIFR within –60- days from the date of adoption of annual accounts / audited balance sheet at the Annual General Body of the concerned company or within 60 days of the Board of Directors of the Company forming an opinion that the company has become sick, whichever is earlier.

How Reference madeThe reference is to be made in ‘Form A’ annexed to the Act. In case the sick industrial company is a Govt Company, the reference will be made in Form ‘AA’. Once a reference is registered, BIFR sends intimation to all concerned parties including Banks, Financial Institutions and Govt. Agencies.

Who can make ReferenceA reference can be made by the followings:a. By the sick industrial company, as described above,b. By Central Govt, Reserve Bank of India, State Govt or a public financial institution or state level institution or a scheduled bank.

When Reference can not be madeA reference to the Board does not lie where financial assets have been acquired by any securitization company or reconstruction company under SARFAESI Act.

When Reference abatesReference to the Board abates if the secured creditors, representing not less than three fourth in value of the amount outstanding against financial assistance disbursed to the borrower of such secured creditors, have taken any measure to recover their secured debts under sub section 4 of section 13 of SARFAESI Act.

Effect of Reference:

On reference to the BIFR by the company, there will be following effects)

a) No legal action/recovery action can be instituted against the borrower company and the guarantors.b) All pending cases against the borrower/guarantors are suspended during the pendency of reference.c) The limitation is suspended for the period for which the reference is pending with BIFR.However, legal proceedings can be instituted/continued after obtaining the permission of BIFR.

Bank's Position:

It is the responsibility of the company making reference to BIFR to send copies of Form A along with enclosures to all secured creditors/ Banks / Financial Institutions and other


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agencies. If, however, the company does not submit 'Form A' within reasonable time, the same can be called for by the Bank by sending suitable communication to the company.

Stages in BIFR referred accounts:

(A) FIRST STAGE IN BIFR REFERRED ACCOUNT: ADMISSION STAGEAdmission stage means when a reference is made by a company to BIFR under SICA under section 15 of SICA and the Board of BIFR is yet to decide about sickness of the Company. There are following sub stages:

(a) Study of Form A and Balance Sheets for the detailed analysis in order to verify the facts leading to such sickness, especially –_ To make critical comparative analysis of all the components of the company’s audited accounts both of revenue and capital nature at least for the last 5 years._ Inconsistencies like overstating/booking of expenses on major inputs/ understating income in the later years in a bid to bring the unit under the ambit of SICA._ Comparative study on each input (raw materials, powers, labour, etc.) to sales ratio in order to study abnormal variations._ Abrupt change in accounting system like method of depreciation, providing liabilities not disclosed earlier, write off of book debts, diversion of funds outside the unit by siphoning off funds in any manner to other group concerns, realisation of book debts by cash without routing through banking system._ Comments of the auditors on the balance sheet and any contradictory stand in Form A.

(b) Financial irregularities in accounts:(1) In case the financials of the Company submitted in Form ‘A’ suffers from irregularities, the same may be questioned and prayed for Special Investigative Audit (SIA) u/s 16 of SICA.(2) Apart from financial irregularities, an analysis of the accounts of the Company should be carried out to ascertain whether the sickness is created as a result of wrong and deliberate accounting system followed by the Company.

(B) SECOND STAGE IN BIFR ACCOUNT: DRAFT REHABILITATION SCHEME (DRS)The primary purpose of the Act is to rehabilitate the sick company and with this purpose in mind and after satisfying about the sickness of the Company,BIFR appoints Operating agency (OA) u/s 17(3) of the Act and directs OA to prepare a Scheme (DRS), as expeditiously as possible and ordinarily within a period of 90 days from the date of such order. As per the direction of BIFR, OA finalize DRS u/s 18 of the Act and circulate to all the lenders and Govt agencies for their comments/consideration.

While scrutinizing the DRS submitted by OA, all the components of the DRS are to be analyzed with a view to check if the DRS will be successful and the Company will have positive net worth within a maximum period of seven years.

While analyzing the DRS, following points, in particular, should be looked into:


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i. TEV Study Report: Critically examine the TEV study Report including justification for Technical feasibility and Economic Viability of the unit, Cost of Project and Means of Finance, comparative study of projected financials vis-à-vis actual, etc.ii. Stipulation given in DRS & presumptions made are workable which may lead to rehabilitate the Company and turn its net worth positive with specific reference to Cost of Project to rehabilitate the unit i.e. Means of Finance and its application/uses of Funds.iii. Other terms & conditions mentioned in DRS are acceptable to the Bank like sacrifice to be made in percentile terms by the Bank vis-à-vis other Banks; terms of repayment of the OTS amount, including servicing of future interest; nature and amount of securities charged to the Bank, if OTS offered, fresh exposure anticipated in the DRS from the Bank. These terms & conditions should not be detrimental to the interest of the Bank.iv. The Bank would, in general, prefer OTS based DRS.v. It is to be ensured that only ‘Contractual Dues’ are advised to BIFR, Operating Agency and other Banks while exchanging information on the account. If there is any variation by the OA/BIFR, it should be contested in right earnest.vi. The DRS must contain ‘default clause’ means if the Company does not fulfill its obligation of repayment of the OTS amount and induction of funds in the business, then the DRS may be treated as frustrated/failed and the Bank may take action as per law to recover its dues.

However where the Board, after making enquiry u/s 16 of the Act and after considering of all the relevant facts and circumstances and after giving an opportunity of being heard to all concerned parties, is of the opinion that the sick Company is not likely to make its net worth exceed the accumulated losses within a reasonable time and that it is just and equitable that the Company should be wound up, it may record and forward its opinion to the concerned High Court u/s 20 of the Act for winding up of the company.

(C ) THIRD STAGE IN BIFR ACCOUNT: IMPLEMENTATION STAGEOnce the DRS is sanctioned by BIFR u/s 18(4) of the Act, step by step actions should be taken for the implementation of the Sanctioned Scheme and developments are to be reported to Monitoring Agency (MA) appointed by BIFR and to the Bench of BIFR regularly and if any deviation is observed, it should also be reported to BIFR for taking remedial actions as per the Act.

(D) Approval of Stand on reference to BIFR:When a reference is made to BIFR and the Bank is to convey its stand on Form ‘A’ or ‘AA”, as the case may be, the Region/Zone should prepare a proposal incorporating therein profile of the account, background of the sick unit, details of credit facilities sanctioned and outstanding, serious irregularities observed in the conduct of the account in the past, adverse observations of the Company’s auditors and Bank’s concurrent/Stock auditors and our comments on Form ‘A’ or ‘AA’ and reasons of sickness alongwith recommendations, should besubmitted to Corporate Centre alongwith Form ‘A or ‘AA’ and audited financials of the Co well before next date of hearing at BIFR/AAIFR for its approval. After obtaining approval from the competent authority, the Region/Branch should accordingly convey Bank’s stand to BIFR, in writing through BIFR Cell New Delhi.

Ineligible Cases:


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(a) A company is not eligible for reference to BIFR if it falls under any of the category: _ SSI unit _ Ancillary industrial undertaking _ Minimum number of workers required in a sick industrial undertaking during the preceding financial year is 50 in case of the unit is run on power and 100 in case the unit is not run on power. _ The Co has been registered under the Companies Act for less than 5 years

(b) Shipping companies, Industrial units registered as SSIUs and serviceunits as Hotels etc. are not eligible for reference.

BIFR proceedings:

The first hearing should normally be attended by an official who is thoroughly conversant with the account to present the Bank’s stand and also should be well prepared to reply to any question which may be asked by BIFR to have proper information on all important issues vis-à-vis Bank’s stand with the officials at BIFR Cell New Delhi.

If BIFR has doubts about the genuineness of sickness of the company, it may dismiss the reference ab-initio or take other steps like Special Investigative audit, further enquiry etc. to ascertain the genuineness of sickness and thereafter initiate action as per the provisions of SICA.

As the branch/Region is in the know of the background and present status of the Company, the Branch/Region is required to keep the Corporate Centre and BIFR Cell New Delhi abreast with the development in the account and to ensure the same before each date of hearing.

Operating Agency:

When BIFR decides about the sickness of the company and appoints Operating Agency, which is normally a Bank or Financial Institution, two situations may arise (a) our Bank may be Operating Agency (b) any other Bank, Financial Institution as Operating Agency.

When our Bank is NOT the Operating Agency.

a) Our Bank should furnish complete details of our dues including uncharged interest upto the cut off date.(b) Inter Institution meetings convened by OA should be attended along with Bank's stand on the specific issues duly approved by appropriate authority.(c) Upon receipt of Draft Rehabilitation Scheme (DRS), it should be scrutinized to verify that it is as per the stand taken by the Bank earlier, if inconsistencies are observed, objection may be filed for their rectification within the time prescribed. Any amendments subsequent to the date are not accepted.

When our Bank is the Operating Agency:


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a) Whenever our Bank is appointed as Operating Agency, the Bank is entitled for fees together with actual expenses to carry out the function/duties of operating Agency (OA) and to claim such fees and expenses during the course of proceedings before the BIFR.b) Whenever our Bank is appointed as Operating Agency, we should act impartially with the unit as the focal point for rehabilitation, irrespective of the promoters, guarantors and / or securities offered to the Bank and our relationship with the borrower like filing of suit, etc.c) i) While appointing Operating Agency to look into the rehabilitation of the sick company, BIFR requires to take any of the steps mentioned in Section 18 of SICA for exploring the possibility of rehabilitation of unit.These steps include –

• Financial Reconstruction of sick Industrial Company.• Change in and / or take over of the Management.• Merger / amalgamation of the company.• Sale or lease of part or whole of the Industrial Company.• Rationalisation of work force.• Any other measure.

With the permission / approval of BIFR, normally, the scheme should be completed within 90 days.

Ii) As soon as the company submits the Draft Rehabilitation Scheme, the OA should scrutinize the same to ensure that the scheme submitted is as per the directions / guidelines of BIFR. Along with valuation of assets of the company, techno economic viability study should be carried out by internal expertise or reputed external agency and thereafter call for inter-institutional meet, including Govt. agencies, to tie up the reliefs and concessions required by the company. Once the DRS is tied up, the scheme should be submitted to BIFR for approval.

iii) During the above period of finalization of DRS, OA should submit periodically the developments to BIFR regarding compliance of the direction by all the concerned.

iv) The DRS may include -2. A regular Rehabilitation scheme3. One time settlement of dues4. Rehabilitation cum one time settlement of dues with any of the5. Above measures.

v) Once the scheme is sanctioned, BIFR may appoint OA or any other Bank or Financial Institutions as Monitoring Agency to monitor the implementation of the scheme and advise BIFR periodically about the performance of the unit and other developments regularly.

If there are no proposals received for rehabilitation of the unit, BIFR may after issuing notice, send the file to High Court for winding up, alongwith its opinion.

A sick Industrial company comes out of the purview of BIFR - When the net worth of the company becoming positive. When BIFR confirm opinion that the company shall be wound up.


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Where our Bank is appointed as Operating Agency, we should keep in mind following points:

a) All the guidelines provided by the Board are studied carefully.b) To maintain follow up with the company for timely submission of DRS.c)To study the DRS submitted by the company and reliefs and concessions sought therein by the company and to verify that the DRS submitted by the company is in total compliance with the guidelines provided by the Board.d)To conduct joint meeting of all stake holders, including government organisations to discuss the reliefs and concessions sought by the company in the DRS so as to take the views of all concerned about such reliefs and concessins sought by the company and accordingly proposals are incorporated in DRS.e) To get the DRS modified as per the suggessions made by the stake holdes and acceptable to the company.f)To prepare minutes of the joint meeting and submit the same to Board alongwith fully tied-up DRS, if any emerges or to submit our Bank's views/recommendations about the DRS to Board for consideration and further direction.g) Act of any non-co-operation from the company should be brought to the notices of the Board for further direction to the company to any other appropriate action against the company.i)To ensure timely action is initiated and compliance of Boards direction is completed within the stipu;ated deadlines.j)No correspondence is made directly with the Board and all correspondence and submissions are made to respective Regional Offices.

AAIFR

If any of the parties is aggrieved by any of the order of BIFR, such affected party may prefer an appeal within 45 days from the date of order to Appellate Authority for Industrial & Financial Reconstruction (AAIFR)

Competent authority to take a decision on Reference

The Competent Authority at the Corporate Centre will take a decision whether to support the Company’s reference to BIFR or oppose the same. The Competent Authority is as under:

i. Chairman and Managing Director: Outstanding (Fund + Nonfund based) above Rs. 60.00 Crores.ii. Executive Director- outstanding (Fund + Non-fund based) Above Rs. 30.00 Crores upto Rs. 60.00 Crores iii. General Manager (Respective Functional Head – SME, Wholesale Banking, Rural and Agril, Retial ): outstanding (Fund + Non-fund based) beyond the powers of Zonal Manager upto Rs. 30.00 Crores in case of standard and sub standard account General Manager ( Credit Monitoring & Rehabiitation of sick units BIF/CDR) beyond the powers of Zonal Manager upto Rs 30 crores in case of other accounts. iv. Zonal Manager: outstanding (Fund + Non-fund based) upto respective delegated powers for sanction.


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Other Matters:

In all the BIFR sanctioned schemes, the Bank should not only keep track of the implementation of the schemes but also monitor the performance / progress in the working of the units. Besides, undertaking an annual review of the scheme at Bank's level, the Bank is required to submit progress / review reports to BIFR where they are the operating agency.

In the cases where BIFR has passed winding up orders, Bank should make arrangements for filing of suit or take up with the concerned High Court for expediting the process of liquidation of the non-viable sick company. Through establishing a proper rapport with BIFR, Bank should take maximum advantage of the other powers of BIFR such as ordering sale of assets, change of management or merger of the sick unit with the healthy unit, initiating misfeasance proceedings against the promoters or blacklisting the promoters.

In certain cases, rehabilitation scheme envisaging One Time Settlement (OTS) of Bank dues formulated by operating agency for approval of BIFR, may involve sacrifices by the Bank by way of write-off of interest either in full or in part or write off of principal amount in part. Having regard to various facts and circumstances of the case and based on the scheme formulated by the operating agency, Bank should accept such OTS subject to the same being approved by the competent authority empowered to approve such proposals.

In cases of urgency, where decisions have to be conveyed to BIFR / AAIFR or any such authorities about acceptance of rehabilitation scheme envisaging sacrifices beyond the powers of Chairman & Managing Director and Executive Director but if they are otherwise satisfied about the commercial soundness of the proposal, the Chairman & Managing Director and Executive Director are authorized to accord in principle approval of the proposed scheme.

Authority for sanctioning Rehabilitation Packages

In respect of sick units, BIFR or non-BIFR (including SSI sick units) authority to sanction rehabilitation packages is delegated as under.

i) All Senior Branch Managers (including Senior Manager- Credit/ Recovery in ROs), Chief Managers (Branches) and Deputy Regional Managers can sanction rehabilitation packages if there is no sacrifice in the account (strictly in terms of BIFR sanctioned scheme in the cases of BIFR accounts) upto their discretionary lending powers. However, Chief Managers (Branches) and Deputy Regional Managers can consider reduction in rate of interest with prospective effect (strictly in terms of BIFR sanctioned scheme in cases of BIFR accounts).

ii) All Regional Managers and above can sanction rehabilitation packages if there is sacrifice in the account such as refund of penal interest charged, reduction in rate of interest with retrospective effect upto their discretionary lending powers subject to their power of sacrifice for compromise settlements (strictly in terms of BIFR sanctioned scheme in the case of BIFR accounts).


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iii) If the borrower is not agreeable for "Right of Recompense" (except where BIFR has denied right of recompense), Zonal Managers can sanction such rehabilitation packages upto their discretionary lending powers, subject to their power of quantum of sacrifice for compromise settlements, after obtaining sanction for waiver of right of recompense from Corporate Centre, Mumbai. Chairman and Managing Director/ Executive Director will take a decision on waiver of right of recompense. However, for accounts below Rs.50lacs (outstanding), Zonal Managers need not obtain sanction from Corporate Centre, Mumbai for waiver of right of recompense.

iv) Sanctioning of rehabilitation proposals shall be subjected to PSR Noting by the next higher authority. In the case of Senior Branch Managers and Senior Manager- Credit/ Recovery in Regional Office, Deputy Regional Manager shall be the PSR Noting authority.In respect of Chief Managers (Branches) and Deputy Regional Managers, Regional Manager not below the rank of Assistant General Manager shall be the PSR Noting authority.

Potential Sick Units

(i) While SICA 85 vide Section 23 defines a "Potential Sick Industrial Company", there are no accepted definitions of "Potential Sick Units" in respect of Partnership, Sole Proprietorship and other firms including SSI Units.

(ii) However, based on the above definition and from the experience, one can draw an inference that any unit, irrespective of its constitution, can be considered a "Potentially Sick Unit" if it starts incurring cash losses repeatedly and it is likely to make cash losses, in the coming years also.

(iii) In such cases, branches should take all effective steps as per extant guidelines to arrest the sickness and to rehabilitate the account for recovering our dues.

(iv) It should be well understood that no unit should be classified as 'Sick or Potentially Sick' if:

(a) the unit has wilfully defaulted in repayment of the bank's dues even though it has been making adequate profit and net worth is positive.

(b) the unit has incurred cash loss, but has no financial imbalance.

(c) only a particular unit / division of the company has incurred cash losses, while the overall performance of the company shows profit.


State whether following statements are true or false.

1. To classify a Unit as Sick Industrial company, it must be registered at least for a period of five years


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2. In case of Weak Industrial company the accumulated losses are equal to or more than 50% of its peak net worth for immediately preceding four years.

3. A Sick Industrial Company independently cannot make reference to BIFR4. If 75% of the secured creditors or more have taken decision to proceed under

SARFAESI Act, reference can not be made to BIFR5. Even after making reference to BIFR by the company, bank take legal action for

recovery of dues.6. DRS under BIFR may recommend for one time settlement.7. Any party who is aggrieved by the order of BIFR can file appeal

a. in AAIFR within 30 days.8. A wilful defaulter can also take benefit of provisions of SICA 1985.9. A company will come out of of BIFR when its net worth will become positive.10.Unit can be classified as Potential sick unit, if it is incurring cash losses and likely to

incur cash losses in future.

