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Npa bhavika

  1. 1. N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH “SRISHTI”, SECTOR – 1, MIRA ROAD (E), MUMBAI – 401 104NPA Management Submitted By: Bhavika Thakker PGDBM FINANCE 2007-09 Submitted To Prof. Jyotsna Arya
  2. 2. NPA MANAGEMENT CERTIFICATEThis is to certify that Ms.Bhavika Thakker student of Post Graduate Diploma in Management Studies(Finance) batch of N. L. Dalmia Institute of Management Studies and Research has satisfactorilycompleted final project on “NPA MANAGEMENT” under my supervision and guidance as partialfulfillment of requirement of PGDBM course, approved by AICTE for the year 2007-09.Signature: Signature:Prof. Jyotsna Arya Prof. P. L. Arya(Project Guide) DirectorPlace: MumbaiDate: 31/03/2009 N.L.Dalmia Institute of Management and Research [ 2]
  3. 3. NPA MANAGEMENT ACKNOWLEDGEMENTNo endeavor achieves success without the cooperation of others which goes a long way in shapingand formulating a project.I take this opportunity to extend my heartfelt gratitude to Prof. P. L. Arya and my project guide Prof.Jyotsna Arya who has guided me through the duration of the project with patience and helpedwherever I faltered.Last but not the least I would like to thank my parents, all my friends and staff members of N. L.Dalmia Institute of Management Studies and Research who have constantly supported me in all myendeavors.Ms. Bhavika Thakker N.L.Dalmia Institute of Management and Research [ 3]
  4. 4. NPA MANAGEMENTPGDBM (Finance) 2007-09N. L. Dalmia Institute Of Management Studies and Research, Mumbai.PREFACEThis project report titled “NPA Management” describes the Non-performingAssets (NPAs) in the banking sector & the various policies laid down by the RBIas well as public sector banks for their effective management & control. Itcovers the SARFAESI Act, 2002 in detail.It does not contain a trend analysis of NPAs in banks, although a few tables &statistics are provided to emphasise their importance on the performance &profit margins of bank N.L.Dalmia Institute of Management and Research [ 4]
  5. 5. NPA MANAGEMENTTable of ContentsIntroduction .................................................................................................................. 5 • Factors contributing to NPAs ............................................................................................ 9Asset classification & Provision Requirement ................................................................... 13Monitoring & Follow up Measures ......................................................................................... 19Non-Legal Remedies (Compromise Settlement) .............................................................. 21SARFAESI Act, 2002 ..................................................................................................................... 25 • Procedures under the SARFAESI Act ................................................................................ 27 • Movable assets ........................................................................................................................... 31 • Immovable properties ........................................................................................................... 36 • Appropriation of sale proceeds ...........................................................................................42Recovery / Enforcement Agents ....................................................................................... 46Write off Policy ........................................................................................................................... 48Bid Policy ...................................................................................................................................... 51ASCs / ARCs .................................................................................................................................. 52Board for Industrial & Financial Reconstruction (BIFR) ............................................. 53Conclusion .................................................................................................................................... 55References .................................................................................................................................... 57 N.L.Dalmia Institute of Management and Research [ 5]
  6. 6. NPA MANAGEMENT INTRODUCTIONN on-performing assets & retail banking are closely related. Greater the demand for credit, more is the risk of default, & hence NPAs. So, before looking at NPAs in detail, let us see whatconstitutes retail banking.Retail banking is quite broad in nature - it refers to the dealing of commercial banks with individualcustomers, both on liabilities and assets sides of the balance sheet. Fixed, current / savings accountson the liabilities side; and mortgages, loans (e.g., personal, housing, auto, and educational) on theassets side, are the more important of the products offered by banks. Related ancillary servicesinclude credit cards, or depository services. Today’s retail banking sector is characterized by threebasic characteristics:• multiple products (deposits, credit cards, insurance, investments and securities);• multiple channels of distribution (call centre, branch, Internet and kiosk); and• multiple customer groups (consumer, small business, and corporate)Drivers of retail business in India  First, Economic prosperity and the consequent increase in purchasing power has given a fillip to a consumer boom. Note that during the 10 years after 1992, Indias economy grew at an average rate of 6.8 percent and continues to grow at the almost the same rate – not many countries in the world match this performance.  Second, changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries having highest proportion (70%) of the population below 35 years of age (young population). The BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for India. N.L.Dalmia Institute of Management and Research [ 6]
