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NPA MANAGEMENT

Updated by Champak Das Chief Manager, SBLC Deoghar Mobile- 9431866154 Email- champak.das@sbi.co.in

QUICK SUCCESS SERIES was initiated in the year

2010 by Team SBLC Deoghar with a motive of

learning support to the candidates of romotional

examinations of different grades in the Bank they

had to undergo. With the passage of time QSS

became popular among its readers and SBLC

Deoghar is receiving overwhelming demand for its

updated version year after year from employees of

SBI located in various parts of the country. We

extend our sincere thanks to the readers of QSS for

placing with us the demand of QSS whenever the

date of promotional test is announced.

We take this opportunity to acknowledge active

persuasion of Sri Manish Tandon, our Circle

Development Officer for its updation before

schedule.

I take pride in representing a Team comprising of Sri Champak Das, Chief Manager (Training),

Sri Rakesh Roshan, Chief Manager (Training) &

Sri Mukul Manohar, Chief Manager (Training), who

have maintained the trend of SBLC Deoghar and

are constantly contributing towards its value

addition and keeping it relevant, up to date for the

users & they took extra pain for its updation.

We hope that QSS 2015 edition will be equally

useful for various promotional exams. Though

every care has been taken while updating the

contents, we also request our readers to point out

any lapses at the earliest. This book is however not

a substitute for circular instructions issued by the

Bank from time to time. For detailed guidelines please refer to Banks latest circulars. Soft copy of

this edition is available on our ftp://10.151.51.33 in

QSS folder & on SBI TIMES>PATNA CIRCLE>SBLC

Deoghar site.

Team SBLC Deoghar is humbled by the response

and recognition, it is receiving from various

readers. Our Team wishes the readers grand

success in their endeavours.

S P Singh Assistant General Manager, State Bank Learning Centre, Deoghar- 814112 Phone- 06432-232895

Fax - 06432-231810

E-mail: agmstc.deoghar@sbi.co.in

Updated upto 15th January

2015

Quick Success

Series

ftp://10.151.51.33/

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In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks.

Non Performing Assets A non performing asset (NPA) is a loan or an advance where, Interest and/ or installment of principal

remain overdue for a period of more than 90 days in respect of a term loan. (Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank)

The account remains out of order in respect of an Overdraft/Cash Credit (OD/CC). An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period,

The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops.

The installment of principal or interest thereon remains overdue for one crop season for long duration crops. long duration crops would be crops with crop season longer than one year.

@ Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption. Categories of NPAs Substandard Assets: A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months.

Doubtful Assets : An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. @ The outstanding in the account based on drawing power calculated from stock statements older than three 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. @ All the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/ investment or part thereof which has become irregular. @ The bills discounted under LC favouring a borrower may not be classified as a Non-performing advance (NPA), when any other facility granted to the borrower is classified as NPA. Accounts where there is erosion in the value of security/frauds committed by borrowers i. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 per cent of the value assessed by the bank, Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. ii. If the realizable value of the security is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. Government guaranteed advances 1) The credit facilities backed by guarantee of the Central Government though overdue may be

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treated as NPA only when the Government repudiates its guarantee when invoked. 2) State Government guaranteed advances and investments in State Government guaranteed securities would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days. PROVISIONING NORMS 1) 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. 2) Doubtful assets 100 percent of the extent to which the

advance is not covered by the realisable value of the security.

In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful: Up to one year : 25% One to three years : 40% More than three years : 100%

In cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies would be mandatory. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years.

3) Substandard assets A general provision of 15 percent on total

outstanding. The unsecured exposures which are

identified as substandard would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance.

4) Standard assets (a) Direct advances to agricultural and Small and

Micro Enterprises (SME) sectors - 0.25%. (b) All other loans and advances - 0.40% Medium Enterpises will attract 0.40% (C) Advances to Commercial Real Estate (CRE)

Sector - 1.0%

(d) advances to Commercial Real Estate Residential Housing Sector (CRE - RH) at 0.75 per cent Wilful Defaulters

A "wilful default" would be deemed to have occurred if any of the following events is noted:- (a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations. (b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. (c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. Diversion and siphoning of funds The terms diversion of funds and siphoning of funds should construe to mean the following:- Diversion of funds, would be construed to include any one of the undernoted occurrences: (a) utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction; (b) deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned; (c) transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever modalities; (d) routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender; (e) investment in other companies by way of acquiring equities / debt instruments without approval of lenders; (f) shortfall in deployment of funds vis--vis the amounts disbursed / drawn and the difference not being accounted for. Siphoning of funds, should be construed to occur if any funds borrowed from banks / FIs are utilised for purposes un-related to the operations of the

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borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgement of the lenders based on objective facts and circumstances of the case. The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.