ANSWERS:

Q 1 2 3 4 5 6 7 8 9 10

A TRUE TRUE FALSE TRUE FALSE TRUE FALSE FALSE TRUE TRUE


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SECTION II - NPA MANAGEMENT

NPA MANAGEMENT- Need of the hour

In present scenario NPAs are at the core of financial problem of the banks. Concrete efforts have to be made to improve recovery performance. Measures required to be undertaken are mainly twofold. Banks should make efforts first to avoid fresh addition on NPAs by their effective appraisal and then through monitoring and secondly to recover the amount from accounts which have already turned bad. The main reasons of NPA are willful defaults, ineffective supervision of loan accounts and lack of technical and managerial expertise on the part of borrowers. NPAs put detrimental impact on the profitability, capital adequacy ratio and credibility of banks.NPA is a double-edged weapon. On the one side bank cannot recognize interest on NPAs accounts and on the other, it is a drain of the bank’s profit by way of provisioning. Higher NPA ratio shakes the confidence of investors, depositors, lenders etc. It also causes poor recycling of funds, which in turn will have deleterious effect on the deployment of credit. The non-recovery of loans effects not only further availability of credit but also financial soundness of the credit of organisation.There are a number of factors responsible for weak performance and consequently account turning into NPAs. NPAs occur due to the factors attributed to the borrowers, lenders and also due to external environment. Borrowers may divert their funds for expansion, modernization, diversification etc.Banks are required to have adequate preventive measures in fixing pre-sanctioning appraisal responsibility and an effective post-disbursement supervision. Banks should continuously monitor loans to identify accounts that have potential to become non-performing.Effective use of recovery tools can help in recovery of NPA like –

Picking up early warning signals and providing remedial measures in time can prevent the account from turning into NPA

Regular contact with borrower/guarantor has its own impact in NPA recovery Effective use of legal measures and SARFAESI ,Lok Adalats and Public

Money Recovery Act of the respective States. Reminders especially in rural areas Threats of the impact of CIBIL Timely Rephasement/ Reschedulement can help in prevention Negotiation skills can help in better NPA recovery

In Agriculture sector, organising “Chaupal” meetings for financial literacy and educating the people for timely repayment, facilitating them for regular repayment of loans, peer pressure and meeting the borrowers in presence of their family members - are some of the proactive steps which may help in getting regular repayment of loans and reducing the legal recourse.Time and again it is needed that all the staff members should support in recovery of NPA. There is no standard formula of recovery but if we dedicatedly try to recover the dues and use the different tricks as per demand of situation we have sufficient tools and experience for recovery even in hard core accounts.


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GUIDING PRINCIPLES OF DOMESTIC RECOVERY POLICY 2012

Quick Bites Objective of Recovery Policy 2012 Guiding Principles of Recovery Policy

Recovery Policy:

The Recovery Policy is a non-statutory policy document issued by Bank on a Voluntary basis. Present is the modified /revised version and shall be called Recovery Policy 2012

Objective:

The basic objective of the Recovery Policy is to maximize recovery of dues under the credit portfolio of the Bank through effective credit monitoring for prevention of slippages and to maximize recovery in Non Performing Assets (NPAs) and prudentially written off accounts.

Guiding Principles of Recovery Policy:

Day-to-day monitoring is the first step towards ensuring good recovery and in extending timely assistance for any temporary mismatch of the cash flow of the customers in running their day-to-day business.

1. Greater focus is laid on preventing an account from becoming NPA rather than applying remedial measures at the post-NPA stage

2. The basic approach for recovery is practical and non-prejudiced.

3. Fair treatment and persuasion are the basic principles of recovery mechanism. Legal action is considered only as the last resort.

4. Recovery action in each case would depend upon the characteristics of the case specific and prevailing circumstances; general consistency in approach is expected to be maintained while dealing with the defaulting borrowers.

5. More considerate treatment would be given to the borrower customers who continue to make payments even after being classified as NPA.

6. Since timely rescheduling/restructuring helps in preventing further deterioration of the account, rescheduling / restructuring / rehabilitation of accounts as per RBI guidelines will be resorted to wherever warranted, on merits.

7. In respect of restructuring proposals, the package is generally finalized in consultation with other lenders. Cases eligible for coverage under the Corporate Debt Restructuring (CDR) System are intended to be referred to the CDR Cell.


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8. In the NPA cases where the borrower unit / company may be facing long term problems with structural deficiencies and may not be able to operate on sustained profitable lines, including non-viable sick / closed units, Compromise/ One Time Settlement (OTS) option is explored as an exit route

9. In case of units in operation, but not found to be in a position to generate adequate surplus to service the debt on a long term basis even after examining the possibility of restructuring, Compromise/OTS option would be considered on merits.

10.Bank may consider, assignment/ sale of financial assets to ARCs / Banks / FIs / NBFCs as an alternate option of Resolution and reduction in NPA / PWO portfolio in cases where protracted litigation are going on and/ or otherwise chances of recovery are poor, proving difficult and time consuming.

11.Enforcing provisions of declaring ‘Willful Defaulters’ in accordance with RBI guidelines for helping in maintaining credit discipline and creating a recovery climate.

12.While adopting Recovery measures Bank shall follow ‘CODE FOR COLLECTION OF DUES AND REPOSSESSION OF SECURITY’, as approved by Board of Directors. Appointment of Recovery/ Enforcement Agents shall be in accordance with guidelines issued by Reserve Bank of India from time to time.

13.Bank desires to be proactive and be guided by RBI guidelines in complying with the Recovery measures for the asset quality.

Inspection of Securities in NPA and PWO Accounts:

All NPA and PWO account should be inspected and copy of reports should be sent to respective Regional Managers as under:

Rs One crore and above : Half yearly in June and DecLess than one crore : Yearly in January

In case access is not allowed to the Inspecting Officers, discrete enquiries must be made as regards status of securities and possession thereof, borrowers’ present activities/address etc and suitable observations be given in the report . Such observation be also quoted while noting status of PWO accounts. In case any adverse observations branch should also get land records/Registrar of companies’ records searched to ensure that no outside interest has been created thereon.

Appropriation of Recoveries in NPA accounts.

In respect of existing NPAs where suit is not filed, recoveries effected in the account ( Including recovery under Pubic Money Recovery Act ) from time to time shall be appropriated in the following manner.

i) Towards reduction in Book Dues.


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ii) Towards recovery of expenses.iii) Towards unapplied interest.

Recovery in suit filed/decreed accounts shall be appropriated first towards legal charges/expenses awarded by the court, there after interest due and finally principal amount.

Record of Unapplied Interest /charges

Branch shall maintain a record of unapplied interest and other charges at contracted rate and update the same at periodical intervals.

Insurance Charges, Assets Valuation charges, Stock Audit Charges, Security Charges etc.

In respect of NPA accounts, which are not operated, the above mentioned charges shall not be debited to the accounts. The expenses incurred shall be debited to the Bank’s Profit and Loss account and record of the same shall be maintained.

Additional Funding in genuine cases.

Borrower having genuine problems due to temporary mismatch in funds flow or sudden requirements of additional funds may be entertained as follows:

All senior branch manager ( including Sr Manager ( Cr/Recovery ) in R/Os ) and above are authorised to sanction Special Temporary Limits ( STL ) with proper justifications, within their existing discretionary lending powers i.e. up to the remaining portion in DLP. The limit/present outstanding in the account plus the STL shall determine the level of sanctioning authority. It shall be satisfied that the temporary mismatch is not because of diversion of short term funds outside business or for long term uses.

Disposal of Assets in NPA/PWO Accounts

Many times, borrowers approach the bank to allow them to sell the assets charged to the bank and deposit the proceeds in the borrowal accounts with the Bank. Another Bank or Financial Institution may also approach for sale of assets commonly charged to them and us. There may be instances where a third party may approach the bank to buy the assets charged by the borrower to the Bank. In such cases Chief Manager ( including Dy. Regional Managers Scale IV and above ) and above can authorize sale of such assets in accounts, as per norms.

Before authorising sale of current assets, a fair value of such assets should be ascertained. In respect of fixed assets, valuation of such assets should be conducted by bank’s ( or other bank’s/FI’s Valuer ) approved valuer. In respect of movable machinery, fair market value should be ascertained or valuation should be done before authorising sale of assets.( valuation of the lending FI may be considered for approval if done by a Government/Wealth tax approved valuer ).


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The sanctioning authorities should ensure that the amount to be deposited in the borrowal accounts consequent upon such authorisation of sale of assets should generally not be lower/less than the Net Present Value ( NAP ) of the realisation value of assets being allowed to be disposed off ( fair market value and not the distress value ) net of the cost of realisation in accordance with RBI guidelines.

Monitoring of NPA/PWO/TWO Borrowal Accounts:

Bank has evolved a system of continuous monitoring of large NPA/PWO borrowal accounts on monthly basis. The purpose of regular monitoring is :

1. To examine whether account can be upgraded by rechedulement/restructuring/rehabilitation.

2. To attempt to make appropriate provision because of deterioration in value of security consequent upon ageing process.

3. To prevent the assets from becoming loss assets.4. To explore the possibility for an acceptable compromise settlement.5. To ascertain current status of DRT/BIFR proceedings.

The report should give details of efforts made to recover the dues and developments in the account. The periodicity for submission of Monitoring Reports is as under:

For NPA & PWO accounts with O/s balance (FB+NFB)Limit or O/s whichever is higher

Report to be submitted by/Reviewed by

Periodicity

Accounts Rs 10 Crs and above Through Zonal Manager by CMD/ED

Bi monthly

Accounts Rs 5 Crs and upto Rs 10 crs Through Regional Managr by Zonal Manager

Bi monthly

Accounts Rs 1 crore and above and below Rs 5 crore

Through Regional Manager by Dy Zonal Manager

Quarterly

Accounts Rs 10 Lacs & above and below Rs 1 crore

Through Dy Regional Manager by Regional Manager

Quarterly

Accounts Rs 5 Lacs & above and below Rs 10 Lacs

By Dy Regional Manager Monthly/Regular monitoring.

Account below Rs 5 Lacs By Branch Managers Monthly/Regular Monitoring.

Status Review of NPA AccountsStatus notes of all NPA accounts giving details of action already initiated and proposed to be initiated should be submitted to their Regional /Reporting authority at half yearly intervals who shall note the status of the account and advise steps to be taken for expediting recovery in NPA accounts.

Review of PWO/TWO Accounts


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All PWO accounts should be reviewed on half yearly basis as on 31st December and 30th June every year by way of status note as follows:

PWO accounts Rs 10 crores and above by Corporate OfficePWO accounts Rs 5 crores and above by Zonal HeadPWO accounts Rs 1 crores and above by Regional HeadPWO accounts upto Rs 1/- crore by Branch Head

Final/Pure Write Off:

NO FINAL WRITE OFF will be considered at branch level headed by Chief Manager or below

Final write off may be considered by the Bank only when it becomes clear that there is absolutely no chance of further recovery in the account:

Either by way of Realization of Assets charged OR

By way of proceedings against uncharged assets standing in the name of borrower/s and Guarantor/s OR

By way of proceeding for personal liability of borrower and guarantor/s AND

Further continuing of the account in the books for follow up/recovery will only add cost to Bank and wastage of resources and thorough check up has been made regarding non availability of assets and means of the borrower/guarantors ( or legal heirs ) have been ascertained.

Where frauds are reported in advances accounts and complaints are lodged with CBI/Police Authoities and criminal investigations/proceedings are initiated by such authorities, NO FINAL WRITE OFF WILL BE CONSIDERED EXCEPT with authority of MCB, pending action by outside investigation agencies. In other cases delegated powers to consider final write offi are as under:

Name of Authority For accounts o/s in GL

For PWO accounts

Branch Head ( Scale I to IV) NIL NILBranch Head and Dy Regional Manager ( Scale V)

Rs 6 lacs Rs 12.50 lacs

Regional Head ( scale V&VI)/DGM Head branch

Rs 12.50 Lacs Rs 20 Lacs

Zonal Head and above Upto delegated powers of Sacrifice

Upto delegated powers of Sacrifice



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1. In case of NPA accounts of Rs One crore and above, inspection of securities is to be done a) half yearlyb) Yearlyc) No need to do inspection d) Half yearly in June and Decembere) Quarterly

2. In case of NPA account, if there is recovery in the account, it should appropriated in following sequence. 1) Book Dues 2) Expenses 3) Unapplied Interesta) 2-3-1b) 3-2-1 c) 1-2-3 d) In any ordere) Only towards book dues.

3. Regular monitoring of NPA accounts upto Rs 5 lac is to be done by

a) Regional Manager b) Dy Regional Managerc) Branch Head d) Any bodye) Credit Officer of the Branch

4. In case of NPA /PWO accounts of Rs 5 crore and above branch to submit monitoring report to Regional Office on ___________basis.

a) Monthly b) Bi-monthly c) Quarterly d) Half yearly e) Yearly

5. All PWO accounts are to be reviewd once in _____ months.

a) 12 monhs b) 03 months c) 06 months d) No Need to reviewe) No specific guidlines

State following statements are TRUE or FALSE

1.Main objective of Recovery Policy 2012 is to take legal action in respect of all NPA account for recovery of dues.


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2. Eventhough the account has become NPA and is not operative, it will be in order for branch to debit banks charges, valuation charges etc to that account.

3. In case of NPA account, no additional funding can be sanctioned at branch level.

4 .In case of NPA account, if borrower is willing to sell the assets and pay the due bank can consider his request , subject to certain condition.

5. In case of NPA account branch to submit status notes to Regional Office , once in six months, to appraise the developments in the account and present status of account.

Q No 1 2 3 4 5Ans d c c b cQ No 1 2 3 4 5Ans False False False True True


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CAUSES AND COSEQUENCES OF NON-PERFORMING ASSETS

Quick Bites Causes of Non-Performing Assets- Internal & External Consequences of Non-Performing Assets Consequences on Quality of Lending Consequences on Profitability Consequences on capital Adequacy Consequences on other factors

Introduction:

By the late 1980s, the state of the Indian financial sector was precarious. Failing profitability, dubious loan portfolio, lack of credit discipline, politicized appointment of chief executives, loss making rural branches, deteriorating customer service was the principal maladies. By the 1990, many of the nationalized banks had to run through their capital. Banks were saddled with an alarming level of bad loans. The massive funds blocked in such sticky loans could not be recycled due to non-recovery of dues in Advances . This led to the erosion of banks’ profitability as they require higher provisions. The reasons for growing NPAs, as revealed by the Reserve Bank of India study group , are as follows:

1. Diversion of funds, mostly for expansion/ diversification/ modernization, taking up new projects or helping/ promoting associate concerns;

Time/ cost overrun during the project implementation stage, Factors internal to business like product/ marketing etc failure, inefficient

management, Strained labour relations and inappropriate technology/ technical problems and product obsolescence;

Changes in the macro environment like recession, infrastructural bottle necks etc; Changes in Government policies( export-import duties); Non payment in other countries; Other systemic deficiencies like delay in release of sanctioned limits by banks.

It is also revealed that the internal factors outweighed the external factors in accounts turning bad.

CAUSES OF ASSETS BECOMIMNG NON-PERFORMING:

The various causes that make an asset Non-Performing can be broadly classified into External Causes and Internal Causes.

(i) The External Causes are those which are attributable to reason, which are beyond the control of the borrower or the management.

(ii) The Internal Causes are those which are within the control of the borrower or management and attributable to them.


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External Causes

The following could be termed as External Causes for an account becoming an NPA:

(i) Adverse Government Policy guidelines affecting the production/marketing Sales of the product.(ii) Natural calamity leading to destruction of assets.(iii) Closure of factory due to strikes, court orders.(iv) Recession in the Industry.(v) Adverse change in the projected demand due to factors like environmental regulations, change of fashion, change in consumer needs etc.(vi) Inputs/ power shortage(vii) Price escalation

Internal Causes

The Internal Causes for an account becoming NPA could be any or many of the following:

(i) Management:

(a) Willful default.(b) Dishonesty of partners, directors, proprietor etc.(c) Dispute among partners, directors etc.(d) Lack of proper organizational set up and control.(e) Lack of farsightedness/ hesitation for modernization

(ii) Marketing: Inadequate product base. Lack of distribution channels. Irregular delivery. Inappropriate pricing. Unhealthy competition

(iii) Financial:6. Faulty costing and pricing.7. Lack of resources.8. Diversion of funds for unproductive expenditure.9. Costly outside borrowings.10. Increased cost of production.11.Under financing

(iv) Production:

1. Inappropriate technology.2. Lack of production planning and control.3. Frequent machine breakdowns.4. Poor labour productivity.5. Inferior quality of finished goods.


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6. Faulty inventory planning.7. Poor quality control.8. Improper site/ location

CONSEQUENCES OF NON-PERFORMING ASSETS

Whenever an asset becomes Non-Performing its consequences on the bank can be manifold and they can be broadly classified into 4 categories:

(i) Consequences on Quality of Lending.(ii) Consequences on Profitability.(iii) Consequences on Capital Adequacy.(iv) Consequences on other factors.

(i) Consequences of NPA on Quality of Lending

The most important consequence of an asset becoming NPA is the effect on the quality of the advances portfolio. The health of the Advances portfolio is measured in terms of its capacity to generate income. Ideally all advances, properly appraised and sanctioned, should remain performing till recovery of all the dues. However, due to various factors described above, accounts become non-performing. Thus, the health and quality of the lending portfolio is measured by the level of non-performing assets. The higher level of NPA would render lending portfolio less healthy. Higher percentage of NPA to total Advances reflects poorly on the quality of appraisal, follow-up and recovery. Thus, the level of NPA provides a quantitative picture of the qualitative aspects of Credit Administration & Credit Management.

(ii) Consequences of NPA on Profitability

(i) The direct outcome of an account becoming NPA is two-fold:(a) Loss of income by way of interest etc.(b) Provisioning requirement.

(ii) As per extant guidelines, when an account becomes NPA, income by way of interest etc. cannot be recognized on accrual basis. In other words, On an account turning to NPA category , banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest .

Therefore, an immediate outcome of an account becoming NPA is the loss of income to the Bank by way of interest etc.

(iii) Further, as per norms for provisioning prescribed by RBI, bank will have to provide for certain percentage of outstanding amount against the loss that may arise, due to the classification of an account as NPA. Such provisioning requirement, as per the regulatory norms may vary from 15% to 100% of balance outstanding, depending upon the classification of an asset as sub-standard, doubtful or loss and also on the realizable value of securities available. Such provisions have to be made from the Gross Profit made in a year which includes interest income from other standard assets.


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(iv) To illustrate the point, assume that an account with outstanding balance of Rs. 10,00,000/- is treated as NPA. Assuming that the average rate of interest on the a/c is 12%, the loss of income by way of interest in a year would be about Rs. 1,20,000/- (Approx.). If the account is classified as substandard a further provision of Rs. 1.50/- lac @ 15% will have to be made from the Gross Profit. Therefore, the net Profit would be reduced by Rs. 1,20,000/-+ 1,50,000/- = 2,70,000/- on account of the a/c being treated as NPA.

(iii) Consequences of NPA on Capital Adequacy

(i)As per RBI’s guidelines, all commercial banks are required to maintain a minimum CRAR of 9 percent on an ongoing basis, which will be 11.5% under Basel III on an ongoing basis

(ii) The unimpaired capital & reserves can be strengthened either by issue of fresh capital or by retaining profits. While the issue of fresh capital will depend upon statutory guidelines, market conditions, performance of the bank etc. the addition to reserves is directly related to the profitability of the bank. The profitability in turn is dependent on the income earning capacity, which is dominated by interest income from Advances.

