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8/8/2019 NPAs and Recovery Policy
1/31
NPAs And Recovery Policy
Presented By-
Bipul Singh Rajput (09FT-041)
Chandan Jain (09FT-043)Chandan Jee (09FT-044)
Ankur Srivastava (09IT-002)
Rahul Jain (09IT-020)
Komal Agarwal (09IT-)
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NPA-Non Performing Assets
A/c which ceases to generate income for the
bank
Defined as a credit facility in respect of which the
interest and / or instalments of principal has
remained overdue for a specified period of
time
Under IRAC norms, specified period at presentis 90 days
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IRAC Norms
An a/c is an NPA:
Interest and Principal remain overdue for a period of
more than 90 days.
Account remain out of order in respect of an overdraft/ cash credit for more than 90 days.
Bill remain overdue for a period of more than 90 days
in the case of bills purchased and discounted.
Any amount to be received remains overdue for morethan 90 days.
Direct Agricultural advances, a/c is NPA- overdue based
on crop seasons.
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Asset Classification
Standard
totally regular, safe and conducted as per norms of sanction
Can be termed watch category if irregularity occurs
Substandard
NPA for period less than or equal to 12 months
Doubtful
Doubtful I NPAs for a period between 12 months and 24 months
Doubtful II NPAs over 24 months to 48 months
Doubtful III NPAs over 48 months
Loss
Loss identified by bank but amount not fully written off
Considered uncollectible and of little value
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Provision forNPAs
Asset Classification Provision
Requirements
Standard Assets 0.25%
Sub-standard Assets 10%
Doubtful Assets (Doubtful I) 20%
Doubtful Assets (Doubtful II) 30%
Doubtful Assets (Doubtful
III)
100%
Loss Asset Should be written off
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Some General Guidelines
No further charging of interest.
Asset classification will be borrower wise not facilitywise.
Under consortium-Based on recovery record of individualBanks.
Loan a/c -> NPA -> Standard a/c
But in case of Re-structuring NPA-> Standard a/cafter 1 year.
Stand Still Clause under CDR. Infrastructure Projects-Treated as Substandard if date of
completion extends by 1 yr.
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WILFUL DEFAULTERS
Wilful Default is deemed when:
Unit has defaulted even when it has the capacity.
Unit not utilised the finance from the lender for the
specific purposes. Unit has siphoned off the funds.
Siphoning of Funds
Funds utilized for un-related operations of borrower.
Detriment to the health of the lender or any otherentity.
Decision based on the lenders judgement.
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DIVERSION OF FUNDS
Utilization of short term WC funds for long term
purposes.
Deployment of funds for other activities not in sync for
which it was sanctioned. Transfer of funds to subsidiaries.
Investment in other companies acquiring equities/debt
without approval.
Shortfall in deployment in funds.
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PENAL MEASURES
No additional facilities granted.
Debarred from Institutional finance- 5 years.
Legal proceedings & Recovery of dues.
Proactive approach change of management of wilfullydefaulting unit.
Incorporate a covenant in the loan agreement- steps for
removal of a wilful defaulter.
Tracking of Repayment performance to the lenders. RBI publishes booklet-list of suit filed accounts.
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YoY NPA as Percentage of Total Assets
Type of Banks Gross NPAs/Total
Assets
Net NPAs/Total Assets
2006-
07
2007-
08
2008-
09
2006-
07
2007-
08
2008-
09
Public Sector Banks 1.6 1.3 1.2 0.6 0.6 0.6
Private Sector Banks 1.2 1.4 1.7 0.5 0.6 0.7
Foreign Banks 0.8 0.8 1.5 0.3 0.3 0.7
All Scheduled
Commercial Banks
1.5 1.3 1.3 0.6 0.6 0.6
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YoY NPA as Percentage of Advances
Type of Banks Gross NPAs/Gross
Advances
Net NPAs/Net
Advances
2006-
07
2007-
08
2008-
09
2006-
07
2007-
08
2008-
09
Public Sector Banks 2.7 2.2 2.0 1.1 0.8 0.7
Private Sector Banks 2.2 2.5 2.9 1.0 1.2 1.5
Foreign Banks 1.8 1.8 4.0 1.0 0.9 1.7
All Scheduled
Commercial Banks
2.5 2.3 2.3 1.0 1.0 1.1
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Income Recognition
Income from non-performing assets (NPA) is notrecognized on accrual basis but is booked as incomeonly when it is actually received
Interest on advances against term deposits, NSCs, IVPs,
KVPs and Life policies may be taken to income accounton the due date, provided adequate margin is availablein the accounts
Fees and commissions earned by the banks as a resultof re-negotiations or rescheduling of outstanding debtsshould be recognized on an accrual basis over theperiod of time covered by the re-negotiated orrescheduled extension of credit
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Reversal of Income
If any advance becomes NPA as at the close of any
year, interest accrued and credited to income account in
the corresponding previous year, should be reversed or
provided for if the same is not realized.