The penal measures would normally be attracted by all the borrowers identified as wilful defaulters or the promoters involved in diversion / siphoning of funds, keeping in view the present limit of Rs. 25 lakh fixed by the Central Vigilance Commission for reporting of cases of wilful default by the banks/FIs to RBI, any wilful defaulter with an outstanding balance of Rs. 25 lakh or more, would attract the penal measures stipulated below. This limit of Rs. 25 lakh may also be applied for the purpose of taking cognisance of the instances of 'siphoning' / 'diversion' of funds. Penal measures In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters (non-suit filed accounts) and list of wilful defaulters (suit filed accounts) are forwarded to SEBI by RBI and Credit Information Bureau (India) Ltd. (CIBIL) respectively. The following measures should be initiated by the banks and FIs against the wilful defaulters identified as per the definition indicated above: a) No additional facilities should be granted by any bank / FI to the listed wilful 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 wilful defaulter is published in the list of wilful defaulters by the RBI. b) The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary. c) Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the wilfully defaulting borrower unit. d) A covenant in the loan agreements with the companies in which the banks/FIs have significant stake, should be incorporated by the banks/FIs to the effect that the borrowing company should not induct on its board a person whose name appears in the list of Wilful Defaulters and that in case, such a person is found to be on its board, it would take expeditious and effective steps for removal of the person from its board. It would be imperative on the part of the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action.

SARFAESI Act (2002) (Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act) 1) Applicable to NPA only 2) A secured creditor can take possession of the secured assets and sell the same without recourse to the courts. 3) If the sale proceeds are not adequate, the bank can file a suit with DRT for recovery of the balance. 4) In case of joint loans by banks, creditors covering at least 75% of the advances should agree to serve the notice through one of the banks. 5) The financial assets can be sold to a securitization company. 6) The authorized officer empowered to issue notices to the borrowers is SMGS IV or above. SARFAESI Act are not applicable a) Lien on any goods.

b) A pledge of movables.

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c) Any conditional sale, hire-purchase or lease or

any other contract in which no security interest

has been created.

d) Any security interest for securing repayment of

any financial asset up to Rs. 1 lac.

e) Any security interest created on agricultural

land.

f) Any case in which the amount due is less than

20% of the principal amount and interest thereon.

Time frame for different activities under SARFAESI Act :

1. Time to be allowed to the borrower / guarantor in demand notice to repay the dues - 60 days from the date of notice.

2. Time within which the borrower can submit representation / objection to the above notice - 60 days from the date of notice.

3. Time within which the Bank has to convey its decision against the above representation / objection - 15 days from the date of receipt of the representation / objection .

4. Minimum Time Bank has to permit for the borrower to repay the debt, while issuing the sale Notice - 30 days from the date of notice.

5. Time within which Borrower can file a petition in the DRT against Bank for having taken possession of property - Within 45 days from the date of action of the Bank.

6. Maximum time within which DRT has to pass the order for the above - Within 4 months from the date of application in the DRT.

7. Time within which the Bank / Borrower can file appeal with the Appellate Tribunal against the order of the DRT - Within 30 days from the date of receipt of the order of the DRT.

LOK ADALAT 1) Set up under the Legal Services Authority Act, 1987 2) Dues up to Rs. 20 lac can be settled. 3) The Bank can insist on down payment of 25% at the time of compromise and grant time between 6 months to 12 months to pay the balances dues. 4) No concession on the principal amount. Future interest may be 6% simple on AGL loans and 10%-18% on commercial advances from the date of decree till the date of realization. DEBT RECOVERY TRIBUNAL (DRT) 1) Established on the recommendation of Narasimham Committee. 2) The bank has to file cases for recovery of debts

of Rs. 10 lac and above. 3) The tribunal has to dispose of the cases within

6 months. 4) An appeal to the Appellate Tribunal has to be

filed within 45 days. 75% of the debt due should be deposited with the Appellate Tribunal.

ASSET RECONSTRUCTION COMPANIES (ARC) 1) As per recommendation of Narasimham

Committee 2) It will be a Public Financial Institution with a

minimum capital of Rs. 2 crore. 3) A bank can approach an ARC to take over the

doubtful assets. ARC will issue 7 to 10 year bonds to the bank.