(iii) If the Non-Performing Assets are more, the income generating capacity gets reduced and consequently the profitability is affected thus affecting the capital adequacy of the bank.

(iv) The effect of not achieving the capital adequacy norm is that risk weighted assets like advances cannot be increased without a corresponding increase of at least 9 % in unimpaired capital and reserves.

(iv) Consequences of NPA on other factors

Besides the three major consequences of NPA, there are some other ramifications of increase in NPA. Some of them are given below:

(i) International banks insist on all banks having equal prudential norms for doing business with them. Therefore, banks having large NPA would find it difficult to have banking relations with them, like opening of LCs, negotiation of documents under LCs, opening lines of credit etc.

(ii) RBI has modified the guidelines on issue of licenses for opening of new branches, whereby only those banks whose NPA levels are below the desired level will be allowed to open new branches.

(iii) High level of NPA prevents the banks from obtaining a good credit rating which in turn, would impair its ability to issue shares on high premium

(iv) In present competitive environment, market analysts, press media, business channels, critically comment upon the performance of Corporate and specifically Banks and Financial Institutions. Health of Assets, level of net and gross NPAs and consequently the profitability of Bank is always under scanner of Market. This has direct bearing on the stock price of


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share having bearing on the capacity of the Bank to raise fresh capital as well as the confidence of all stake holders viz. Investor (Retail) FIIs, Corporate and Banks consultants.

The huge level of NPA also affects the Return on Assets, Net worth, Autonomy, Business expansion, image of the Bank etc.

RBI has taken action on the following areas of concern to contain the increasing NPAs among the Banks:

1. Restriction on expansion of Risk weighted assets2. Capital restoration plan3. Approval for opening new branches4. New lines of business5. Paying off costly deposits6. Drive to reduce NPA

To conclude, Bank credit is the catalyst to economic growth of the country. Any bottleneck in the smooth flow of credit like NPA will have serious repercussions in the economy.


State following statements True or False.

1. The increasing NPA has only an impact on profitability of Bank.

Diversion of funds is an external cause of NPA.

Frequent strike in the factory is an external cause of NPA

4. Increasing NPA will have an adverse impact on business expansion.

5. Increasing NPA may affect incentive schemes for staff.

Bifurcate the following causes of NPA into different categories.

No. Cause No. Cause

1 Adverse Government Policy 2 Poor quality of product

3 Inadequate product base 4 Increased cost of production

5 Price escalation 6 Unproductive expenditure

7 Inappropriate technology 8 Natural calamity

9 Unhealthy competition. 10 Irregular delivery


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ANSWERS

Q 1 2 3 4 5

A FALSE FALSE TRUE TRUE TRUE

Type of cause Question No. Type of Cause Question No

Financial cause 4 ,6, Production 2, 7,

Marketing cause 3 ,9, 10 External cause 1 ,5, 8 ,


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INCOME RECOGNITION, ASSET CLASSIFICATION & PROVISIONING NORMS IN ADVANCES PORTFOLIO &CAPITAL ADEQUACY NORMS

1.0 Introduction

In December 1991, the Committee on the Financial System, under the chairmanship of Shri M. Narasimham [Narasimham Committee] recommended for the introduction of the prudential norms on income recognition, asset classification and provisioning in advance portfolio of banks in line with the international practices. The RBI introduced these norms in banks in a phased manner starting from the year 1993.

The prudential norms on Income recognition require banks to classify advance accounts as Non-performing Assets [NPA] if interest or installment remains unpaid for a certain period and not to recognize income on such accounts on accrual basis.

The prudential norms on Asset Classification require banks to classify all advance accounts into four categories namely Standard, Sub-standard, Doubtful and Loss assets depending on the period for which they have remained Non-Performing Assets and their recovery prospects.

The prudential norms on Provisioning require banks to make provision on different types of assets. The basic purpose of these norms is to move towards greater consistency and transparency in published accounts. With a view to moving towards international best practices and ensure greater transparency, the Reserve Bank of India has decided to adopt the “ 90 days overdue” norm for identification of NPAs, from the year ending 31 st

March,2004. However, Our Bank adopted to switch over to -90- days norms from the quarter ending 31st December, 2003 it self.

With the introduction of these norms the RBI withdrew the health code norms and made it optional on the part of banks to use the same.

2.0 Definition of Non-performing Assets [NPA]

Conceptually, an asset becomes non-performing, when it ceases to generate income for the Bank. The RBI has given the following guidelines for classification of advance accounts to NPAs.

2.01Loan Accounts ( TL/DL)


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Quick Bites Concept of NPAs Various Prudential Norms Income Recognition norms Asset Classification Norms Provisioning Norms

A Loan account [term loan/DL] is to be classified as NPA when interest and/or installment of principal remain overdue for a period of more than 90 days.

For example, a loan account will not be classified as NPA on 31st March 2013, if the interest and installment on principal have been fully serviced up to 31st December, 2012.

A loan account where the interest has been serviced but the installment has remained unpaid will also be classified as NPA.

2.02 Cash Credit or Overdraft Account

A cash credit or overdraft account is to be classified as NPA when it remains out of order as on date of Balance Sheet for reasons as given below:

If the outstanding balance remains continuously in excess of the sanctioned limit / drawing power for 90 days, OR

where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits for 90 days as on the date of Balance Sheet, OR

Credits are not enough to cover the interest debited during the same period;

ExampleAs on 31.03.2013, if we find that the outstanding balance in a cash credit account has remained continuously in excess of the sanctioned limit / drawing power during the March 2013 quarter, it should be classified as NPA.

If as on 31st March 2013, we find that in a cash credit account the outstanding balance in the account is less than the DP / sanctioned limit and there has been no credit to the account during March 2013 quarter, the account has to be classified as NPA.

Further if as on 31st March 2013, we find that in a cash credit account the outstanding balance in the account is less than the DP / sanctioned limit and the total of all credits made during March 2013 quarter is less than the interest debited in this quarter, the account has to be classified as NPA.

2.03 Bill purchased / Bill Discounted account

A bill purchased / bill discounted account will be classified as NPA if the bill remains overdue for a period of more than 90 days from the due date.

2.04 Agricultural advances

A crop loan account for short duration crop will be classified as NPA if the instalment of principal or interest thereon remains overdue for two crop seasons subject to maximum 12 months. [i.e. remains unpaid for two crop seasons beyond due date.]


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A crop loan account for long duration crops will be classified as NPA if the instalment of principal or interest thereon remains overdue for one crop season, subject to maximum 12 months . [Long duration crops means crops with crop season longer than one year.]

RBI has directed that the repayment schedule of the rural housing advances to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme should be linked to crop cycles.

In case of term loans given to non-agriculturists the account becomes NPA on the basis of 90 days delinquency norms as applicable to non-agriculture finance.

Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of thequarter.

2.05 In respect of derivative transactions, the overdue receivables representingpositive 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.

3.0 NPA due to temporary deficiencies in Accounts

In case of cash credit accounts, where the stock statement has not been obtained for a continuous period of more than three months and the outstanding in the account is based on drawing power calculated from stock statements which is older than -3- months would be deemed as irregular.

A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of -90- days even though the unit may be working or the borrower’s financial position is satisfactory.

An account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.

4.0 Other points on NPA classification

Consortium advances: In case of consortium advances, the account will be classified as NPA by a member bank depending on the record of recovery in its own books irrespective of the recovery status with the lead bank or any other member bank.

NPA classification borrower wise and not facility wise: In case any one of the facilities sanctioned to a borrower is classified as NPA, all other credit facilities availed by him and also the investments made by the bank in all securities issued by him will also be classified as NPA.

Exempted Categories: Advance against bank's term deposits, NSCs, IVPs, KVPs, and Life Policies will not be classified as NPA if the outstanding balance is fully covered by such securities. These advances also come under the exempted category for the purpose of income recognition and asset classification.


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Advance guaranteed by Govt. : The credit facilities guaranteed by Govt. [both central or state] will be treated as NPA as per the above mentioned 90 days delinquency norms. [However the treatment is different for the purpose of asset classification.]

Post-shipment Supplier's Credit

i. Credit extended by the banks covering export of goods to countries for which the ECGC’s cover is available, EXIM Bank has introduced a guarantee-cum-refinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days from the day the bank invokes the guarantee after the exporter has filed claim with ECGC.

ii. Accordingly, to the extent payment has been received from the EXIM Bank, the advance may not be treated as a nonperforming asset for asset classification and provisioning purposes

Export Project Finance

i. In respect of export project finance, there could be instances where the actual importer has paid the dues to the bank abroad but the bank in turn is unable to remit the amount due to political developments such as war, strife, UN embargo

ii. In such cases, where the lending bank is able to establish through documentary evidence that the importer has cleared the dues in full by depositing the amount in the bank abroad before it turned into NPA in the books of the bank, but the importer's country is not allowing the funds to be remitted due to political or other reasons, the asset classification may be made after a period of one year from the date the amount was deposited by the importer in the bank abroad.

Project Loan- 'Project Loan' would mean any term loan which has been extended for the purpose of setting up of an economic venture. Banks must fix a Date of Commencement of Commercial Operations (DCCO) for all project loans at the time of sanction of the loan / financial closure (in the case of multiple banking or consortium arrangements).

For this purpose, all project loans have been divided into the following two categories:

(a) Project Loans for infrastructure sector(b) Project Loans for non-infrastructure sector

A loan for a project will be classified as NPA: i. As per record of recovery (i.e. 90 days overdue)ii. On account of non-achievement of commercial operations,

For Infrastructure Sector: if it fails to commence commercial operations within two years from the original DCCO,

For Non Infrastructure Sector: Up to six months from the original Date of Commencement of Commercial Operations ( DCCO), even if it is regular as per record of recovery.


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Restructuring of Project Loan:

If a project loan classified as 'standard asset' is restructured any time during the period up to two years ( Infra structure) & Six months ( Non Infra structure ) from the original date of commencement of commercial operations (DCCO), within the following limits, and further provided the account continues to be serviced as per the restructured terms.

(a) Infrastructure Projects involving court casesUp to another 2 years (beyond the existing extended period of 2 years i.e total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.

(b) Infrastructure Projects delayed for other reasons beyond the control of promoters Up to another 1 year (beyond the existing extended period of 2 years i.e. total extension of 3 years), in other than court cases.

Exception: Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if:

(a) The increase in scope and size of the project takes place before Commencement of commercial operations of the existing project.

(b) The rise in cost excluding any cost-overrun in respect of the original Project is 25% or more of the original outlay.

(c) The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO.

(d) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.

5.0 INCOME RECOGNITION :

income recognition has to be objective and based on the record of recovery

Banks should not charge and take to income account interest on any NPA.

Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts

Reversal of income: In case of NPA Account the entire interest accrued and credited to income account in the past periods should be reversed if the same is not realised. This will apply to Government guaranteed accounts also.


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In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected

6.0 ASSET CLASSIFICATION : a. Standard b. NPA

Standard Assets-Standard assets are those, which are regular in payment of interest and Installments due as per sanction.

Nonperforming assets:

Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues:

i. Substandard Assets ii. Doubtful Assets iii. Loss Assets

6.01 Substandard Assets With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

6.02 Doubtful Assets

With effect from 31 March 2005, a Doubtful asset is one which has remained in sub standard category for period of -12- months. Normally , once an account becomes NPA, it is classified as substandard asset and it remains in this classification for 12 months and unless upgraded to standard asset, it is then classified as doubtful asset.

In case of accounts where there is a significant erosion in the value of security i.e. if the realizable value of the security is less than 50% of the value of security assessed in the last year by the bank / RBI inspectors or where the borrower has provided fraudulent security, the account can be straight away classified as doubtful.

6.03 Loss Assets

A loss asset is one where loss has been identified by the bank or internal auditor or external auditor or by RBI inspector but the amount has not been written off wholly. It is an asset which is considered uncollectible and is of such little value that its


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continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Where the realizable value of the security is less than 10 % of the outstanding of the borrowal account, the existence of the security should be ignored and the account should straight away be classified as loss asset

6.04 Loans with moratorium for payment of interest:

i. Where moratorium is available for payment of interest, payment of interest becomes 'due' only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence do not become NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected.

ii. In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates.

6.05 Up gradation of loan accounts classified as NPAs

If arrears of interest and principal ( Total overdue) are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as ‘standard’ accounts

7.0 Provisioning Norms

The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below:

a. Loss Assets:

Loss assets should be written off. If loss assets are permitted to remain in the books for any

reason, 100 percent of the outstanding should be provided for.

b. Doubtful Assets:


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In case of doubtful assets, bank has to provide 25% or 40% or 100% of the secured portion depending upon the period for which the asset has been classified as doubtful plus 100% of the security shortfall. If the asset has remained in doubtful category for a period of not more than one year the provision requirement is 25% of the secured portion, for more than one year and up to three years it is 40% and for more than 3 years it is 100%.

Period for which the advance has remained in ‘doubtful’ category

Provision requirement

(%) Up to one year 25 One to three years 40 More than three years 100

The security shortfall will be calculated as per the following formula.

Security Shortfall = Outstanding Amount - Realizable value of the security - Amount of claim if receivable from ECGC or CGTSI.

Here the realisable value of security means the current market value of both the prime security and collateral security.

The guarantee if available from ECGC or CGTSI has to be calculated on the amount which is arrived after deducting the realizable value of security from the loan outstanding.

In case of NPA account with balance above Rs. 5 crores, bank has to get the stock audit done every year by external agencies appointed as per the guidelines approved by the Board of Directors.

The collaterals such as immovable properties should be got valued once in three years by valuers appointed as per the Guidelines approved by the Board of Directors.

c. Sub-standard Assets

In case of substandard assets, a general provision of 15% has to be made on the total outstanding of the substandard asset without any allowance for ECGC cover available and also securities available.

In case of unsecured exposure, which has been identified as substandard, an additional provision of 10% is to be done i.e. 25% of the outstanding balance is to be provided for. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure

‘Security’ mean tangible security properly charged to the bank and will not include intangible securities like guarantees (including state government guarantees), comfort letters etc.


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The rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured.

However, banks may treat annuities under build-operate-transfer (BOT) model inrespect of road / highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks' right to receive annuities and toll collection rights is legally enforceable and irrevocable

However “unsecured exposures” in respect of Infrastructure Loan accounts classified as sub-standard, in case of which certain safeguards such as escrow accounts are available will attract an additional provision of 5% only. i.e a total of 20% as against the existing 25%.

d. Standard Assets

Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis.

(a) Direct advances to agricultural and SME sectors (Micro & Small) at 0.25 %(b) Advances to Commercial Real Estate –at 1.00%(c) All other loans and advances not included in (a) and (b) above at 0.40%(d) Housing Loans at Teaser rates - 2%

e. Restructured Advances :

Restructured accounts classified as standard advances will attract provision of 2.75 per cent in the first two years from the date of restructuring. In cases of moratorium on payment of interest/principal after restructuring, such advances will attract a provision of 2.75 per cent for the period covering moratorium and two years thereafter; and

Restructured accounts classified as non-performing advances, when upgraded to standard category will attract a provision of 2.75 per cent in the first year from the date of up gradation

Infrastructure projects:

Particulars Provisioning RequirementIf the revised DCCO is within two years from the original DCCO prescribed at the time of financial closure

0.40%

If the DCCO is extended beyond two years and upto four years or three years from the original DCCO, as the case may be, depending upon the reasons for such delay

2.75 % – From the date of such restructuring till the revised DCCO or 02 years from the date of restructuring, Whichever is


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later.


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Non Infrastructure projects:

Particulars Provisioning RequirementIf the revised DCCO is within six from the original DCCO prescribed at the time of financial closure

0.40%

If the DCCO is extended beyond six months and upto one year from the original DCCO prescribed at the time of financial closure

2.75 % – From the date of such restructuring for 02 years.

f. Additional Provisions for NPAs at higher than prescribed rates

The regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs

g. Takeout finance

The lending institution should make provisions against a 'takeout finance' turning into NPA pending its takeover by the taking-over institution. As and when the assetis taken-over by the taking-over institution, the corresponding provisions could bereversed.

h. Reserve for Exchange Rate Fluctuations Account (RERFA)

When exchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign currency denominated loans (where actual disbursement was made in Indian Rupee) which becomes overdue, goes up correspondingly, with itsattendant implications of provisioning requirements. Such assets should not normally be revalued. In case such assets need to be revalued as per requirement of accounting practices or for any other requirement, the following procedure may be adopted:

The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account.

Besides the provisioning requirement as per Asset Classification, banks should treat the full amount of the Revaluation Gain relating to the corresponding assets, if any, on account of Foreign Exchange Fluctuation as provision against the particular assets

i. Provisioning for country risk


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Banks shall make provisions, with effect from the year ending 31 March 2003, on the net funded country exposures on a graded scale ranging from 0.25 to 100 percent according to the risk categories

j. Provisions for Diminution of Fair Value

Provisions for diminution of fair value of restructured advances, both in respect ofStandard Assets as well as NPAs, made on account of reduction in rate of interestand / or reschedulement of principal amount are permitted to be netted from therelative asset.

k. Provisioning norms for Liquidity facility provided for Securitisation transactions

The amount of liquidity facility drawn and outstanding for more than 90 days, in respect of securitisation transactions undertaken in terms of our guidelines on securitisation dated February 1, 2006, should be fully provided for

l. Provisioning requirements for derivative exposures

Credit exposures computed as per the current marked to market value of the contract, arising on account of the interest rate & foreign exchange derivative transactions, credit default swaps and gold, shall also attract provisioning requirement as applicable to the loan assets in the 'standard' category, of the concerned counterparties

m. Provisioning Coverage Ratio

i. Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to grossnon-performing assets and indicates the extent of funds a bank has kept aside tocover loan losses.

ii. From a macro-prudential perspective, banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn. This will enhance the soundness of individual banks, as also the stability of the financial sector. It was, therefore, decided that banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent. The PCR of the bank should be disclosed in the Notes to Accounts to the Balance Sheet.

n. Write-off at Head Office Level

Banks may write-off advances at Head Office level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to be made therefore

SUMMARY OF PROVISIONS (IN %AGES)


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Standard –General accounts 0.40%Direct Agriculture & SME(Micre & Small) 0.25%Commercial Real Estate 1.00%Treser rate loan – for 1st Year 2.00%Restructured Loan 2.75%Sub-Standard - Secured 15%Sub-Standard - Unsecured 25%Doubtful- Up to One Year 25%Doubtful- One Year to 3 years 40%Doubtful- more than three Years 100%For Unsecured portion of Doubtful 100%Loss Assets 100%


1. If any irregularity persists beyond _____ days we call it as a special mention account.

a) 60 Days b) 30 days c) 90 days d) 120 days

2. Maximum period the account can remain in sub standard category is ___ months.

a)36 b)24 c)48 d)12

3. Loss accounts are those accounts where there is no security or value of security is less than ______ of outstanding balance.

a)5% b)15% c)10% d)20%

4. An agricultural account will become NPA if

a) Instalment or interest is overdue for more than 90 days .

b) Instalment or interest is overdue for more than one crop season in case of long duration crop maximum 12 months

c) Instalment or interest is overdue for more than two crop seasons in case of short duration crop maximum 12 months

d) Both b&c

5. Provision on the secured portion in an account in doubtful category for more than 12 months but less than 36 months is :


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a)20% b) 40% c)50% d)100%

6. Provision on the unsecured portion in an account in doubtful category for more than 36 months is :

a)20% b)30% c)50% d)100%

7. The concept of NPA, introduced by RBI in phased manner started from the yeara)1995 b)1996 c)2001 d)1993

8. Introduction of prudential norms in advances accounts were recommended by

a)Narang Committee b)Mitra Committee c) Narasimhan Committee d) Kannan committee

9. Concept of out of order to classify NPA is applicable for

a) Bills purchased account b)Bills discounted A/c c)Bank Guarantee d) Cash Credit Account

10. Bills purchased /discounted account will be classified as NPA if they,

a)Remain overdue for a period of more than 120 days.d)Remain overdue for a period of more than 30 days.c)Remain overdue for a period of more than 90 days.d)Remain overdue for a period of more than 180 days.