  7. 7. NPA MANAGEMENT  Third, technological factors played a major role. Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new customers into the banking field. Technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking has contributed to the growth of retail banking in India.  Fourth, the Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation. Considering the fact that retail’s share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams.  Fifth, decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit.Credit Risks & NPAs: However, lending is a business associated with risks. One of the risks being risk of default. Banks being commercial organisations have to continue lending activity to earn profits. Profitability very much depends on how Banks are able to roll over their advances portfolio. Rolling over of advances would be possible only if there is a timely recovery of money lent. Prompt recovery of Loans and Advances by Banks not only increases liquidity and profitability but it also keeps funds cycle moving by continuous lending for the development of the economy.Following the introduction of Income Recognition and Asset Classification (IRAC norms) and CapitalAdequacy norms, Banks have become increasingly sensitive to credit risks and there is a growingawareness of the need to keep Non Performing Assets (NPAs) at a low level. With all Banks havinginternational exposure required to move towards Basel II recommendations, stricter risk assessment N.L.Dalmia Institute of Management and Research [ 7]
  8. 8. NPA MANAGEMENTnorms and provision requirement leading to improved capital adequacy will be the order of the day inthe times ahead.With the recent modifications in IRAC norms and provision requirement announced by the ReserveBank of India in July 2004, it is implied that an asset will require 100% provision after 48 months fromthe date of the account becoming NPA, irrespective of availability of any security or not. The 100%provision to be made on an account which does not yield any income to the organisation is a severestrain on the bottom line of the Bank. In this context the management of NPA portfolio assumesparamount importance.What is an NPA ?An asset becomes non-performing when it ceases to generate income to the Bank.Thus, a non-performing asset (NPA) is 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. N.L.Dalmia Institute of Management and Research [ 8]
  9. 9. NPA MANAGEMENTThe concept of ‘specified period’ is reduced in a phased manner. The shortening of the period is from4 quarters in 1993 when the concept of IRAC norms was first introduced in India to the present levelof 90 days .Thus from 31.3.2004 an advance or loan (other than direct agricultural advance) shall be classified asan NPA where -a. Interest and / or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.b. The account remains out of order in respect of an overdraft / cash credit for more than 90 days.c. The bills remain overdue for a period of more than 90 days in the case of bills purchased and discounted.d. Any amount to be received remains overdue for a period more than 90 days in respect of any other accounts.In case of direct agricultural advances, w.e.f. 30.9.2004, a loan granted for short duration crops will betreated as NPA, if the instalment of principal or interest thereon remains overdue for 2 crop seasons.In the case of long duration crops, the loan will be treated as NPA if the instalment of principal orinterest thereon remains overdue for 1 crop season.Explanation of some terms used in NPA managementSecurity Interest:Security Interest means right, title and interest of any kind whatsoever upon property, created in favourof any secured creditor and includes mortgage, charge, hypothecation and assignmentWilful defaulters:"A Wilful Default” would be deemed to have occurred if any of the following events is noted :- N.L.Dalmia Institute of Management and Research [ 9]
  10. 10. NPA MANAGEMENT • The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations. • 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. • 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 of funds:Diversion of funds, would be construed to include any one of the undernoted occurrences: • Utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction; • Deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned; • Transferring funds to the subsidiaries / Group companies or other corporates by whatever modalities; • Routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender; N.L.Dalmia Institute of Management and Research[10]
  11. 11. NPA MANAGEMENT • Investment in other companies by way of acquiring equities / debt instruments without approval of lenders; • Shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn and the difference not being accounted for.Siphoning of funds:Siphoning of funds, should be construed to occur if any funds borrowed from banks / FIs are utilisedfor purposes un-related to the operations of the borrower, to the detriment of the financial health of theentity or of the lender. The decision as to whether a particular instance amounts to siphoning of fundswould have to be a judgement of the lenders based on objective facts and circumstances of the case.Factors contributing to NPAs:According to a recent study conducted by the RBI, the underlying reasons for NPAs in India can beclassified into two heads, namely: 1. Internal Factors N.L.Dalmia Institute of Management and Research[11]
