Sub-standard : The account holder belonging to this category don't pay three installment continuously after 90 days and up to 1year. Bank has made 10% provision of funds for this category to meet the losses generated from NPA from their profit.

Doubtful NPA : Doubtful NPA are classified into three sub categories : 20% provision is made by the banks for D1 i.e. up to 1 year 30% provision is made by the bank for D2 i.e. up to 2 year

100% provision is made by the bank for D3 i.e. up to 3 year.

Loss Assets : When account holder belongs to this category 100% provision is made by the banks to write off their accounts. After this the assets are delivered to recovery agents for the purpose of sale.

Fig 1: Asset Classification

Assets

Performing

Assets

Standard

Assets

Non Performing Assets

(NPA)

Sub -Standard

Assets

Doubtful

Assets

Loss

Assets

NPA arises due to a number of factors or causes like:-

Speculation : Investing in high risk assets to earn high income.

Default : Willful default by the borrowers.

Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc.

Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business.

Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labourproblems, marketing failure, etc. resulting in poor performance of the companies.

External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

Indian Banks are pursuing variety of strategies to control NPAs, which can be studied under two broad categories as under :

◦ a. Preventive Management

◦ b. Curative Management

a. Preventive Management -

Developing ‘Know Your Client’ profile (KYC)

Monitoring Early Warning Signals

Installing Proper Credit Assessment and Risk Management Mechanism

Reduced Dependence on Interest

Generating Watch-list/Special Mention Category

b. Curative Management

Pursuing Corporate Debt Restructuring (CDR)

Encouraging rehabilitation of potentially viable units

Encouraging acquisition of sick units by healthy units

Entering compromise schemes with borrowers / Entering one time settlement

Using Lok Adalats for compromise settlement for smaller loans in “doubtful” and “loss” category.

Using Securitization & SARFAESI Act(THE SECURITISATION AND RECONSTRUCTION OF THE FINANCIAL

ASSET AND ENFORCEMENT OF SECURITY ACT 2002.)

Using Asset Reconstruction Company (ARC) Approaching Debt Recovery Tribunals (DRTs). Recovery Action against Large NPAs

Circulation of Information of Defaulters-Strengthening Database of Defaulters

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.

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The Act provides three alternative methods for recovery of non-performing assets, namely: -

Securitisation

Asset Reconstruction

Enforcement of Security without the intervention of the Court.

The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac.

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Banks have a specific cell for NPA, which is called as Stress Asset Recovery Cell.

This cell continuously works on “How Recoveries Can Be Done”.

Bank does its recovery by sending notices, by bidding, and by taking a legal action.

“DECREE” is a paper of court or the permission given by the court to sell the land or any asset.

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This is the account which is made before NPA.

When a customer’s account comes under this account then immediate follow up is done by the respective bank.

Warning signals are given by the bank.

(when a bank has a doubt on a customer although they have standard accounts)

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When bank has a doubt on the intension of the customer it ask for the whole money to be paid back even, if he has not paid two or three installments.

Notices are sent to the customer.

On recalled assets bank can take legal action also.

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Recovery agent : they are agents hired by the banks for the recovery of the non-performing assets at 10% commission.

Enforcement agent: they are the agents hired by the bank after filing the case in court. They are hired under SARFAESI act at 10% commission.

Self help group(SHG): SHG is a group of 10 to 15 people in rural areas which is appointed by the banks especially SBI as recovery agent for govt.

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ARCs are meant to maximise recovery value while minimizing costs.

The Asset Reconstruction Company Limited(ARCIL),

India’s first ARC with an initial equity of Rs.10cr with ICICI bank, IDBI and SBI to pick up 24.5% stake each(and remaining to be acquired by HDFC, IDBI Bank and UTI Bank).

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