11. Repayment schedule of rural housing advances to agriculturists should be Linked to

a) Crop cycle.b) Term loans for other housing advances accounts.c) Half yearly basis.d) None of above

12. An account will be treated as NPA if the limits have not been reviewed for a) for more than 90 days b) for more than 120 daysc) for more than 180 days d) Non of the above.

13. A cash credit account will be treated as irregular if stock statement has not been obtained for more than


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a)Three months b)90 days c) 180 days d) Three months+ 90 days

14 A cash credit account will be treated as NPA if stock statement has not been Obtained for more than

a) Three months b)90 days c)180 days d)Three months +90 days

15. Special Mention account is a category which would fall between the following

a)Substandard and Doubtful category.b) Standard and sub-standard category.c) Doubtful and Loss category.d) Loss account and written off account.

16. Gross NPA means

a) Outstanding in the borrowal account including the uncharged interest.

b) Outstanding in the borrowal account plus Provision held in respect of NPAs, unrecognized income kept in interest suspense account and claim received ,but not appropriated.

c) Outstanding in the borrowal account including the provision made for that account.

d) Outstanding in the borrowal account excluding the provision made for that account.

17. Net NPA is the amount of Gross NPA less

a) Interest debited to borrower’s account.b) Interest suspensec) Provision held in respect of NPAsd) Provision held in respect of NPAs, unrecognized income kept in interest

suspense account and claim received ,but not appropriated.

19. Which among the following results in an account becoming NPA?

(a) Where Principal and / or interest in TL has become due and not paid by the borrower for -75- days (b) where the Cash credit account has been out of order for more than 90 days. (c) Where the bill purchased/ discounted has become overdue and continues for 87 days. (d) Where amount remains unpaid for less than two crop seasons for short duration and less than one crop season for long duration crop in case of all agriculture accounts. (e) All of these.


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20. An account will be classified as substandard if it remains NPA for a period not exceeding____ months

(a) 18 (b) 12 (c) 24 (d) 6 (e) NONE

21. An account which remains in NPA category for a period of more than ____ months will be classified as doubtful asset.

(a) 18 (b) 12 (c) 24 (d) 6 (e) NONE

22. An account guaranteed by Govt. will become NPA if the interest or instalment due remains overdue for a period of ____ .

(a) 90 days (b) 180 days (c) it does not become NPA (d) 90 days in case of State Govt. guaranteed advances only (e) NONE 23. The account will be classified as NPA in case of the following lapse

(a) Stock statement not received for three months on the date of the balance (b) sheet & the same irregular feature is continued for another-3- months

(c) account not renewed even after 180 days of the due date of Review (d) account is backed by security which is fully-fraudulent and thus carries no value (e) all of these

24. In accounts where there is an erosion of the value of security and the realizable value of the security is less than 10% of the outstanding the account will be classified as

(a) Substandard asset (b) Doubtful asset (c) Loss asset(d) No such guideline as NPA classification depends on recovery record alone(e)Noneof these

25. Advances accounts backed fully by the following securities will not be treated as NPA

(a) Gold ornaments (b) Govt. securities (c) NSCs and KVPs (d) Shares of PSUs (e) All of these

26. An Agricultural advance for long duration crop will be treated as NPA if the interest or instalment remains overdue for

(a) Two crop seasons (b) One crop season (c) Two years(d) 18 months (e) none of these

27. In case of accounts guaranteed by Govt. of India the non-performing account will be treated as standard till the


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(a) Guarantee is invoked (b) The Govt of India repudiates its liability against the guarantee (c) Becomes a loss asset due to complete erosion of security (d)Account is not more than 12 years old (e) none of these

28. In case of standard asset the general provision to be made against the total outstanding of direct agricultural loans and direct loans to SME sector is ______%.

(a) 1 (b) 0.25 (c) 0.40 (d) nil (e) None of these

29. In case of doubtful asset which has remained doubtful for more than three years the provision to be made against the secured portion is ______% of the secured amount

(a) 20 (b) 30 (c) 50 (d) 100 (e) None of these

30. In case of unsecured exposures in substandard category the provision to be made is ______% of the total exposure

(a) 10 (b) 25 (c) 12.5 (d) 100 (e) None of these

31. As per the RBI guidelines the banks are required to make floating provision minimum to the extent of ______% of their risk weighted assets.

(a) 1 (b) 1.5 (c) 2.5 (d) Nothing is prescribed by RBI as this provision is voluntary (e) None of these

32. Where an advance account is guaranteed by the ECGC or CGTSI and it has been classified as doubtful, the banks are required to do the following

(a) Not to provide any thing (b) not to provide on the amount receivable from the guaranteeing organization (c) have to provide like any other account (d) provide only for the unsecured amount(e) None of these

33. As per prudential norm, the Non-performing assets are classified into _____ categories

(a) 4 (b) 3 (c) 5 (d) 2 (e) None of these

34. Banks are required to make provision for country risk where the net funded exposure to a country is ______% or more of its total assets

(a) 5 (b) 2 (c) 1 (d) 2.5 (e) NONE

35. If an account is more than -3- years in doubtful category as on 31.03.2007 with a balance of Rs 10 lacs and security value of Rs 6 lacs. The amount provision would be:


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(a) 5 lac (b) 6 lac (c) 7.5 lac (d) 10 lac.

36. In NPA A/c the interest will be reversed – (a) entire interest charged during current financial year will be reversed. (b) entire

interest charged during current Quarter will be reversed (c) entire interest charged in the past periods, should be reversed if the same is not realised (d) entire interest charged in the last quarter, should be reversed if the

same is not realised

37. Asset classification of accounts under consortium should be based on-

(a) on the record of recovery of the individual member banks(b) on the record of recovery of the Consortium Leader(c) on the record of recovery of the any member banks(d) None

38. Banks may restructure the accounts classified under- (a) Any advance account (b) Only Standard Account (c) Only NPA Account (d) Only Standard & Sub standard account (e) Only Standard , Sub Standard & Doubtful account (f) None of These

ANSWERS

Q 1 2 3 4 5 6 7 8 9 10 11 12

A b d c d b d d c d c a c

Q 13 14 15 16 17 18 19 20 21 22 23 24

A a d c b b d b b b d d c

Q 25 26 27 28 29 30 31 32 33 34 35 36

A c b b b d b d b b c d c

Q 37 38

A a e


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RECOVERY THROUGH NON-LEGAL MEASURES

Recovery Measures

Recovery measures may be classified into two categories: Non legal measures and Legal measures. A detailed write up on Non-Legal measures is as under;

NON-LEGAL MEASURES

1.0 Appointment of Professional Agencies for Recovery

Recently, IBA has worked out certain guidelines for banks on matters concerning the appointment of outside professional agencies whose services can be utilized to ascertain the whereabouts of the borrower and enforcement of securities. There is some hesitancy on the part of public sector banks in engaging them for recovery purposes due to unpleasant experiences in certain cases. But in the post-VRS scenario, it is suggested to seek such outsourcing. This should be done after examining the credentials of the agencies. It is also essential to keep a constant vigil on their practices.

Appointment of Enforcement/ Recovery Agents:

With a view to facilitate smooth action, authorities in the Region and Zone are authorized to appoint enforcement agencies for taking physical possession of assets, guarding of the secured assets, sale and post sale actions under SARFAESI Act.Powers to appoint Enforcement Agents based on the amount involved are as under:

Amount of NPAs/PWO inclusive of suit filed & decreed a/cs

Authority to appoint Enforcement Agent

i) Upto Rs100 lacs Chief Manager

ii) >100 lacs to 200 lacs AGMiii) Above Rs200 lacs upto Rs.500 lacs Dy.General ManageriV) Over Rs.500 lacs upto Rs.1000 lacs General Manager/Zonal Head Scale VIIV) Over Rs.1000 lacs to any amount ED/CMD


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Quick Bites

Recovery Agents

Compromise Settlement

Write-off/ Prudential Write off

Purchase and Sale of NPAs

Recovery Agents

Bank’s Special schemes for recovery – SANKALP

Note: No authority except with the permission of ED/ CMD shall appoint Recovery Agents in Sub Standard Accounts. However, zonal heads may authorise appointment of recovery agents wherever necessary in case of accounts with outstanding upto Rs. 100 lacs after expiry of six months from date account turning to be NPA

a) The name and addresses of all the Recovery Agents on the Bank's approved panel of the bank will be placed on the bank's website for information all concerned.

b) Only recovery agent from approved panel will be engaged by the bank.

c) In case bank engages services of such recovery agent/enforcement agent/seizure agents for any recovery case, the identity of the agent will be disclosed to the borrower.

Payment of Fees:

It may be appreciated that Recovery Agents may be required to initiate various steps depending upon stage of specific NPA account and also where such actions are initiated in part only. Therefore fees can be negotiated/ fixed looking to stages involved, however subject to the maximum as contained in Recovery Policy 2012 (Page 63)

Where the Enforcement Agent/Recovery Agents has made efforts for locating and realization/recovery from the uncharged assets (with required details/ proof) of the borrower/ guarantor an additional fee not exceeding Rs.15,000 OR 1.5% of the value realized of such property, whichever is less, to meet his out of pocket expenses, over and above the prescribed recovery charges may be paid to the Enforcement/Recovery Agent. However payable on actual recovery and shall not be applicable in case higher fee is negotiated under clause 13.

In case any NPA account is regularized/ upgraded and comes out of NPA through recovery effected after taking action by the said agency and services of enforcement agency are no longer required, fee in such case will be 2% of NPA *amount recovered or Rs.50, 000/- which ever is lower . This will cover NPA accounts as outstanding as NPA within one year from the date of NPA, not covered above.

In case the defaulting borrower approaches the Bank for OTS or adjustment of account after assignment the case to Enforcement/Supporting Agent, fee shall be as under:

• Before taking physical possession of secured assets-25% of above fee schedule subject to maximum Rs.50000/-.

• After taking physical possession of secured assets but before sale of Secured assets-50% of above fee schedule subject to maximum Rs.1 lac

Recovery charges upto maximum of 10% ( to be negotiated with Recovery Agents ) of the actual Cash Recovery ( subject to ceiling on maximum amount as per table given above ) can be paid to Recovery Agents in cases where Bank does not have any security whatsoever ( Ist charge or II nd charge or extension of charge etc ) in any account


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outstanding as NPA for more than one year and classified as doubtful or loss or PWO. However, no other charges, fees, reimbursements, of Misc expenses etc will be paid at any stage before or after cash recovery is made. Incentive to staff will not be payable in such cases.

Further the accounts where the securities were available but since disposed off through Recovery Agent making them eligible for charges will not be eligible for higher charges though rest dues will then be unsecured.

In case of OTS, fee payable to Enforcement/supporting Agents shall be negotiated for recovery from the borrower in additions to OTS amount.

Reimbursement of reasonable and actual out of pocket expenses for security, insurance, statutory/legal compliances only (after taking the possession of securities charged to bank) may be paid after being satisfied about the need for such expenses and the reasonableness of the amount taking into consideration local conditions etc.

TDS and service tax on fee paid to the agency will be deducted as per rules applicable.

No separate misc. expenses of any kind except as mentioned above will be paid to the Enforcement/supporting agencies by the bank.

In recently slipped accounts, branches are required to issue notice under SARFAESI Act immediately after account becoming NPA in order to pressurize the borrower for upgrading the account. Sometimes, the accounts are upgraded but when repayment of overdues is not forthcoming, branches are required to take possession of secured assets after completion of 60 days of notice period.

The support of enforcement / recovery agency is required in obtaining permission from District Magistrate / Police and also in taking physical possession of assets. In such cases the charges payable to recovery agency will be as under:

Fee for obtaining DM’s order and arranging police assistance for taking physical possession shall be actual expenses or Rs. 5000/- per case which ever is lower.

Procedure for appointment of Recovery Agents/ Enforcement agents.

In appointment of both Recovery Agency and Recovery Agent an Undertaking to be obtained/ agreement with recovery agents i.e.

i. adoption of lawful means,

ii. not to accept cash;

iii. he or his employees shall be solely responsible for any step taken beyond authority/ law and shall indemnify bank against all losses/claims for all such acts .


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iv. will appoint agents/ employees only in accordance with guidelines of RBI as applicable,v. will follow code as laid down in Model policy on code for collection dues and repossession

of security, circulated vide circular No. BCC/BR/101/185 dated 3rd July 2009

Monitoring of Recovery Agents:

The Branches are advised to review the performance of Recovery Agent every month. In this regard, branches are advised as under:

1. The specific time limit should be given to Recovery Agentsfor making recovery in the account. Generally the total limit should not exceed 6 months as the period required for taking recovery action under SARFAESI from issuing notice to confirmation of sale is around 6 months maximum.

2. During this period if it is found that the service of the Recovery agent is not satisfactory, he should be given notice and inform Regional/ Zonal office so that they can take a view to terminate the Recovery Agent and appoint another Recovery Agent.

3. The Zonal office should inform the termination of such Recovery Agents to all concerned so that he will not be appointed as Recovery Agent in future for any other account.

4. Before assigning any new/ additional account to any Recovery Agent, his performance in the account should be kept in view to avoid bunching of large no. of accounts to one recovery agent as well as to avoid assigning accounts to non performing recovery agents.

5. As per existing guidelines the annual review of all empanelled RecoveryAgents should be undertaken by the Regional office under reportingsystem to Zonal Office/ BCC.

2.00 Compromise Settlement

In general, it is experienced that filing of suits and recovery of dues of banks through the process of courts is a cumbersome, expensive and time consuming, and task without any fruitful results in many cases. One of the main reasons attributed for non-recovery of dues through the process of law/court is lack of proper follow-up and timely and proper action. Hence, it would be worthwhile to think of other ways to tackle the situation. The tradition of amicable settlement through panchayat and arbitration, leads to think as to why bank loan disputes cannot be settled without having recourse to the court.

A compromise is an agreement reached by mutual consent, a negotiated settlement with or without sacrifice component on the concerned parties to the dispute.

Compromise settlement is a non-legal remedy for reduction of NPAs of the Bank.

AUTHORITY TO RECALL: Except for officials / Branch Managers upto the level of Middle Management Grade/Scale III, Powers for Recalling an advance and filing suit are co-extensive with discretionary lending powers, subject to reporting to next higher authority.


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i.e. Officers, Managers, etc., upto the level of Middle Management Grade/Scale III are not empowered for Recalling and filing of suits for recovery of bank’s dues in respect of advance accounts. Therefore, all proposals for Recalling/ filing of a suit in respect of branches headed by JM-1, MM-II, and SM-III Officers, should be forwarded to respective Regional authorities for permission.

Normally, bank would like to recover the entire dues with unapplied interest at contractual rates and costs in full, without any sacrifice.

However, there may be instances/ cases where the bank may consider waiver of part interest and/or legal charges and agree to settle the account by receiving a little lesser amount. In such a situation, the bank may enter into a compromise agreement with the borrower to accept a specified amount instead of the actual dues in full and final settlement. The difference between the total dues & total offer amount is 'sacrifice' (by way of write off and/or waiver) to be borne by the bank.

2.01 When to Compromise

Normally compromise proposals can be considered in following situations:

When the borrower is willing to settle the dues in full in a lump sum and the sacrifice of the bank is minimum.

When the bank feels that the time taken and cost involved in recovering the dues through the legal will be more than the likely recovery to be effected.

When a unit has become unviable to continue operations and borrowers' verifiable means/resources as well as securities are not adequate.

When there is no security or realization of the same is difficult or unit is closed and there are no assets for execution of decree and the borrower/ guarantor is willing to settle the dues out of court.

2.02 When not to Compromise

Branches should not, in general, enter into a compromise for lower amount in respect of following cases:

When there are adequate realizable securities available covering our dues and properly charged to us.

ii. When the account is covered by guarantee cover of DICGC/ ECGC and adequate securities are available to cover the Bank’s dues and/or net worth of the borrower/s and guarantor/s is adequate.

2.03 When to entertain compromise proposals

Compromise proposals can be negotiated in all NPA & PWO accounts,


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(a) before filing the suit(b) after filing the suit(c) after obtaining the decree / RC but before execution of the decree / RC.(d) even after the account is written-off prudentially. In other words, compromise proposals

can be entertained any time till the borrower settles the dues in full.

Special One Time Settlement Scheme of RBI announced from time to time like RBI OTS Scheme for SME, scheme for small borrowers, scheme for small and marginal farmers, are outside the purview of this policy. Separate guidelines are being issued from time to time for such schemes.

2.04 Basic Principles governing compromise settlements

1. Ensure recovery of dues to the maximum extent possible at minimum expense and within shortest possible time frame.

2. The opportunity cost analysis be made i.e. the advantage available to the Bank from prompt recycling of funds should be weighed in comparison to the likely recovery by following legal or other protracted course of action.

3. Where security is available the realizable value thereof.

4. A proper distinction will have to be made between “Willful defaulters” and ‘defaulters due to circumstances beyond their control’. While in the case of former, a tough stand may be taken, in latter case a sympathetic view is to be taken.

5. Due weightage to be given to present activities of the borrower /guarantor, their worth present means etc.

6. Norms as applicable for assessment of staff accountability be strictly adhered to & be invariably formed a part of the proposal ( In case of NPA).

7. There shall be a committee approach for vetting and recommending compromise proposals to ensure fair and proper assessment of proposals.