Fees, commission and similar income that have accrued
should cease to accrue in the current period and should
be reversed or provided for with respect to past periods,
if uncollected
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Recovery using Recovery Certificate
Recovery Officer proceeds to recover the amount in any
of the following ways :
a) attachment and sale of the movable and immovable
propertyb) arrest and detention of the defendant
c) appointing a receiver for the management of the
movable or immovable properties
d) issue Garnishee Order against third parties. Reacting promptly would be in favour of the Bank
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Waiver of Appeal
Suit filed by the Bank has been dismissed by the Court
Suit is decreed in Banks favour but for the amountslower than prayed for
Reasons for award of lower than the prayed for andchances of success of appeal
Availability of security from which to recover the dues
Cost benefit analysis, if appeal is preferred
Time value of money and the possibility of delay in
execution of decree in case of preferring appeal Suit filed by the Bank has been dismissed by the
Court/DRT
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Time frame for various actions
For action under DRT Act Filing for Recovery Application before DRT, if permitted by Competent
authority, should be done within two months from date of sanction
Within one month from date of passing of the Recovery Certificate itshould be taken on the record of the Recovery Officer for the purposeof execution
For action before Civil Courts In case of filing a civil suit before Civil courts, if permitted by Competent
authority, should be done within two months from date of sanction.
Within one month from date of filing of the Banks Application/Requisition it should be taken on the record of the Revenue authority forthe purpose of execution.
Further, particulars of assets, location of assets and other necessaryparticulars should also be provided to the Revenue Officials within onemonth of date of filing of Banks Application / Requisition
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Review of suit filed /decreed cases
The developments of all suit filed and decreed accounts shall beassessed and reviewed by the Branch and reported to the Zoneonce in a quarter.
Review is to ensure that All suit filed accounts are properly followed up by the Branch and its
Advocates Summons is served on all the defendants at the earliest
Assets of the borrowers / guarantors are identified by making localenquiries and by perusing the Income Tax / Wealth Tax Returns, CBD23 etc of the borrowers / guarantors
Decree / Recovery Certificate is obtained at the earliest
Branch supplies the assets detail to the Banks Advocates within one
month of the issuance of the Decree / Recovery Certificate or files anapplication, before DRT or before the Civil Court praying for an orderdirecting the defendants to declare on Affidavit all the particulars ofattachable assets of them
Further Review of all suit filed and decreed accounts based onbook-outstanding will be done once in a year
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BIFR
Board for Industrial and Financial Reconstruction(BIFR)
is a body constituted under Sick Industries Companies
(Special Provision) Act (SICA) 1985
Timely detection and power to consider revival andrehabilitation of sick companies
Any sick company can make a reference to BIFR within
60 days from date of adoption of annual accounts after
which the board of directors have come to a conclusion
that company has become sick
Shipping companies, Industrial units registered as SSIUs
and service units like hotels are not eligible for reference
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BIFR/AAIFR
Immediate effect of reference:
no legal action/ recovery action can be institutedagainst the borrower company and the guarantors
all pending cases against the borrower/ guarantorsare suspended during the pendency of reference
legal proceedings can be instituted/ continued afterobtaining the permission of BIFR
If any of the parties is aggrieved by any of the order of
BIFR, such affected party may prefer to appeal within 45days from the date of order to Appellate Authority forIndustrial & Financial Reconstruction (AAIFR)
Being misused by defaulting and dishonest borrowers
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Corporate Debt Restructuring(CDR)
Objectives:
ensure timely and transparent mechanism for
restructuring the corporate debts of viable entities
facing problems, outside the purview of BIFR, DRTand other legal proceedings, for the benefit of all
concerned
preserving viable corporate that are affected by
certain internal and external factors
minimize the losses to the creditors and other
stakeholders through an orderly and coordinated
restructuring programme
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CDR -Structure
CDR StandingForum
Representative generalbody of all financialinstitutions and banks
self- empowered bodylaying down policiesand guidelines, andmonitor the progress of
CDR Carves CDR core groupwhich lays downpolicies and guidelinesfor debt restructuring
CDR EmpoweredGroup
Deals with individualcases of CDR
Examines viabilityand feasibility of debtrestructuring and ifpossible approves
restructuringpackage
CDR Cell
Assists other two
groups in all functions initial scrutiny of the
proposals received fromborrowers / lenders andputs up the matter withEmpowered group
If feasible, it prepares
detailed rehabilitationplan with the help oflenders
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CDR - Features
Covers only multiple banking accounts / syndication /consortium accounts with outstanding exposure of Rs.20crores and above by banks and institutions
applicable only to accounts classified as 'standard' and
'sub-standard BIFR cases not eligible
Requests of any corporate indulging in wilful default,fraud or misfeasance not considered
Reference to CDR can be triggered by: any creditor who have minimum 20% share in either
working capital or term finance
by the concerned corporate
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SARFAESI Act 2002
The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002
(SARFAESI) empowers Banks / Financial Institutions to
recover their non-performing assets without the
intervention of the Court.