REVISED COMPROMISE SETTLEMENT POLICY Compromise settlement refers to a negotiated settlement where a borrower offers to pay and the Bank agrees to accept in full and final settlement of its dues an amount less than the total amount due to the Bank under the relative loan account. Thus, the settlement invariably involves certain sacrifice by the Bank by way of write off and/or waiver of a portion of its dues. Recovery of advances through compromise settlement is accepted as an effective method of recovery by the Bank in cases where it is appropriate to adopt this option. It is not possible, at the same time, to lay down precise guidelines which can be followed uniformly in all compromise cases, as each offer is

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unique in the context of the circumstances necessitating its consideration as a recovery option. However, certain basic principles and guidelines to be kept in view by the branches and their controllers, while processing compromise proposals, are detailed in the subsequent paragraphs. 1. Basic principles for Compromise Settlement proposals i. Banks Approach: The compromise will be a negotiated settlement under which the Bank will endeavour to recover its dues to the maximum extent possible with minimum sacrifice and this process will be initiated after the Bank has exercised its right to set off or lien against any deposits of the borrower/guarantor lying with the Bank. ii. Realisable Value of Securities, and NPV of compromise amount & Securities: The realisable value of security charged to the Bank as also the Banks ability to dispose the security will be the basic factors which would decide the compromise amount. While assessing the realisable value of security, proper weightage would have to be given to its location, condition and marketability. For this purpose, services of approved valuers may be engaged and it should be ensured that the valuation reports are not more than six months old. In case of loans above Rs. 1 cr , two valuation reports from Banks approved valuers have to be obtained and the higher value has to be taken into account for deciding the compromise amount. The Net Present Value (NPV) of settlement amount should generally not be less than NPV of the realizable value of the available securities. In case of lower value, the same has to be justified with valid and sufficient reasons. For calculation of NPV, the rate of discount should be taken as the prevailing Base Rate with annual rests and the maximum estimated time to realize the securities may be taken as 5 years from the date of notice under section 13(2) in case of SARFAESI action and 7 years from the date of filing suits in case of DRT / Court cases. iii. Influence of Group Companies: In case the borrower has other group companies, influence of these companies or the parent company may be used for a better settlement. iv. Initial Deposit : Normally along with the compromise offer letter, an initial deposit of

at least 5% of the offer amount may be taken from the borrower under no lien account as an evidence of the borrower's bonafide intention to pursue the compromise settlement with the Bank. v. Terms of Payment : Time Period for Payment & Charging of Interest on Compromise Settlement amount : It will be the endeavour of the Bank to get the entire compromise amount paid up in lump sum. In cases where the amount is agreed to be recovered in instalments, normally at least 15% of the approved settlement amount (inclusive of initial deposit) would be payable upfront with the balance instalments spread over a maximum period of 12 months. To incentivise early payment, no interest is to be charged on the compromise amount paid within three months from the date of approval of compromise conveyed to the borrower even in cases of compromise settlement on installment basis. If the entire compromise amount is not paid within three months, interest at minimum Base Rate for compromise amount up to Rs.50 crs and below, and interest at minimum Base Rate+2% for compromise amount of above Rs.50crs on the balance amount paid after three months shall be charged from 15th day from the date of letter conveying approval of the compromise to the borrower. Repayments exceeding 12 months should not be considered unless the repayment source is assured to the satisfaction of the Bank. Efforts should be made in such cases to tie up the payment directly to the Bank. The sources from which the borrowers and/or guarantors will raise funds to pay the compromise amount will be identified and recorded, particularly in those cases where the payment is proposed to be made in instalments. In case, the compromise amount is not paid as per terms of sanction, the Bank will be entitled to treat the compromise settlement as cancelled. vi. Cases of wilful defaulters: In the matter of settling compromise amount, distinction will need to be made between wilful defaulters and the borrowers defaulting for reasons beyond their control. In case of the former, a tough stand has to be taken and the proposal should be put up after obtaining in-principle approval of the GM (NW/MCG/CAG/SAMG) based on a review of such cases. Further, in case of wilful defaulters, initial deposit under no lien account will be 10% of offer amount and on approval of the compromise,

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upfront payment including initial deposit will be 25% of the approved compromise amount. If the compromise amount is payable in instalments, no interest is to be charged on the compromise amount paid within three months from the date of approval of compromise conveyed to the borrower and interest is to be charged on balance amount paid after 3 months from 15th day of the date of letter conveying approval of compromise to the borrower at a minimum of Base Rate + 2%. vii. Default Clause: Compromise settlement will be arrived at with borrowers / guarantors subject to the condition that in the event of any failure to honour any of the terms of the compromise settlement, the Bank will be entitled to exercise against the borrowers / guarantors all the rights and remedies available prior to the compromise settlement. This will include collection from the borrowers/guarantors of the entire amount due prior to the compromise settlement, together with interest thereon at the applicable rates. Suitable clauses in this regard are to be included in the letter conveying approval for compromise. viii. Consent Decree: An application for obtaining Consent Decree from the appropriate Court/DRT should be filed immediately on sanction of the compromise proposal incorporating therein a clause that in the event, the borrowers / guarantors fail to adhere to the terms of compromise, the compromise settlement shall stand automatically cancelled and the Bank will be entitled to recover the entire outstanding amount together with interest at the contractual rate. A consent decree/recovery certificate should be obtained from the competent court/DRT recording the settlement. In case the borrowers / guarantors do not adhere to the settlement terms, the Bank can proceed with the execution of the decree/recovery certificate. ix. Position of other recovery action: The sanctioning authority must satisfy itself that all possible steps to recover the dues have been explored and that compromise settlement is in the larger interest of the Bank. x. Opportunity cost analysis : While arriving at a negotiated settlement, the advantage available to the Bank from prompt recycling of funds should be considered in comparison to the likely recovery by following legal or other protracted course of action i.e. opportunity cost analysis to be made.