2.05 Guiding Factors

i) While negotiating a compromise settlements following factors have to be kept in mind:-

a) Total Contractual Dues: This is the sum total of balances outstanding in the various accounts of the borrower and are due for recovery from him. It will include O/s balance plus amount of Interest/ charges reversed plus unapplied interest at contractual rate of interest from date of cessation of interest to date of compromise proposal plus amount of Legal Expenses and security expenses etc. already incurred and debited to P/L a/c, if any.

b) Net Book Dues: Balance outstanding in the various accounts of the borrower less unrealized interest / uncollectable charges, which are subject to reversal


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c) Margin money and recoveries held separately: The net book dues as above will be

reduced to the extent of Margin money (excluding margin against non crystallised non-funded facilities) etc. kept in current a/c, Time Deposit a/c or any G/L a/c and the recoveries kept separately in any account or the retainable portion of claims received from DICGC, ECGC etc. except sums accepted by bank under ‘No Lien’.

d) Securities detail: Details of securities are to be taken into account. For immovable’s such as Area of land, nature of land (Agricultural Land, Industrial Land, commercial, residential etc) carpet / built up area, location and the related information be taken into consideration. Apart from the above, it should also be indicated if the property is leasehold (in such a case balance period of lease), freehold.

e) Realizable value of security: The nature and realizable value of securities is an important factor to be considered while arriving at a compromise. The valuation of securities should have been done by our approved valuer and should not be more than 01 Year old at the time of considering of compromise. If the securities are adequate and easily realizable, the sacrifice in the compromise should be minimum.

For property/assets having value of Rs Five crores and above, valuation should be

obtained from two approved valuers independently, Valuer should invariably be registered under Wealth Tax Act for type of properties to be valued

Therefore following factors are to be considered for assessing realizable value of securities:-

• Fair Market Value given by ‘Approved Valuer’ should be taken for the purpose ‘and not the distress value’.• Marketability of the securities with a special reference to immovable properties is a function of legal tangles affecting security like:

various laws meant for protection of agriculturists/ SCs/ tribal people govern security in the form of agricultural land wherein marketability would be a factor of constraint._ getting permission from Collector._ Availability of purchasers from tribal communities._ Restrictions on sale to non-agriculturists etc.

f) Net Present Value (NPV): Settlement amount should not generally be low/ less than the Net Present Value (NPV) of the realizable value of available securities (Fair Market Value and not the Distress Value) net of the cost of realization.

g) Reasons for failure of business: Reasons for the failure of business or the unit are also important to be kept in mind. Sometimes, a change in Government guidelines and policies may be the cause of the failure of the unit. Sometimes, it can be due to mismanagement and willful act by the borrower.

h) Present status of the unit: If the unit is running and prospects are good and branch / region has not lost trust in borrowers' conduct and dealings; it would be worthwhile to


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consider possibility to rehabilitate the unit. If, however, the unit is closed and prospects are bleak, it would be better to compromise and recover the dues to the maximum.

i) Means of borrowers/guarantors: Present means of the borrowers, guarantors etc. will also have a bearing on the compromise settlement.

j) Amount of compromise and mode of payment: The amount of compromise and the period for receiving the payment will also influence the terms of compromise. Bank would like to receive the maximum amount within the shortest possible time. As regards the amount of compromise, the most important guiding principle should be the minimum sacrifice as far as possible. Further book dues, as far as possible should be recovered in full, so that there is no adverse impact on Profit & Loss A/c.

k) Period of Recovery: As a matter of principle, compromise settlement shall be negotiated for direct bullet payment i.e. normally within 30 days of advising the sanction. Based on the circumstances, time can be allowed up to 90 days payable in 2-3 installments (with a down payment of at least 15%).

In exceptional cases where the cash flow does not permit or assets will take time to be sold and realized, extended period say up to 12 months can be permitted. In such cases, a down payment of at least 10-25% shall be stipulated with preferably monthly installments. In the case of large compromise proposals with compromise amount say above Rs.1 Crore, time beyond 12 months may be permitted with down payment of at least 15% and remaining amount in monthly/quarterly/ half yearly installments carrying suitable interest.

l) Recovery of Interest on Compromise: Wherever compromise settlement is extended over a period of time or in installments, it is necessary to negotiate/ recover the suitable rate of interest not only to cover cost of funds but also prompting the borrower not to delay the repayments. Interest negotiation maybe at minimum of Base Rate plus 4% or at a rate not lower than 10% simple. Same may be stipulated to be recovered simultaneously, with each installment.

m) Impact on Profit & Loss Account: In accounts which are already written-off or full provision has been made because of nil or negligible security, any recovery affected through compromise would increase the income by credit of such recovery to P/L A/c or release of provision.

2.06 Others: The following points may also be kept in mind:

Compromise negotiation should not hover around book dues.

Interest at contracted rate shall be calculated and the total contractual dues (including expenses incurred on filing the suit in the cases of suit filed accounts) shall be advised to the borrower.

Negotiation shall start from such total dues owned by the borrower. Depending on the security available, borrower’s/guarantor’s Assets/resources etc. concessions can be considered on the rate of interest and/ or compounding of interest.


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Minimum interest that is acceptable to the bank is 10% p.a., simple, from the date of cessation of interest till the date of repayment.

A lower rate of interest may be accepted as a matter of exception in deserving cases

Limitation: In the case of non-suit filed accounts, it shall be ensured that the documents are kept alive by obtaining LAD from borrowers/guarantors.

In the case of suit filed accounts where compromise is sanctioned, consent terms signed by the bank and the borrower/guarantor shall be filed with Court/ DRT subject to default clause and consent decree shall be obtained. Consent decree shall contain the default clause to the effect that in case of failure in full or in part to repay Bank’s dues in accordance with the terms, the contractual dues shall be recoverable along with interest at contracted rate, costs and expenses.

Net worth of the borrower/guarantor as of a recent date shall be incorporated by making suitable enquiries. In case it is not available the net worth as available on bank record should be incorporated with date.

Date of valuation and details of the property of the borrower shall be invariably mentioned and justification for the value shall be given. In case there is wide downward variation in the value of the property while sanctioning the advance and while negotiating compromise, the cogent reasons to be explained in the proposal invariably.

Staff accountability: Staff accountability certificate/ Report must be enclosed to the proposal as per the prescribed format. In case any staff lapse is observed, Zonal Office shall mention the same or enclose a copy of the Report along with the action proposed/taken by them. Factors stated above are only illustrative and not exhaustive. It is important that an overall view is taken, considering all the aspects. Branch to ensure that information in context with Staff accountability has been submitted to respective Regional authority in time

2.07 Delegation of Powers:

Board of Directors / Management Committee of Board have powers to sanction any compromise proposal irrespective of quantum of sacrifice, nature of compromise settlement and/ or nature of the account in which a compromise is considered.

With a view to facilitate recovery through compromise, following discretionary powers are delegated to grant sacrifice, till further modification/ amended in terms of MCB/Board directions or RBI guidelines. Sanction of Compromise proposal are linked with Sacrifice amount not with Loan amount in other words a Branch manager in rank of JMG/S I can sanction a compromise proposal within his power of sacrifice irrespective of Loan sanctioning authority (Rs in lacs)


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Authority Powers for sacrifice(waiver plus write off)

Chairman & Managing Director 120.00Executive Director 90.00General Manager at corporateOffice

50.00

General Manager heading Zone 45.00Dy. General Manager/Dy. Zonal Head (Scale VI)DY General Manager as Regional Head / Branch Head

35.00

30.00Asstt. General Manager 25.00Chief ManagerAs Regional Manager/DRM/Chief Manager as recovery in charge at Regional Office (Other than DRM)Branch Head.

20.0015.00

12.50Sr. Branch Manager /Sr. Manager At ROs (Recy.)

6.00

Branch Manager Scale II 1.00Branch Manager Scale I 0.50

2.08 Extension of time

Where ever the party is facing genuine difficulties in payment as per terms of compromise sanction, the extension of time may be allowed by sanctioning authority on the request of the party. However the Zonal Head ( in the rank of General Manager )is authorized to extend time for the period of 6 months and Zonal Head/Regional Head ( In the rank of Dy General Manager ) is authorized to extend time for the period of 3 months in case of sanction by Management Committee Board/ Chairman & Managing Director Executive Director/ General Manager (Recovery), provided interest for extended period is recovered @ Base Rate Plus 4% from the party, and all other terms and conditions remain same.

2.09 Deviation

In case of sanctioned compromise proposals, normally for any deviation in the compromise terms, it should be referred to the sanctioning authority. However, modifications in the terms of sanction of compromise proposals earlier sanctioned by Management Committee (Board) may be approved by Chairman & Managing Director and in his absence by Executive Director

12. for change in mode of repayment and/or13. total Repayment period and/or14.other modification/ deviation

PROVIDED revised additional sacrifice is not more than 20% of sacrifice as per original sanction. Such modifications are to be reported to Management Committee (Board).In other cases, the modifications shall be approved by the same authority who has sanctioned the proposal earlier and/ or who is now vested with powers of such compromise.

2.10 Deciding Level of Authority:


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For the purpose of deciding the level of authority for sanction of compromise, notional interest shall be calculated at @10% p.a. simple or @ contractual rate whichever is less

Compromise in Decreed cases where Rate of Interest awarded by Court is less than 10% p.a.

In case of decreed accounts, where rate of interest awarded as per decree is less than 10% and bank has not preferred an appeal at higher court or an appeal, if made, is decided against bank, the calculation of sacrifice should be made on the basis of terms of decree. However, the sacrifice will be calculated based on decretal dues for the purpose of deciding the level of authority for sanction of compromise proposal.

There is no group/associate concern concept for compromise proposals, unless security charged to the bank is common. Compromise proposal shall be based on total sacrifice involved in all such accounts where security is common.

2.10 Compromise in Staff Loan/ Staff Related Accounts/ Staff Guaranteed A/c:

In Staff related / Staff guaranteed accounts, no compromise by way of sacrifice / waiver may be sanctioned by any authority below the level of Zonal Head as under:

In respect of staff related accounts the Zonal Manager shall ensure the genuineness of the difficulty in recovering the contractual dues from the staff member or the borrower as the case may be.

The compromise settlements in respect of staff related accounts may be considered by the Zonal Manager within his delegated powers of sacrifice. However, before considering such proposals prior vigilance clearance should be obtained.

The compromise settlements in respect of staff accounts and staff guaranteed accounts may be considered by the Zonal Manager within his delegated powers of sacrifice provided such staff member has ceased to be in the service of the Bank for more than –2- years.

In other cases of Staff Loan accounts/ Staff guaranteed accounts where the staff is ceased to be in the service of the Bank for less than – 2- years, proposals are to be submitted to Baroda Corporate Centre, Mumbai for sanctioning by Executive Director and above as per delegated powers.

2.11 Compromise in Fraud Reported Cases

Branches, Regional Offices shall not enter into any compromise settlement in accounts where frauds are committed. Any compromise proposal in respect of such an account (other than cases registered or under investigation with CBI ) shall be considered by an authority not below the Zonal Head in the rank of General Manager and Baroda Corporate Centre viz.General Manager ( Recovery ), Executive Director, Chairman and Managing


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Director or Management Committee of Board upto their respective powers for sacrifice in compromise settlement.

2.12 Settlement Advisory Committee Approach:

Committee approach shall be adopted for compromise settlement. At Corporate Centre, Mumbai, Settlement Advisory Committee (SAC) will consist of seven General Managers to examine and recommend the compromise proposals falling under the Powers of Executive Director, Chairman & Managing Director or M.C. (Board).The minimum quorum prescribed is three GM’s including compulsorily the presence of the GM (Recovery).

Such Committees shall function at Zonal level, Regional level and Branches.

Details regarding Constitution of Settlement Advisory committees at various levels are given on page No. 22, 23 and 25 of Recovery Policy 2011

2.13 Other matters concerning to Compromise settlements:

1. Compromise proposals (including those of CFS, CBB & MMO) falling under the powers of Corporate Centre, Mumbai shall be recommended by the Zonal SAC and for the purpose of Recovery and NPA Management, Zonal Authority shall be the controlling authority in respect of all branches/ offices in the zone.

2. The next higher authority of the sanctioning authority shall do PSR Noting of compromise sanction. In case of compromises sanctioned by Zonal Manager PSR will be noted by Corporate General Manager (Recovery).

3. The sanction letter shall contain the terms and conditions as agreed by the borrower and accepted by the bank also specifically mentioning as to compromise for dues outstanding at concerned specific branch. There shall be a default clause to the effect that if the borrower does not pay the compromise amount (bullet payment/installment), the bank will treat the sanction as withdrawn and the borrower will be liable to pay the entire gross dues to the bank with contractual rate of interest/ expenses.

Maintenance of Sanction Register: All branches to maintain a compromise sanction register for recording all compromise sanctions including sanctions by the higher authorities. This will facilitate the follow-up at all level for recovery of dues as per compromise sanction. The register is to be maintained w.e.f. 01.04.2009 in the format as given in the circular no. BCC: BR: 101/140 dated 11.05.2009).

Monitoring and Follow up for recovery in Compromise in Suit filed cases

COMPROMISE:

Wherever genuine difficulties are experienced by borrowers/ guarantors in repaying outstanding dues in full, compromise negotiations may be initiated for early settlement of accounts.


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In such cases it should be invariably ensured that compromise terms duly signed by the borrowers/ guarantors and the Branch is filed with the DRT and a consent decree with default clause is obtained by Bank.

The consent decree is also a decree in favour of the Bank which will enable the Bank to proceed for recovery through DRT in case the compromise terms are not honoured or there is any default in repayment by the borrowers/ guarantors as per compromise sanction.

The consent decree must be obtained immediately on sanction of compromise without waiting for the payment of due instalments in future, in view of the fact that after default in payment of the compromise amounts, the borrowers are not likely to cooperate in filing consent terms and the matter will again drag in DRTs.

3. Prudential Write Off/Technical Write Off & Write Off:

Prudential /Technical write off is generally resorted to by the bank in respect of following advances accounts where suits have been filed and staff accountability has been examined

In respect of any asset, which is not contributing any income to the bank or its continuation in the Balance Sheet, is deemed to be undesirable for continuing on asset side.

1. Loss asset with 100% cover and Doubtful with 50% cover by way of Provision, Interest Suspense, DICGC/ECGC claim received, amount held in Suit Filed Sundry Deposit account etc.

2. Other NPA accounts in Sub-Standard and Doubtful category with less than 50% cover by way of Provision, Interest Suspense, DICGC/ECGC claim received, amount held in suit filed Sundry Deposit account etc. on case to case basis looking to the prospect of realisability in immediate future.

A decision on PWO will always be taken by the Corporate Centre under authority of Management Committee (Board). Zonal/ Regional/ Branch Managers shall not prudentially write off any account without express authority from the Corporate Centre. Authority may be granted account-wise or for a class of accounts (Outstanding/ Sector/ Age of NPA etc.).The MCB may also allow any deviation from the policy on merits as may be deemed fit.

Prudential Write off of the following accounts will be considered only on case to case basis.

1. TODs in current account, BOBCARD TODs and adhoc/ one time bills purchase/discounting.2. Accounts where frauds have been committed.3. Quick Mortality accounts (NPA within one year of sanction/disbursement). 4. Staff accounts (if any) and staff related/ guaranteed accounts.5. Advances accounts such as Cash Credit, Demand Loan, Term Loan etc. wherein

borrower/s are also having outstanding TOD in current account, S.B. account, BOBCARD TOD etc.


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For New PWO/ TWO accounts ( w.e.f 1.4.2010)

Under the new system of PWO no accounting entry is to be passed at Branch level. The relative advances accounts will continue to remain as any other NPA account as at present. For maintaining the records following book keeping and accounting procedure shall be followed:

The accounts identified for Prudential Written Off will be flagged in ASCROM system as Prudentially Written off account at Corporate Office.

When an account is identified for the first time and the flagging is done at BCC level, a report in respect of such PWO accounts with outstanding balance and provision made there against will be generated. On the basis of this report, necessary entries shall be passed at Corporate Accounts Department, BCC.

Shortfall, if any, to cover the PWO amount by way of Provision, Interest Suspense, DICGC/ECGC claim received, amount held in Suit Filed Sundry Deposit account etc. for any of these accounts being considered for Prudential Write Off will be met through debit to the Profit & Loss account of the Bank.

4.0 Write Off

Final write off may be considered by the bank only when it becomes clear that there is absolutely no chance of recovery in the account , No FINAL WRITE OFF will be considered at branch level headed by Chief manager and below

12.Either by way of Realisation of Assets charged OR 13.By way of proceeding against uncharged assets standing in the name of Borrower/s

and Guarantor/s OR 14.By way of proceeding for personal liability of borrower and Guarantor/s. AND15.Further continuing of the account in the books for follow up/ recovery will only add to

cost to Bank and wastage of resources.

For Final Write off additionally it should be ensured:

While justifying final write off proposal in accordance with provisions mentioned herein above, steps taken and present status as regards to steps initiated for recovery be specifically mentioned inter alia as given below

The present means of the borrower/s. Guarantor/s should be thoroughly probed into and ascertained. Also that Present activities of borrowers/Guarantors relating to other businesses carried out and sources of income should be ascertained. It should be ascertained whether the Bank will be able to enforce any of these assets/ income more particularly in case Borrowers and/ or Guarantors are as ‘willful defaulter’. Comments be also made as regards referring to old records to find unencumbered assets for proceeding for realization of bank’s dues.

In case outstanding are covered under any of Assurance Cover obtained by Bank/ Borrower (policy assigned in bank’s favour) and/ or cover under DICGCI/ECGC/ CGFTSI/


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others if any, is admissible, same should be got settled and adjusted in dues, before final write off.

Suits should have been filed or proceedings under Public Money Recovery Act are initiated (unless specifically exempted by the Regional Manager and above up to their write off powers).

Staff Accountability has been examined and if required, proper action has been taken against erring official/s.

The write off proposal alongwith staff accountability certificate and compliance certificate should be submitted to the sanctioning authority.

All such proposals be screened and recommended by respective “Settlement Advisory Committee”

All such sanctions be recorded giving ‘sanction sr. no.’ and reported to next higher authority for PSR Noting. Zones are also to submit a consolidated data of all such authorizations (including sanctions of corporate office) at quarterly intervals to General Manager (Recovery). A Certificate to above effect must be enclosed with such Final write off Proposals.

Certificate for Final Write-off of NPA / PWO Account

Name of Account:

1. All the possible measures / methods of recovery have been explored and exhausted in the account.2. All the securities charged to the Bank have been sold / auctioned and share of our Bank is received and appropriated in the account. Presently there are no tangible securities available to fallback upon for recovery and there are NIL or very meager chances of further recovery through any mode.In case of realization through O/L, Bank has received its due share and no property/proceeds are left with O/L for sale /distribution.3. The Borrowers / Guarantors are either not traceable or of no means as per our discrete enquiries / market reports.4. Continuance of the account in the books of the Bank and further exploring for recovery will only add to further cost and wastage of time to the Bank.5. Staff accountability has been examined and dealt appropriately.