The Act has three segments:
Securitization and Asset Reconstruction Companies
Central Registry
Enforcement of Security Interest
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Methods for Recovery
Securitization
Asset Reconstruction
Enforcement of Security withoutthe intervention of the Court
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Securitization & Asset Reconstruction
Securitisation is the process of pooling and repackaging ofhomogenous illiquid financial assets into marketablesecurities that can be sold to investors
Securitisation company or reconstruction company may raisefunds from the qualified institutional buyers by formulating
schemes for acquiring financial assets Any securitization or reconstruction company can act as an
agent to a bank/financial institution for the purpose ofrecovering their dues
ARC will be treated as secured creditors once they take overfinancial assets and have authority to take over themanagement of the business of the borrower
ARC restructure NPAs and sell them to investors as PassThrough Certificates (PTCs)
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Provisions of the Act
NPA loans with outstanding above Rs 1 lac
Amount less than 20% of the principal and interest are
not eligible to be dealt with under this act
Assets under pledge, lien/ assets financed under leaseor hire purchase are not covered
Either a bank must be the sole Banker to the borrower or
in case of joint lending, at least lenders representing 75
% of the contractual amount due and out-standing agree
to take Action
Any security interest created over agricultural land cant
be proceeded with
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SARFAESI Act- Empowerment to Bank
The Act empowers the bank to:
To issue demand notice to the defaulting borrower
and guarantor, calling upon them to discharge their
dues in full within 60 days from the date of the notice. To give notice to any person who has acquired any of
the secured assets from the borrower to surrender the
same to the Bank.
To ask any debtor of the borrower to pay any sum
due or becoming due to the borrower
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Procedure for Proceeding under SARFAESI
Act
Identification of accounts & Obtain Approval for Action
Issue of duly signed notices by Authorised Officer to
borrower and guarantor asking them to discharge their
dues within 60 days If borrower makes any representation or raises any
objection and if on careful consideration Bank doesnt
accept it, then it has to communicate within one week
from receipt of such representation or objection with the
reasons for non-acceptance
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Procedure for Proceeding under SARFAESI
Act
If the borrower/guarantor fails to meet the liability withinnotice period, bank can take one or more of the followingmeasures:
Take possession of the secured assets
Take over the management of the secured assets
Issue notice for collection of receivables / book debts
Bank can also sell or lease out the business and takeover the management of the Company
If the sale proceeds are not sufficient to liquidate banksdues then bank will have to file recovery suit / DRTapplication before Civil Court / DRT for enforcing thepersonal covenant against the borrower / guarantor
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Appeal to DRT/DRAT
If any person is aggrieved by any of the measures taken
by the bank, he may file an application to DRT within 45
days from the date such measures have been taken
Borrower can also appeal to DRAT after DRT but onlyafter depositing 50% of the amount of debt due or
determined by DRT whichever is less but cant be below
25%
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Sale ofNPA To Other Banks/FIs
Only NPA accounts with outstanding balance over Rs.
25 lakh and assets classified as NPA for atleast 2 years
are eligible
The sale consideration should be received from thepurchasing Bank in Cash
NPA transferred to purchasing bank on without
recourse basis
If the sale is at a price below Net Book Value (NBV), the
shortfall will be debited to the P&L a/c of the year
If sale is for a value higher than the NBV, the excess
provision shall not be reversed but will be utilised to
meet shortfall on account of sale of otherNPAs in future