xi. Uncharged assets of the borrowers / guarantors: Before entering into any compromise settlement, details of uncharged assets of the borrowers and guarantors should be collected by either engaging the services of investigative agencies or otherwise. xii. Compromise settlement proposals from Guarantors: Compromise Settlement proposals from guarantors should be treated on par with proposals from borrowers. Guidelines on Publication of Photographs of Defaulter Borrowers/Guarantors Background i) The publication of details including photographs of defaulters in newspapers is useful in cautioning the public in general and the fellow banks in particular in respect of dealings with such persons or their assets. Such publication is of great help in dealing with the defaulters who avoid/evade the notices of the Bank or not responding to the correspondence from the Bank seeking the repayments of their dues. It is also helpful in gathering valuable feedback about the networth or other hidden financial dealings of the defaulters. ii) Publication of details as above is also helpful in stopping further lending to such defaulters and also to prevent the fraudulent/dishonest alienation of securities and assets by the defaulters. Dissemination of information of the cases of frauds, misfeasance and wilful defaults is also in the interest of public at large and to maintain the proper financial health of banks and financial institutions who are the custodians of public money. iii) In view of the past experience in the matter, it has been decided to put in place the following Guidelines in the matter of publication of photographs of defaulter borrowers/guarantors. Guidelines: 1. Publication of the names and addresses of the defaulter Borrowers/Guarantors with their photographs shall not be resorted to as a matter of routine. Utmost care is to be exercised in this matter.

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2. The Branches/CPCs may resort to publication of photographs of defaulter borrowers/guarantors in cases where the accounts have been classified as Non-Performing Assets as per RBI guidelines and the account falls in any of the following categories: i. Loan Accounts where the borrower or guarantor has committed any acts or omissions which tantamount to wilful default. The expression willful default would cover the following: -Default in an account where the borrower/ guarantor fails to repay the dues despite having the capacity to do so; b. Default in an account where the borrower/guarantor has diverted or siphoned off the proceeds of loan/ credit facility availed from the Bank for any purpose other than the purpose for which such loan/ facility is sanctioned (i.e. other than a legitimate business purpose); c. Default in an account where the borrower/ guarantor who has wrongfully disposed of any of the assets/property charged to the Bank or other properties so as to delay or hamper the recovery of dues by the Bank. ii. Loan Accounts where the borrower or guarantor has indulged in any act or omission which in the opinion of the Bank amounts to misfeasance, fraud, nonfeasance or malfeasance, adversely affecting the interest of the Bank; iii. Loan Accounts where the borrower/guarantor is not traceable/absconding and/or the demand notice/letter sent by the Bank has been returned undelivered/ refused. 3. In case of loans under any segment where SARFAESI Act is not applicable, the Branches /CPCs may resort to publication of photographs of defaulter Borrowers/Guarantors, if the account satisfies any of the conditions stipulated in paragraph 2(i) to (iii) above. 4. In the case of Loan Accounts with outstanding below Rs.25 lacs, publication of photographs of the defaulter Borrowers/Guarantors shall not be resorted to. 5. In respect of educational loans, under no circumstances, the photographs of students will be published. 6. In all cases, an advance notice of not less than 15 days shall be issued without fail to the defaulter borrowers/guarantors, advising them of the Banks intent to publish their names and addresses with photographs in the newspapers,

before publishing the same in the newspapers. The advance notice must briefly set out the allegations against the borrower/guarantor. 7. In case any objection is raised by the borrower/guarantor to such notice issued by the Bank, the same shall be considered carefully on merit and a suitable reply should be given before proceeding further in the matter. 8. The publication of the names and addresses of the defaulter borrowers/guarantors with their photographs shall be approved in each case by the Chief General Manager of the concerned Circle/CAG/MCG/SAMG on a case to case basis after prior vetting of each case by the Law Department at the Module/LHO/Corporate Centre, as the case may be.

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