5.0 Purchase and Sale of Non-Performing Asset

In order to provide another option to banks / FIs for resolving their Non-performing Assets, the Reserve Bank of India has permitted them to sell and purchase Non-performing Assets among themselves. This measure aims at providing a secondary market for the Non-performing assets.

Accordingly the Reserve Bank of India has issued on July 13, 2005 certain guidelines (as given below) in this regard to be complied by the banks / FIs.


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These guidelines are applicable to all commercial banks (except Regional Rural Banks), term lending institutions and NBFCs.

Banks / FIs are required to get the necessary permission from their Board for implementation of these guidelines.

Reserve Bank of India’s guideline for purchase and sale of NPAs:

Non-performing for at least two years: A bank is permitted to sell an NPA only if it has remained non-performing in its books for at least TWO years.Sale on cash basis: The NPA is to be sold only on cash basis and the entire amount should be received upfront by the selling bank.

Sale on without Recourse Basis: A bank has to sale the Non-performing asset only on non-recourse basis i.e. the entire credit risk should be transferred to the purchasing bank. After the sale no known liability should devolve on the selling bank.

No credit enhancement by the selling bank: The bank selling the assets should not assume any type of risk with respect to the asset sold and should not provide any credit enhancement / liquidity facilities in any manner.

No sale on contingent basis: The sale should not be made at a contingent price with the condition that in case of any shortfall in realization of the price, the selling bank would bear a part of the shortfall.

Purchasing bank to hold the NPA for at least 15 months: The bank purchasing an NPA has to hold the same for at least FIFTEEN MONTHS before it sells the same to other banks. The NPA bought cannot be sold back to the bank from whom it is purchased.

Asset Classification as Standard for Ninety days: The asset purchased may be classified by the purchasing bank as standard asset for a period of ninety days from the date of purchase. After this period the bank has to classify the asset depending on the record of recovery. Any restructuring / reschedulement by the purchasing bank will result in classification of the asset as an NPA. The asset will attract provision as per the asset classification status.

Risk Weight for Capital Adequacy: The NPA purchased will attract 100% risk weight for the purpose of capital adequacy.

Recovery: Any recovery will be first adjusted towards acquisition cost and the balance, if any, can be taken towards profit.


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RECOVERY THROUGH LEGAL MEASURES

1. Lok Adalat

Lok Adalat is a process of administering justice without resorting to filing suit and is established under the Legal Services Authority Act 1987. Under the provisions of the Act, States have constituted Legal Services Authorities at High Court, District and at Taluka level. Under the Authorities of such Committees respective Courts are organizing Lok Adalats within the area of jurisdiction.

Bank shall take maximum advantage of the medium of Lok Adalats for compromise settlements especially in hardcore cases. It is the fastest and cheapest mode of settlement of disputes and branches can take the benefit of such Lok Adalats regularly being organized by District Civil Courts, DRT. We may request for a special Lok Adalat where number of cases to be addressed are fairly large.

Advantages in utilizing the forum of Lok Adalats:-

1) There is no court fee involved when fresh disputes are referred to it.2) It can take cognizance of any existing suit in the Court as well as look into and adjudicate upon fresh disputes.3) If no settlement is arrived at, the parties can continue with court Proceedings.4) Every award of the Lok Adalats shall be deemed to be a decree passed by Civil Court and is binding on the parties and execution proceeding can be filed accordingly.5) No appeal lies against the decree passed by Lok Adalats as the matters are settled through negotiation and mutual consent of the parties.6) In case where matter is compromised or settled in Lok Adalat or award is made, then the Court fee will also be refunded in the manner provided under the Court Fee Act / Legislation.

Guidelines for organizing Lok Adalats

1. The Lok Adalats are constituted under the Legal Services Authorities Act, 1987. The State/ District/ Taluka Level Legal Services Committees/authorities constituted under the Act (Hon’ble sitting Sr. Judge of court) have to be contacted for doing the ground work for organizing Lok Adalats.


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Quick Bites Lok Adalat Civil suit/ Debt Recovery Tribunal (DRTs) SARFAESI act Public Money Recovery Act Purchase & sale of NPA Recovery agents Bank’s special schemes for recovery – SANKALP

2. Cases of amount involving up to Rs. 20.00 lacs can be referred to Lok Adalats as per Policy.

3. The branches should go through their records and identify the borrowers’ accounts coming under the purview of Lok Adalat. A list of such borrowers should be prepared and kept ready. While finalizing such list, the willingness of the borrowers/ guarantors, their net worth, actual and as per record, value and nature of the securities available in the account are to be considered.

4. Though, pre-litigation disputes can also be taken before Lok Adalats, for selection of cases under the suit filed category, it is advisable to give priority on selection of old cases, which are pending before the Civil Courts for more than three years. Please note that DRTs also in some centres have been conducting Lok Adalats in respect of cases under their purview. Hence, the Bank does take benefits of such Lok Adalats. However, prior sanction of the Competent Authority, based on the quantum of sacrifice shall be obtained before giving consent at DRT Lok Adalat.

5. For the purpose of organizing Lok Adalats, it will be advisable to identify the area taking into consideration of conglomeration of the branches before approaching the concerned Judicial Authorities, so that maximum number of branches can participate.

6. On getting approval from concerned Judicial Authorities for organizing Lok Adalats, summons be prepared, authorized/ signed by the Hon’ble Court and be served preferably through Court representative and as far as possible borrowers should be approached personally. It should be seen that the branch manager/ officials of bank ensure that borrowers/ guarantors remain present during the proceedings of Lok Adalat and if possible a settlement should be arrived before hand.

7. Considering the detailed guidelines contained in the recovery policy or as may be updated from time to time on negotiating compromise settlements, it should not be difficult for the region/ branch to arrive at amount acceptable from the borrowers.

8. Powers for sacrifice have been delegated to various functionaries for compromise settlements. However, the region should ensure that only those officials, who have been delegated with adequate powers of compromise/ sacrifice and other requisite authority, should attend the Lok Adalat so that instant and clear cut decisions can be taken as to the extent of which Bank is willing to compromise.

9. Compromise be entered and it should be ensured that in the consent terms default clause is incorporated against the borrower and the guarantor stating that in the event of default either in full or part or non-adherence to the terms of the award, Entire contractual amount as claimed with all interests and costs thereon would become payable forthwith minus the amount already received in pursuance of the award so made.

10. Further, it is imperative that after the amicable settlement is arrived at with the borrower/s; the branches should ensure to obtain Recovery Certificates/ Decrees where applicable in such accounts and monitor the accounts very closely to ensure full recovery of compromised amount as per the consent terms filed before the Lok Adalat.


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11. Where an award has been made by the Lok Adalat in the matter which was transferred from the Court, the Bank must appraise the concerned Court and apply for and obtain refund of the court fees, wherever applicable.

12. It may please be noted that all such RC or decrees awarded by the Court are valid for execution like a normal decree obtained by the bank.

Settlement Formula

1. A decree shall be sought from the Lok Adalat for the principal amount and interest claimed in the suit as per terms of compromise with default clause, and after full payment of decree amount, the branch shall issue a Discharge certificate.

2. As far as possible the branch shall endeavor to recover at least the outstanding amount as on the date of NPA/ suit filed whichever is higher.

3. While settling, the compromise amount may be arrived at considering the Net Present Realizable value of security, worth of the borrowers/ guarantors and their repaying capacity etc. However, Bank should endeavor to Recover a minimum of the following:-

* DB A/cs: Min 75% of the gross outstanding amount as on the date of NPA.

* TWO /PWO/ Loss A/cs: Min 50% of the gross outstanding amount as on the date of NPA.

4. However, in genuine cases where no security is available or realizable value of security is much less than the outstanding contractual dues, borrowers/ guarantors worth is negligible, cost of suit is high, suit is being dragged for long duration without any decision etc., the bank may accept lesser amounts on merit authorized by competent authority having such delegated powers of waiver / sacrifice.

5. As far as possible it shall be to endeavor to recover the entire compromise amount in bullet payment within a period of -90- days. In suitable cases the period of payment may be considered unto one year or beyond but not exceeding three years with payment of interest @ Base rate plus 4 % and in no case below 10% simple.

6. The negotiated agreement with the borrower shall contain a default clause in terms of which if the borrower makes a default, in payment, the entire debt will fall due for payment and bank may proceed to execute RC / decree received by Lok Adalat.

Sanctioning Authority

The competent authority under whose discretionary powers the proposal falls shall take decision on the compromise settlement as per Discretionary powers delegated to different authorities for write off/ waiver.

DRT – Lok Adalats


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DRTs in some centres have been conducting Lok Adalats in respect of cases coming under their purview. Bank does take benefit of such DRT- Lok Adalats. However, prior sanction of the Competent Authority, based on the quantum of sacrifice, shall be obtained before giving consent at the DRT Lok Adalat.

2. Legal Action: Civil Suit/Debt Recovery Tribunal (DRT)

Before initiating legal action, Bank may adopt any one or more of following strategy:a) Efforts to be initiated for compromise settlement.b) Appropriate action to be taken under SARFAESI Act, 2002.c) Ascertain the availability and realisability of securities, net worth of borrowers, guarantors and enforceability /validity of documents.d) Issuance of legal notices.

It is advised to keep documents alive under all circumstances, steps be taken to prepare for filing suit and it is ensured that the suit is filed within limitation period.

Accounts requiring legal action shall be referred to Regional Office at least 6 months in advance before the expiry of documents so that the Regional Office, Zonal Manager/Corporate Centre and Advocate/s will have sufficient time to study the case. It is advisable that while preparing such proposal branch should also put on record the possible strategies / available avenues to execute the decree / RC to realize the dues.

On receipt of sanction from Regional Office, all the relative papers, xerox copy of documents, etc shall be immediately handed over to the concerned advocate/s against proper acknowledgement. On receipt of the draft of legal notice to be served, the branch shall immediately verify the facts and particulars and return the same to the Advocate/s with corrections, if any, to serve the legal notice.

If there is no response to the legal notice/s, our Advocate/s shall be suitably instructed to proceed with filing of the suit, etc. rather than to wait for a reminder from him/them. The plaint prepared by the Advocate shall be thoroughly scrutinised.

The plaint shall rely not only on the documents and ledger outstanding but also on the correspondence between the borrower and bank where he/they have agreed to regularize the account, sought time to repay the dues and financial statements (Balance Sheet & P&L Account) prepared and made available to the bank. The plaint original application (OA) involving Rs 50 lacs and above be got vetted by legal Deptt at RO/ZO/BCC.

Proviso: Waiver of Legal Action

In case the sanctioning authority is of the view that initiation of legal action will only amount to increasing of the cost without any fruitful results, such sanctioning authority may request for waiver of legal action to the next higher authority (unless such an action is required as a coercive measure, for instance against willful defaulters) who will be the competent authority for such sanction.

Following steps to be taken while preparing for filing suit in civil court or DRT.


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16.Branch should appropriate the credit balance in any current / savings account / and/or FDRs in the name/s of the Borrower/s or Guarantor/s, prior to filing the suit( Right of set-off).

17.Reasonable notice to be given to the borrower before filing suit.

18. In the case of hypothecated goods, take possession of the assets and sell the same after giving due notice.

19. In case the LIC policies assigned to Bank, surrender the policies and appropriate the surrender value so received from LIC in the account.

20.The proceeds of securities such as, NSC, Mutual Fund, shares, debentures etc. should be appropriated/ adjusted against the loan account.

21.Ensure that documents / securities are enforceable against borrowers / guarantors.

22.Proper and meaningful discussions to take place and Advocate should be briefed accordingly before filing suit.

23.Ensure that the draft Plaint is prepared by Advocate within a reasonable time of assignment of the case.

24.All details with facts and figures stated in the draft Plaint/OA suit be verified and should be sent to the Competent Authority for approval along with the list of documents.( OA means Original Application.)

A case involving Rs.10 lacs and above shall be filed in DRT and below Rs.10 lacs is to be filed in Civil Court.

Proceedings before Civil Court

1. Case to be filed with the Civil Court within a reasonable time after approval received from appropriate Authority

2. Advocate may be instructed to file Application for interim sale of hypothecated movable assets, which are subject to speedy and natural decay, along with filing of Plaint.

3. Plaint should contain description of all relevant documents and securities charged to the Bank.

4. While filing the Suit, Xerox copies of documents only need be given to the Advocates & Original Documents should be retained with the Branch till Court requires the same.

5 Interim reliefs such as injunction against sale of properties, attachment before judgment, appointment of Receiver, Decree for admitted dues should be prayed as a rule.


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6. Account Extracts should be produced and certified as per the provisions of Bankers Books Evidence Act and be annexed to the Plaint.

7. In case branch is proceeding for destruction of old records, records pertaining to suit filed cases are to be preserved.

Procedure after filing the Suit with the Civil Court/DRT

1. Civil Court gives a Suit number and issue summons to borrowers /guarantors called defendants.

2. Branches should obtain interim orders for restraining the mortgagor from transferring, alienating or disposal of the mortgage assets in any manner, attachment of uncharged assets of the borrower and guarantors including debtors and appointment of receiver where there is a income from the charged assets or otherwise to the borrower and guarantor.

3. Serving of summons is very important for quick disposal of the case and the Branch / Advocate should take maximum care to see that the summons are served within a period of one month.

4. If summons are served on the defendants, proceedings commence with evidence by way of Affidavits filed by the Bank and Defendants/Opposite parties. In case of DRT, no cross-examinations of witness is allowed without their specific permission. This is followed by arguments ending up in Judgment and Decree.

5. Evidence by way of affidavits as aforesaid, clarifications / documents required by Civil Courts should be filed in time and no adjournment should be sought on this score. Reply to counter-claims raised by the borrower/s should be filed immediately.

6. Attempt to take adjournment by Defendants’ should be opposed by the Bank’s Advocate if sought on any ground including that their compromise proposal is pending under consideration before the Bank.

Passing of Decree.

1. Branches must ensure that the statement of expenses, such as court fees, advocate fees and other expenses be claimed in the decretal amount along with the claims as made in the plaint.

2. Within one month of obtaining the Judgment Decree the execution Application has to be filed by the Branch.

3. In addition to or in the alternative the Branches concerned may consider applying to the Court for an Order under Order 21 Rule 41 of Civil Procedure Code, requiring the Judgment Debtor to declare on Affidavit before the Court all the particulars of his attachable assets.

4. In case of a Decree for realisation of the hypothecated book-debts, the Court will appoint a Commissioner or Receiver to realise the book-debts by sending notices of demand to the


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Debtors of the Borrower / Guarantor who is the Judgement Debtor and if necessary by filing a Suit and taking legal proceedings against the Debtors for recovery of the amounts which are due by the Debtors and which are hypothecated to the Bank.

5. Where the Judgment Debtor i.e. borrower / Guarantor is entitled to any shares or Debentures in any Company or has deposits in any other Bank or Company, the Bank should initiate Garnishee Proceedings.

6. The Branch should initiate action and proceed with the execution of the decree for the entire outstanding, if there is a case of default in payment as stipulated in the decree.

7. If any money is deposited by the Judgement Debtor with the Court’s Office/court Receiver, pending disposal of the suit, Branch should follow up with them and ensure early withdrawal/collection of money.

8. Even if an Appeal is filed by the Judgement Debtor against the Bank before the Appellate Court challenging the money decree passed by the lower Court in Bank’s favour, the Bank should nevertheless proceed to apply for execution of the decree passed by the lower Court, unless the execution of decree is stayed by a specific order.

9. Where there are two or more Judgement Debtors in the decree obtained by the Bank, and in the absence of anything to the contrary provided in the decree, the Bank has an option to execute the entire decree either against any one or more or some or against all the Judgement Debtors.

10. If the decree is sought to be executed after a period exceeding two years from the date of the decree or if the decree is sought to be executed against the legal representative/s of the Judgement Debtor, then an Application will have to be made in the first instance before the executing Court for leave of the Court to executive the decree.

11. If a decree is passed against a partnership firm the Bank will have to apply for leave of the Court under Order 21 Rule 50 of C.P.C. for the purpose of executing such a Decree against a partner who was not made a party to the suit or who was not individually served with the Summons in the Suit.

Recovery through Mortgage Suit:

Wherever the collateral security has been mortgaged to cover the advance and the Bank wants to realise its dues through such security, the mortgage suit is to be filed.

Recovery through Summary Suit:

A summary Suit can be filed as per the provisions laid down in Order 37 of Code of Civil Procedures (CPC) at specific centres notified by the respective High Court. The summary procedure is not available when the Plaintiff seeks to enforce any securities by way of mortgage, hypothecation or pledge or any other charge on any property. So far as Bank advances are concerned, Summary Suits can normally be filed, inter alia in the following cases:


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When the suit is against a borrower on a mere Promissory Note or a Term Loan Agreement, wherein no security is to be enforced; or

When the suit is against a borrower on a Pro-Note or Term Loan Agreement and / or guarantor on his Letter of Guarantee, wherein no security is sought to be enforced against either of them; or

When the suit is against a guarantor alone on his Letter of Guarantee, wherein no security is to be enforced against him; or

When, in a Bills Purchase or Discount facility, the suit is against the borrower (who would be the drawer) and acceptors and guarantors, if any, wherein there is no security to be enforced.

(i) In the suits tried under Order 37 of CPC the Defendant has to apply for leave to defend such suit and the Court may not grant such leave but decree the suit in favour of Bank if the Court is satisfied that the Defendant has no substantial defence to raise or that the defence intended to be put up by him is frivolous or vexatious. Even when he is permitted to defend the suit, the Court has powers to direct him to give such security and within such time as the Court may fix.

(ii) Order 37 of CPC applied to all High Courts, City Civil Courts and Courts of Small Causes. It also applies to all other courts, subject to proviso that the High Court may, by notification in the Official Gazette, restrict the operation of the Order only to such categories of suits as it deems proper. The summary procedure normally takes shorter time than the usual procedure. Therefore, in cases mentioned hereinabove or where the security is negligible after taking the decision at appropriate level to give up such security the Branch Advocates may be instructed to consider filing wherever possible, a Summary Suit under Order 37 of CPC.

Recovery through Money Suit:

Where there are no securities by way of Mortgage and the Bank is to recover the dues on the basis of loan documents or amounts paid to the borrower, the suit will be filed to get a money decree against borrower / guarantor.

Steps after obtention of recovery certificate from DRT / decree from Civil Court

Debt Recovery Tribunals, in cases before them, issue Recovery Certificates to the Recovery Officer for recovery of the amount of debt specified in the Certificates. On the basis of the said Recovery Certificates, the Recovery Officer proceeds to recover the amount in any of the following ways:

(a) Attachment and sale of the movable and immovable properties of the borrower / guarantor.(b) Appointing a receiver for the management of the movable or immovable properties of the defendant.


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(c) Issue Garnishee Order against third parties if any amount is due from them to the defendant.(d) Arrest of the defendant and his detention in prison.

When a Recovery Certificate is issued by DRT or Decree has been obtained by the Bank in its favour, prompt steps should be taken for execution of such Recovery Certificate / decree for recovery of the Bank’s dues. Lack of prompt action and proper follow up at the Branch/Region and Zonal level in the matter of execution of Recovery Certificate / decree may jeopardize and adversely affect the Bank’s interest and result in the weakening, deterioration and frittering away of the securities obtained by the Bank. Such delays will also make it difficult to enforce or realise the securities for recovering the RC / decretal amount. In many cases, after a Recovery Certificate / decree is obtained, the Branch / Zonal Office fails to identify the assets of the borrower / guarantorwhich can be attached in execution of the decree, with the result that the execution proceedings remain pending without the decree getting executed. In the absence of details of attachable assets, Bank’s Advocates for recovery are also helpless, resulting in the entire proceedings being futile, in spite of the Bank having to incur enormous legal costs. Branch should make local enquiries to ascertain the attachable assets of the Judgement Debtor. Where the Branch has on its records copies of Income Tax / Wealth Tax Assessment Returns, ascertainment of assets will be easier. Branches should closely liaison with the execution of the case and the Recovery Officer for the purpose of ensuring execution of Recovery Certificate / Decree.

Arrest of defendants / judgement debtors

The DRT has the power to pass interim orders by way of injunction, attachment to direct the defendant to furnish security in pending cases. In case of disobedience of such orders the DRT can order such persons to be detained in Civil prison for a term not exceeding 3 months. The Branch should file petition seeking injunction and attachment orders against defendants and their properties. Wherever such orders are defied by the defendants, the Branch must file petition for arrest of the defendants.

In case of Recovery Certificate issued by DRT, the Recovery officer has got the powers under Section 25 of the DRT Act inter alia, to recover the amounts under the RC by arrest and detention of the judgement debtors in prison. Therefore, in cases wherever our Bank / Branch concerned is convinced that the borrower / judgment debtors are intentionally avoiding making payments though they have means to pay, in fit cases, the branch may, after obtaining permission from the authority which has authorized filing Recovery Application, file an Application before the Recovery Officer for arrest and detention of such judgment debtors.

In execution of money decree awarded by the Civil Courts, the executing court can send the judgement debtor into prison if the Court is satisfied that the judgement debtor, with the object of delaying the execution of decree, has after filing of the suit in which decree was passed dishonestly transferred, conceal or remove any part of the property. Branches should also take action against such properties in consultation with the advocate of the Bank for realising the Bank’s dues.


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Initiation of winding up proceedings

In case of limited companies where the securities are not available, the bank may also consider to initiate liquidation proceedings by issuing a demand notice under section 433 of the Companies Act.Insolvency proceedings

In suitable cases where borrowers / guarantors, are other than limited companies, have transferred the assets in the names of their family members and others to deprive the Bank of its lawful rights to recover the Bank’s dues, branches with the permission of the competent authority may initiate insolvency proceeding against such borrowers /guarantors.

Our Board of Directors in their meeting held on 03.02.2013 have approved the scheme of ‘Appointment of Specialized Agency/Person for assisting in recovery from the office of O.L. (BCC/BR/105/45 dated 05.02.2013)

3. SARFAESI ACT, 2002

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is an effective tool in the hands of the bank to enforce the security interest and recover the dues thereby reducing NPAs/PWOs.

The Act deals with three aspects:

1. Enforcement of Security Interest by secured creditor (Banks/FIs].

2. Transfer of non- performing assets to asset Reconstruction Company, which will then dispose of those assets and realise the proceeds.

3. To provide a legal framework for securitization of assets.

Enforcement of Security Interest

Before enforcing security interest, branches should ensure that the borrowal accounts comply with the following criteria –

2. The contractual dues in the account should be more than Rs.1 lac.

3. The default must have occurred i.e. the account should have become NPA as per RBI norms.

4. The security charged to the Bank must be specific, clear and available to the Bank. It must be duly and effectively charged to the Bank and therefore, enforceable if the borrower fails to pay in response to the Notice.

5. The security documents in the advance account should be in full force on the date of serving the 60 days notice. As an abundant caution, it should be ensured that they


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will be in force even at the time the action that will follow for enforcement of security i.e. at least up to one year from the date of serving the notice.

6. The security documents should be duly filled in.

7. Either our Bank must be the sole banker to the borrower i.e. 100% lending is done by us or in case of consortium lending consent of secured lenders representing not less than 60% of the amount outstanding in value is obtained.

8. In case of multiple Banking, if the security is exclusively charged, the bank can proceed as though it is the sole banker.

9. Even in B.I.F.R. referred cases and suit filed cases, action can be taken.

10.An action under SARFAESI Act also facilitates abatement of reference from BIFR.

11.Since limitation Act applies to action under SARFAESI, care should be taken that the action is within limitation time.

Issue of Notices

Service of notice is a pre-requisite for enforcement of security interest. Hence, it should be ensured that proper notices are served on the borrowers/ guarantors who created the security interest.

Powers have been delegated to Authorized Officers (all Executives in Senior Management Grade/Scale-IV and above including branch heads): -

i) to issue/ authorise to issue Notices, as per their discretionary lending powers, under SARFAESI Act and take all steps under the Act.

ii) to take possession, get the same valued and insured and safeguard the secured assets of the borrowers.

iii) to incur various revenue expenses including insurance charges, charges for valuation of property, stock audit/valuation, charges of security guards and other expenses for safeguarding the property upon take over of secured assets.

iv) to appoint Enforcement Agencies (Recovery agents/Security agents) to take physical possession of the assets and safeguard the same till final sell off.

v) to take steps for realisation of secured assets in satisfaction of Bank’s dues and for the purpose to lease, assign, sell or transfer the secured assets on taking possession thereof and do all other acts, deeds, matters and things as empowered under the Act.

To facilitate smooth implementation of the Act, certain administrative powers are extended to functional authorities.


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All decisions taken under the Act shall be reported to the next higher authority. Decisions taken by the Chief Managers and Deputy Regional Managers shall be reported to the Regional Manager concerned.

(a) When notice can be given An account is classified as NPA & is not falling in any of the category described

below. Notice must contain the contractual dues and details of secured assets.

(b) When notice can not be given

When Bank has lien on any goods, money or security under Contract Act or any other Law for the time being in force.

A pledge of movable asset within the meaning of Sec.172 of the Indian Contract Act. Any security interest created in agricultural land. Any case in which the amount due is less than 20% of the Principal amount and

interest thereon. Any security interest for securing repayment of any financial asset not exceeding

Rs.1/- lac Any property/ies not liable for attachment (excluding the properties specifically

charged with the debt recoverable under this Act) or sale under the first proviso of sub section (1) code of the Civil Procedure, 1908.

Any rights of unpaid sellers under sec. 47 of the Sale of Goods Act. Any conditional sale, hire purchase or lease or any other contract in which no

security interest has been created. Creation of any security interest in any air craft as defined in sec. 2 of the Air craft

Act. Creation of any security interest in any vessel as defined in clause 55 of sec. 3 of the

Merchant Shipping Act.

If agriculture land has been utilized for non agricultural activities, action under SARFAESI Act can be taken, even though the status of the land in Revenue Recover is Agriculture Land. This has been decided by Uttaranchal Higher Court in a case filed by Uttaranchl Gramin Bank against Hari Sagar Educational Trust.

Contents of Notice:

Notice is the basic document and is the subject matter of scrutiny before the court/DRT .Branches must exercise utmost care while preparing notice. Notice must contain the contractual dues (upto date of serving the notice) Notice must contain the details of the secured assets i.e. movable or immovable securities charged to the Bank.

Service of the Notice

Service of Notice may be made by delivering or transmitting the notice at the place where borrower or his agent actually and voluntarily resides or carries on business or personally works for gains by:A. Registered post AD.


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B. Courier.C. Any other means of transmission of documents like fax or electronic mail service.D. By affixing copy of the demand notice on secured assets.

If the borrower is a body corporate, the demand notice shall be served on the registered office or any of the branches of such body corporate. The demand shall be made on all borrowers, if more than one. If notice returned unserved, service shall be effected by publishing the contents of the demand notice in two leading newspapers, one in vernacular language having sufficient circulation in that locality.

Representation by Mortgagor / Borrower / Guarantor Sec. 13(3A)

15. If borrower on receipt of notice represents to the Bank or raises any objection, the Bank shall reply the representation within 15 Days of receipt of such representation / objection.

16. In case the borrower fails to discharge his liability in full within the Notice period, the Bank may take recourse to one or more of the measures given under Sec.13 (4) of the Act including possession of mortgaged properties for which Authorised Officer shall issue notice demanding possession.

Possession of Movable and immovable Secured Assets

When amount demanded in demand notice is not paid within time, the Authorised Officer (AO) shall proceed to realize the amount by adopting any of the means provided in sec.13 (4).including possession of secured assets. It has been experienced that branches resort to symbolic possession which may in some cases lead to compromises but in case of need such possession cannot be enforced as the AO cannot handover the possession of the secured asset to the buyer, if any. As such branches should take physical possession only for facilitating realization of the Bank’s dues.

AO shall take possession of secured assets in the presence of two witnesses Known as Panchs. AO shall draw Panchnama as given in the circular no. BCC/BR/96/247 dated 08.7.2004.

AO shall make inventory of the secured assets taken into possession in the form as given in the circular no. BCC/BR/96/247 dated 08.7.2004].AO can also have video film of the secured assets.

AO shall keep the movable and immovable secured assets taken into possession in his custody or a person authorized or appointed by AO.

AO must sell the movable secured assets immediately if it is subject to speedy or natural decay.

AO shall take steps for preservation and protection of the movable and immovable secured assets till sold/ disposed off.


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AO shall give a public notice in two news papers, one in English language and other in Vernacular language widely circulated in the area where the secured assets are situated / located immediately within a week of taking possession.Specific procedure while applying before CMM / DM for seeking assistancefor physical possession:

The application by the secured creditor to Chief Metropolitan Magistrate (“CMM”) or District Magistrate (“DM”) to assist in taking possession of secured asset will now have to be accompanied with an affidavit duly affirmed by theauthorized officer of the secured creditor

Valuation of Secured assets and fixation of Reserve Price

AO shall obtain valuation, of secured assets from an approved valuer and fix the reserve price in consultation with the secured creditor.

Sale of the Movable Property

AO may sell the movable property taken into possession in one or more lots, by adopting any of the following methods:

By obtaining quotations from parties dealing in movable properties or otherwise interested in buying such movable property.

By inviting tenders from the public. By holding public auction. By private treaty: In case the auction is not successful the AO may dispose the

secured movable assets by private treaty by giving notice to borrower. In case sale by public auction or by inviting tender from the public, a public notice in

two leading newspapers and out of them one in vernacular language having sufficient circulation should be given. The public notice must give the following details:

a) Details about borrower & the secured creditor.b) Description of movable secured assets to be sold for identification.c) Reserve price.d) Time & place of public auction.e) Depositing of Earnest Money.f) Sale must be on “as is where is and whatever is” basis.g) There should be clear 30 days between the notice of sale in the news paper and actual sale.h) After publishing sale notice , one copy of it must be sent to borrower along with letter

i) the banks were now empowered to accept any immovable property in realization of a claim from a defaulted borrower, as the banks were not able to find appropriate buyers to buy for these assets. The Act proposes that if the sale of such asset is postponed due to lack of a bid at the reserve price, the secured creditor (including banks) may bid for the asset at a subsequent sale and make appropriate adjustments of the amount due to the bank. This change enables the banks to secure the asset(s) in part fulfillment or full


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and final fulfillment of the defaulted loan. However, the Branches should take prior permission from controlling offices before bidding for the immovable property.

Sale of the Immovable Property

AO must give notice demanding possession.

AO must fix possession notice on the outer door or at such conspicuous place of the property. Panchanama & Inventory of articles be also prepared.

Possession notice should be published in two leading newspapers, out of which one in vernacular language having sufficient circulation in that locality.

After possession of the immovable property AO shall take steps for preservation &

Protection of Secured assets.

AO may sell the immovable property taken into possession in one or more lots, by adopting any of the following methods:

A. By obtaining quotations from parties dealing in immovable properties or otherwise interested in buying such immovable property.B. By inviting tenders from the public.C. By holding public auction.D. By private treaty.

In case the auction is not successful the AO may dispose the secured movable assets by private treaty by giving notice to borrower. In case of sale by public auction or by inviting tender from the Public, a public notice should be given in two leading newspapers and out of them one in vernacular language, having sufficient circulation. The public notice must give the following details:

a) Details about borrower & the secured creditor.b) Description of immovable secured assets to be sold for identification.c) Reserve price.d)Time & place of public auction.e) Depositing of Earnest Money.f) Sale must be on “as is where is and whatever is” basis.g) There should be clear 30 days between the notice of sale and actual sale.h) After publishing sale notice , one copy of it must be sent to borrower alongwith letter as per draft provided in Annexure N2 of circular No. BCC/BR/96/247 dated 08.07.2004

In case borrower is not willing to hand over the peaceful possession of assets, facts should be recorded and application be made to District Magistrate to take possession of the assets and hand over the same to the bank for realisation of dues. While making application please note to enclose copies of Demand Notices, Acknowledgement for having served the notices, Notice Demanding Possession, Note prepared as on the date of taking possession, copies of mortgage deed alongwith supporting papers etc. District Magistrate should take decision within 60 days.


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Confirmation of sale:

(a) The highest bidder has to pay 25% (inclusive of earnest money deposited) of the bid amount in terms of the sale notice immediately i.e. within 24 hours and the balance 75% of the bid amount is payable in 15 days. However, the sale is to be confirmed after expiry of 30 days from the date of sale and in no case the sale to be confirmed before expiry of 30 days. Only after confirmation of sale the sale certificate to be issued.

(b) In case the borrower approaches the Bank before confirmation of sale offering contractual dues / amount acceptable to the Bank, contractual dues Ii.e. amount claimed in sale notice ) plus expenses plus interest @15%PA from the date of proclamation of sale +5% of the purchase money ( in case after sale which is to be paid to successful bidder ) and requests for cancellation of the sale, Bank shall accept the amount and hand over the possession to mortgagor. This is in view of Right of Mortgagor to redeem. However for offer by mortgagor more than the sale price but below contractual dues suitable view may be taken examining legal aspect.

Repossession / Seizure of Vehicle:

a. Whenever, the facility / ies are against the vehicles and the borrower fails to repay the dues and the account turns into NPA, the branch shall give a notice to the borrower advising the dues and the intention of the Bank to seize the vehicle if the overdues are not cleared within the specified period.

b. On failure of the borrower in liquidating the overdue as above, the vehicle should be seized and parked in a godown with proper insurance.

c. The vehicle to be auctioned following procedure given in Sale of Movable Property.

d. In the meantime, if the borrower deposits total overdue amount alongwith expenses incurred by the branch for seizure, security, rent, insurance, etc., Or for the lesser amount with due permission of Regional Authority, the Branch may release the vehicle to the borrower.

Establishment of Central Registry under the provisions of the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002 (SARFAESI Act).

Under provisions of Section 20 of SARFAESI Act , Government of India has decided to set up a Central Registry for the purpose of registration of transactions of securitisation, asset reconstruction and security interest over property and accordingly for the purpose Indian Banks’ Association has obtained a licence under section 25 of Companies Act 1956 for incorporation of a Government Company with 51% shareholding of the Central Government and balance by select Public Sector Banks and National Housing Bank.

Accordingly it is advised as under:


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1. Government of India has made it compulsory that mortgages created by way of deposit of title deeds are to be registered with the Central Registry within 30 days from the date of creation of the mortgage.2. Presently financial institutions will be required to file only information relating to the mortgage by way of deposit of title deeds.3.Branch to incorporate information in respect of all he mortgages created by deposit of title deeds. 4. Such registration system is operative on-line and has been devised to facilitate the banks to assign User IDs to various branches and regional offices to give access to the registration system for the purpose of registration of mortgages by deposit of title deeds.5. Such registration shall be subject to registration fees payable by bank.6. Particulars of any charge created security interest over property is required to be filed with the Registry within 30 days from the date of creation .7. Failure to do so will need specific permission for such registration from Central Registrar, however, subject to payment of penalty as specified therein.

Right to lodge a caveat

The Act enables the secured creditor or any person claiming a right to appear (“Caveator”) before the Tribunal, Court of District Judge, Appellate Tribunal or High Court (“Authority”), to file a caveat before the Authority

Conversion of debt into equity

The Act allows for converting any part of debt into equity shares of a borrower company, and such conversion shall always be deemed as valid.

4. Recoveries under Public Money Recoveries Act

(i) Various State Governments have enacted a law generally called the Public Money Recovery Act providing for speedy recovery of certain dues payable to the State Government, State Financial Corporations, Nationalised and other Banks.

(ii) Such an Act authorises the recovery of the dues of these institutions as a recovery of arrears of land revenue.

(iii) The Act, generally, covers the loans granted under any of the State/Central Government sponsored schemes.

(iv) The Act enacted by various State Governments may differ in operational details and various proforma of forms to be used. Branches are, therefore, advised to refer the issue to the Legal Department at Zonal Offices or to their approved advocates.

(v) Given below are some of the salient features of the Act which may be common to all the States.

Salient Features


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(i) No suit can be filed in a Civil Court for recovery of any dues under this scheme. No Civil Court can grant any injunction against such a move by the bank.

(ii) In other words, when an advance is granted under a State/ Central sponsored scheme no civil suit can be filed.

(iii) However, a civil suit can be filed against the guarantors.

(iv) Branches should file an application to the District Collector requesting him to recover the Bank's dues in respect of a particular borrower as if it were an arrear of land revenue and remit to the branch. Branches should submit the request only as per proforma fixed by the respective State Government.

(v) The collector will then issue a notice of the demand to the defaulter showing the amount and the time within which he has to pay the amount.

(vi) If the borrower does not respond to the legal demand notice, the collector will issue an order of attachment of hypothecated movable property under relevant section of the Land Revenue code or mortgaged immovable property.

(vii) The execution of the attachment order has to be carried out by any Revenue Officer preferably by Tehsildar/Mamalatdar.

(viii)While attaching the property, a Panchnama should be prepared in the presence of the defaulter and witnesses. The Panchnama should contain the following details:

(a) Time, Date and Place of attachment.

(b) Names, age, occupation and address of witnesses.

(c) Description of the properties attached alongwith the value.

(d) Amount due from the defaulter.

(e) Signature of the defaulter should be taken on the Panchnama and copy of the same be given to him. If he is absent, the panchnama should clearly state that he could not remain present in spite of notice served to him. (f) If the property attached is handed over back to the defaulter for safe custody by taking two sureties, a clear note of the same be made and signature of the defaulters and sureties taken. In other case, it may be handed over to the applicant institution for safe custody to be kept at the premises of attached property, properly secured and sealed and a watchman put at the cost of defaulter. The panchnama should clearly mention what course is adopted for safe custody of attached property.

(g) Officer executing the attachment order should ensure that the properties exempted from attachment or sale as per the provisions of the Civil Procedure Code are not attached.


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(ix) Before executing the attachment order issued by the collector, the executing officer has to give notice to the defaulter. This is obligatory in case of buildings used as human dwellings. The law further provides that in the case of buildings of all descriptions due regard should be paid to the social and religious prejudice of the occupiers. Entry in the premises for the purpose of the attachment should not be made unless the said notice having been served not less than 7 days before such entry.

(x) A notice may be published in newspaper after the attachment, stating the details of defaulter, amount due, and properties attached etc. to pressurise the defaulter. The public may also be warned by such a notice not to enter into any transaction in respect of said attached properties.

(xi) In case of immovable properties, the attachment order issued should be sent to the officers, who are keeping record of the properties, i.e. Talati and Mamlatdar in case of agricultural Land/City Survey Officer and local authority in case of non-agricultural properties, (building). These officers should be requested to keep a note of attachment order against the entries of the land properties in the property record maintained by them.

(xii)The proceedings under the Land Revenue Code are for the purpose of realisation of net dues and, therefore, if the defaulter or any person on his behalf any time after the attachment order is issued and before the day fixed for auction, pay dues, the sale should be stayed and proceedings concluded. Sometimes, the defaulters pay the amount under protest to the authority. In such cases, also the amount should be accepted and the proceedings should be stayed. In case of part payment, the collector may decide the issue on merits.

(xiii)Even after the attachment order is executed, if the defaulter fails to pay the dues, the properties attached should be put to auction for realisation of the said dues.

(xiv)Sale of attached property by public auction has to be made in accordance with Rules which prescribe various stages of the auction proceedings:

(a) The local Branch Manager of the bank is required to send to the Collector a certificate in the prescribed form duly filled in and stating therein, that such sum may be recovered as if it were arrears of land revenue.

(b) The collector on receipt of such certificate will make necessary enquiries (including giving hearing to the party affected) as he deems fit to proceed to recover the amount stated therein as aforesaid as arrears of land revenue.

(c) the amount so recovered from the borrower may be paid over by the Collector to the branch after deducting the costs of collection incurred in this connection.

(d) In case of goods pledged to the bank before submitting certificate referred to above, the steps should be taken for sale of the goods pledged after completing necessary formalities and if the sale proceeds are not sufficient to cover the bank's dues then in that case alone proceedings should be taken for recovery of the balance as if it were a arrears of land


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revenue. However, these proceedings are taken for the sale of the pledged goods as directed by the Collector.

(e) In case of immovable properties, mortgaged or charged to the bank to secure the amount of loan or advance under the said State Sponsored Scheme referred to above, proceedings may be taken by the Collector for the sale of the mortgaged properties under the Act as an arrears of land revenue. If, however, there is no prospect of realisation of the entire sum due, any other proceedings are permitted to be taken by the bank such as filing of suit etc.; after obtaining the certificate of the Collector in that behalf.

Follow-up of cases lodged under the Act

(i) Branches should follow-up vigorously with concerned officials of the State Revenue Department/Collectorate for expediting recovery of dues under the Act.

(ii) Branches should extend all co-operation to the officials of the State Government for serving of notices, execution of warrant of attachment etc.

(iii) Charges, if any, prescribed under the Act may be remitted to the concerned Revenue Department only after recovery of dues by the branch.

(iv) Proportionate share of DICGC claim, if any, received should be remitted to DICGC after effecting recovery as above.

(v) In case accounts have been written-off, the recoveries should be credited to P/L Bad Debt written-off a/c.

(vi) In other cases, the amount should be credited to borrower's loan a/c.

While reporting to controlling offices, recovered under this Act should be reported separately.


1. The Legal Services Authority Act was passed in ____________to constitute the Lok Adalat District and Taluka Level.a. 1985b. 1987c. 1997 d. 1990e. 1996

2. In Lok Adalat Bank can refer following casesa. Suit Filed Accountsb. Non Suit Filed Accounts


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c. only Bd. a & b e. None of the above

3. If we have to refer the account to Lok Adalat the total dues should not exceeda. Rs 10 Lacb. Rs 50 Lacc. Rs 20 Lacd. No ceilinge. Rs 5 lacs

4. The Recovery of Debts Due to Banks and Financial Institutions Act was enacted in ___________a. 1993b. 1986 c. 1995 d. 1997e. 2000

5. Accounts where total dues are of Rs __________ and above are referred to DRTa. Rs 5 Lacb. Rs 10 Lac c. Rs 50 Lacd. Rs 20 Lace. Rs 100 lacs.

6. Maximum fee payable for registration of DRT case is Rs ___________a. Rs 100000/-b. Rs 200000/- c. Rs 150000/-d. Rs 500000/-e. No ceiling.

7. Maximum fee payable for filing appeal is Rs ______________a. Rs 10000/- b. Rs 20000/- c. Rs 40000/- d. Rs 30000/-e. Rs. 15000/-

8. Maximum period within which an appeal can be filed in DRAT, against the order passed by DRT is ___________ days.

a. 45 daysb. 30 days c. 60 daysd. 90 dayse. 100 days


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9. An action under SARFAESI ACT can be initiated in case of following:a. If balance outstanding in the account is more than Rs 1 lacb. contractual dues in the account are more than Rs 1 lacc. No such ceiling.d. If the balance in the account is RS 50000 and above.

10.The Demand Notice under SARFAESI ACT must be issued at least for a period of __________ days.

a. 30 daysb. 07 days c. 60 days d. 15 dayse. 14 days

STATE WHETHER FOLLOWING STATEMENTS ARE TRUE OR FALSE.

1. Action under SARFAESI Act can be taken in case of Potential NPA accounts. 2. Issue of Possession Notice is necessary in case of immovable assets. 3. Bank can sell the assets taken under possession under SARFAESI ACT after

issuing sale notice for 15 days. 4. Possession of secured assets can be taken forcefully under SARFAESI ACT for

recovery of bank's dues. 5. Notices under SARFAESI ACT can be sent by e mail. 6. Action under SARFAESI Act can be initiated in case of suit filed accounts. 7. Once account became NPA bank need not consider any request of borrower for

restructuring and can proceed under SARFAESI ACT for recovery. 8. Once the action under SARFAESI ACT has been initiated to recover bank's dues,

bank can not take any other action to recover shortfall, if any. 9. Once the action under SARFAESI ACT has been initiated by bank, borrower can

approach any court for redressal of his grievances. 10.Once the action under SARFAESI ACT has been taken, limitation period for

documents get automatically extended.

ANSWER:

Q 1 2 3 4 5 6 7 8 9 10

A b d c a b c d a b c

Q 1 2 3 4 5 6 7 8 9 10

A FALSE

TRUE FALSE

FALSE

TRUE TRUE FALSE

FALSE

FALSE

FALSE


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POLICY FOR RECOVERY IN FRAUD ACCOUNTS

Quick Bites

To understand the details of the functioning of the policy

Background:

Our Bank has decided to frame a policy for Recovery in Fraud accounts (Advances) pursuant to the instructions from the Govt. of India approved by our Board of Directors in the meeting held on 21.10.2012.

The above policy would be an integral part of Domestic Recovery Policy (Advances) 2012 as a separate chapter.

The silent features of the above policy are as under:

I. Committee at Zonal/ Regional Level:

In compliance with the Govt. of India guidelines it is envisaged that fraud accounts will be monitored by a separate committee at the Zonal and Regional level for the purpose of maximizing the recovery in shortest period and reducing the loss to the Bank. The constitution of Zonal and Regional Committee will be as under:

1. Regional Office Committee

i. DRM – Head of committeeii. Senior Manager/ Manager (Recovery) – Conveneriii. Legal Officer of the Region - Member

2. Zonal Office Committee

i. Deputy Zonal Head – Head of Committeeii. Executive/ In-charge of Recovery at Zonal level – Conveneriii. Legal Department in-charge - Member

II. Amount involved:

The fraud cases involving amount upto Rs. 50 lacs will be monitored by the Regional Committee & above Rs. 50 lacs by the Zonal Committee.

III. Time frame for regular review/ reporting with developments in recovery action:

i. Regional Committee to review the cases on monthly basis and submit the progress of action taken and recovery made in fraud reported accounts to the Zonal Committee through Regional Manager on monthly basis.


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ii. Zonal Committee to put up the progress of action taken and recovery made to the Zonal committee on monthly basis.

iii. Zonal Committee will review the progress reported on fraud cases in every Zonal committee meeting. This will be a regular agenda for each Zonal committee meeting.

iv. Quarterly report to be submitted by the Zonal office on all fraud cases involving Rs. 100 lacs and above to the General Manager (Recovery, Legal & ASCROM), Baroda Corporate Centre, Mumbai.

v. General Manager (Recovery, Legal & ASCROM) will submit status report to the Chairman & Managing Director on quarterly basis.

IV. Action points for the specialized team at Regional/ Zonal level:

1. The committee would immediately access all related documents/information with regard to the purported fraud. The committee and/or its members/representatives may visit the branch/place of fraud and get hold of documents, papers as warranted immediately.

2. The committee may look into the following aspects:

a) Inspection of moveable and immovable assets charged to the Bank.

b) Seek Legal opinion of Advocate/ law officers and arrange for verification of validity of security documents and enforceability of the title deeds of the securities mortgaged.

c) Explore seeking services of detective agency to find out uncharged personal assets of borrowers and guarantors.

d) To suggest to start action under SARFAESI Act and Legal action.

e) Personal meeting with the borrower and guarantor.

f) To suggest filing of Criminal action/ FIR in case of need.

g) Arrange to declare the borrower as willful defaulter in terms of the extant guidelines issued by RBI.

h) Arrange for seizure of moveable assets charged to the Bank in consultation with Legal department and Advocates.

i) Committee to appraise developments to Regional Head and Zonal Head fromtime to time.

j) Recovery Agent may be appointed if required.

k) Arrange to impound the passport of borrowers and guarantors.


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l) Any other steps to minimize the loss and to maximize recovery.

The above committees constituted would be looking after fraud cases related to Advances accounts & focus would be to initiate urgent steps to minimize the loss to the Bank & maximize the recovery.

The matters concerning staff accountability and action thereon will be monitored by Vigilance Department as usual. As such the above committees are not expected to go into such issues.


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SUMMARY

Quick Bites

To understand the Guidelines for Strategy of the Banks towards NPA Management, Recovery of Loss Assets

Background:

The draft strategy paper in the captioned subject was discussed during the meeting of General Managers (Recovery) of all PSU Banks at Department of Financial Services (DFS), Ministry of Finances (MOF), New Delhi on 12.07.2012.

The said strategy paper are received by Bank from DFS, MOF, New Delhi which are reproduced herein below. These are broad guidance on the Monitoring and Recovery of NPA only. The other details may be obtained from circular No. BCC / BR / 104 / 293 14th August, 2012.

The aforesaid Guidelines are in addition to the various Policy Guidelines of our Bank and various circulars issued from time to time in the matter.

GUIDELINES FOR STRATEGIES FOR EFFECTIVE NPA MANAGEMENT

Strategy of the banks towards expeditious recovery of loss assets and timely corrective steps to prevent slippages of Standard Assets to NPA is very crucial for the good health of banking system. Problems vary from sector to sector and hence a good strategy would include sector wise identifying the early warning signals, necessary steps to prevent slippage of such accounts to NPAs, and speeding up the pace of recoveries of NPAs.

1. AGRICULTURE SECTOR:

Speeding Up the Pace of Recoveries of NPAs:

1. SLBC forum, District Consultative Committee and BLBC forum should also be effectively utilized. Further, the services of Farmers’ Club may also be utilized for better recovery.

2. Resorting to one time settlement/compromise by organizing Rin Mukti Shivirs in the branches/cluster of branches.

3. Proper tempo should be built sufficiently in advance for launching of Recovery Campaigns during Kharif and Rabi harvesting/marketing seasons.

Full involvement of branch staff should be ensured in these Campaigns. While organizing Recovery Campaign, active participation of Chronic & Identified Branches should be ensured for better recovery from the borrowers.


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4. Settling the cases through compromise in Lok Adalats.


1. The borrower be served with a Legal notice during the 4th month if irregularity is not rectified.2. Organizing Regular Recovery Camps in general and more number of camps for branches chronic in recovery.3. Initiating Steps under SARFAESI ACT meticulously, as per the provisions of Law without giving any chance to obligants to escape or adopt delaying tactics.

4. Under Recovery arrangement branches are obtaining Post Dated Cheques/Advance Cheques signed by the borrowers towards monthly installments of the loan. Branches should effectively make use of the remedy available under Section 138 of Negotiable Instrument Act, wherein in the event ofdishonor of cheque a person can be punished with imprisonment for a term which may extend to 2 years or with fine which may extend to twice the amount of cheque or with both. Similarly the functionality of PDC management system in CBS, recovery and regular collection of EMIs need to be monitored on day to day basis the branches.

It was further decided that the practice of obtaining PDCs may be replaced/supplemented with the system of ECS Debit Authorizations which too are at par now with dishonouring of cheques U/S 138 of NI Act.

2. MSME /CORPORATE ADVANCES:


1. In respect of Loan accounts which get classified as NPA, Incumbent Incharge should immediately serve a formal notice (say maximum within 15 days) to all the Obligants for immediate regularization of the account and demanding a specific overdue amount.

2. In case if the account is not regularised as per the terms of the notice, steps should be taken to serve legal recall notice by taking up the matter with the competent authority without any delay, besides immediately establishing a personal dialogue, maximum within 30 days.

3. One of the strategies to resolve NPAs is upgradation of accounts to standard category by regularizing the accounts either through recovery of overdue amount or bringing the exposure within the Drawing Power (DP) besides other option of Restructuring /re-scheduling. In such cases, bank may permit operations in the account by tagging arrangement, which should be pro-actively implemented to get freshly slipped accounts upgraded to Standard Category.

3. OTHER STEPS:

1. Corporate Debt Restructuring: The eligible cases of corporates affected by internal or external factors with fund based and non-fund based outstanding of Rs.10 crore and above


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from the financial system in Standard/Substandard/ Doubtful categories are being referred to Corporate Debt Restructuring (CDR) Cell for revival through restructuring of debts under CDR Mechanism. In terms of the revised guidelines issued by Reserve Bank of India, suit filed and large value BIFR cases are also being considered for restructuring under CDR mechanism. All field functionaries should identify eligible accounts in the first quarter of the financial year and report the details to the Head Office by July 31st positively.

2. Debt Restructuring Mechanism (DRM) for SMEs:

The objective of the Debt Restructuring Mechanism (DRM) is to ensure timely and transparent mechanism for restructuring the debts of potentially viable SMEs facing problems for the benefit of all concerned. For the purpose of the mechanism all industrial units having investment in Plant & Machinery upto Rs.10 crore including SSI units are eligible. Debt Restructuring Mechanism is applicable to the entities, which are viable or potentially viable.

3. One to One Meetings with High Value NPAs:

In high value NPAs also, dialogue/meeting with borrowers/guarantors is necessary not only to facilitate to resolve the account but also to discuss other issues related to smooth conduct of their accounts. Therefore, besides issuing usual Demand Notices to such borrowers a formal/specific invitation be sent to such borrowers to come forward for OTS (One Time Settlement).

4. Engagement of Recovery Agencies

In terms of Policy for engagement of Recovery Agencies NPA accounts (whether non-suit filed, suit filed or decreed) with outstanding upto Rs. 10 lac are eligible under the scheme. Moreover, written off accounts can also be entrusted to Recovery Agencies to effect recovery. The progress of the Recovery Agencies should be monitored at Circle/Zonal/Regional office level and the progress is reviewed by the Board on annual basis. There is a need to implement the scheme with greater vigor and proper planning.

5. Engagement of Resolution Agents:

Similarly all NPA accounts of Rs. 1 lac and above including High Value NPA Accounts can be entrusted under Policy for Engagement of Securitisation/ Reconstruction Companies (SC/RCs)/ Firms/ companies other than SC/RCs/Retired bank Employees as Resolution Agents.

6. Recovery through Legal Action:

Where SARFAESI Act-2002 is not applicable or where bank’s dues are not fully recoverable through action under SARFAESI Act, legal action should be initiated immediately without loss of further time. In terms of Recovery of Debts due to Banks and Financial Institutions Act 1993, Debt Recovery Tribunals have been established to adjudicate claims involving an amount of Rs.10 lakh and over inrespect of amounts due to Banks and FIs. Suit/Claim filed before Civil Courts/DRTs shall be pursued effectively.


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Remedies under SARFAESI Act and DRT Act are complimentary to each other and can be taken up simultaneously.

7. SARFAESI Act:

The SARFAESI ACT-2002 is a handy tool available with the secured creditors todeal with the defaulters. The Act facilitates enforcement of security interest by secured creditors without intervention of courts. There is provision of transfer of NPAs to ARCs which will realize the impaired assets within a time frame. Field functionaries should make effective use of the rights of enforcement of security interest as provided in the Act for quicker resolution of NPAs.

8. Transfer/Sale of Financial Assets to Securitisation Companies/ Reconstruction Companies

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) provides also for sale of financial assets (NPAs) by banks / FIs to Asset Reconstruction Companies (ARCs). Sale of NPAs is an important mechanism available to lenders for quicker resolution of NPAs proving difficult of recovery and cleansing the balance sheet. Provisions of this policy should be put to optimum use by field functionaries for reduction in NPAs.

9. Sale of NPAs to Other Banks/Financial Institutions (FIs)/Non Banking Finance Companies (NBFCs):

Besides selling their NPAs to ARCs Banks are now allowed by RBI to resolve their NPAs by sale to other banks/ FIs/NBFCs (other than Securitization Companies & Reconstruction Companies).

10. Engagement of Detective/ Investigating Agency:

Based on experience and qualifications, a panel of Detective/Investigating Agencies may be prepared at Circle level. Performance of such agencies be reviewed after one year for renewal of the empanelment. Circle Head may approve availment of services of the Detective Agencies/ Investigating Agencies on merits of the each case and cost consideration.

11. Negotiated Settlement for Recovery:

After analysis of the account, when it is found that the unit is not viable for rehabilitation or restructuring then normal course of recovery procedure should be immediately initiated. In case recovery is not forthcoming through normal process, possibilities of settling the account through OTS are to be explored.

Resolution of Non Performing Assets through One Time Settlement (OTS)/ Negotiated Settlement/Compromise has been recognized as an effective non legal remedy by the Bank due to twin advantages of faster recovery of dues and income generation by recycling of funds, otherwise likely to be blocked for a long time.


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