  12. 12. NPA MANAGEMENT 2. External FactorsInternal Factors: a. Diversion of funds for expansion/diversification/modernisation or for taking up new projects b. Diversion of funds for assisting or promoting associate concerns c. Time or cost overrun during the project implementation stage d. Business failures due to product failure, failure in marketing, etc e. Inefficiency in management f. Slackness in credit management & monitoring g. Inappropriate technology or problems related to modern technologyExternal Factors: a. Recession in the economy as a whole b. Input or power shortage c. Price escalation of inputs d. Exchange rate fluctuation e. Accidents & natural calamities f. Changes in government policies relating to excise & import duties, pollution control orders, etc g. Government loan waiver scheme N.L.Dalmia Institute of Management and Research[12]
  13. 13. NPA MANAGEMENTOther Factors:Apart from the above factors, there are certain other factors which are responsible for standard assetsbecoming NPAs. They are : a. Liberalisation of the economy & the consequent pressures from liberalisation like severe competition, reduction of tariffs, removal of restrictions b. Poor monitoring of credits & the failure to recognise early warning signals shown by standard assets c. Promoters’ over-optimism in setting up large projects d. Sudden crashing of capital markets & the failure to raise adequate funds e. Granting of loans to certain sectors on the basis of the Government’s directives rather than commercial imperatives f. Mismatch of funding i.e. using loans granted for short term for long term transactions g. High leveraging & high cost of borrowing h. Commitment of wilful defaults sensing that the legal recourse available to collect debts is very slow Early Warning Signals The Early Warning Signals (EWS) are those that clearly indicate or show some signs of credit deterioration in the loan account. They indicate the potential problems involved in the accounts so that remedial action can be initiated immediately. In fact most banks have Early Warning Systems for identification of potential NPAs. N.L.Dalmia Institute of Management and Research[13]
  14. 14. NPA MANAGEMENT Classification of Early Warning Signals They can broadly be classified into 5 categories: 1. Financial signals 2. Operational signals 3. Banking signals 4. Managerial signals 5. External signalsFinancial Warning Signals a. Default in repayment b. Continuous irregularity in the account c. Development of L/C or invocation of guarantees d. Deterioration in working capital position or in liquidity e. Declining sales compared to precious period f. Substantial increase in long-term debts g. Rising sales but falling profits h. Incurring operating losses or net losses N.L.Dalmia Institute of Management and Research[14]
  15. 15. NPA MANAGEMENT i. Rising level of bad debt losses Operational Warning Signals a. Underutilisation of plant capacity b. Non-payment of electricity bills, wages, etc c. Frequent labour problems d. Poor diversification & frequent changes in plan for expansion / diversification / modernisation e. Evidence of overstocking & aged inventory f. Loss of important customers Managerial Warning Signals a. Diversion of funds & poor financial controls b. Lack of co-operation from key personnel c. Change in management or ownership pattern or key personnel d. Undertaking of undue risks e. Fudging of financial statements Banking signals a. Frequent request for further loans N.L.Dalmia Institute of Management and Research[15]
  16. 16. NPA MANAGEMENT b. Delays in servicing of interest c. Reduction of operations in the account or reduction in bank balances d. Opening of accounts with other banks e. Dishonouring of cheques or return of bills sent for collection f. Not routing sales transactions through the account g. Delays in submitting stock statements & other data or non-submission of periodical statements h. Frequent excesses in the account External Warning Signals a. Economic recession b. Introduction of new technology c. Changes in Government policies d. Emergence of new competition e. Natural calamities f. Weakening of industry characteristics N.L.Dalmia Institute of Management and Research[16]
  17. 17. NPA MANAGEMENTASSET CLASSIFICATION AND PROVISIONREQUIREMENTStandard Assets:The standard assets consist of assets which are totally regular, safe and conducted as per norms ofsanction. However, during the operations of such accounts, some of them, at times, show signs ofdeviations, sickness, out of order position wherein they became irregular. When such irregularities arenoticed, they are classified as ‘Watch Category” assets with Code No. 12 but continues to be a part of“Standard Asset”. These accounts need higher level of monitoring and have to be regularised beforethese irregularities continue for more than 90 days. Provision requirement for a standard asset(including Watch Category asset) is given below: 0.25% of the outstanding dues in all Standard Assets under SME and Agricultural sector 1.00% of the outstanding dues in all Standard Assets of the A/c’s to Capital Market exposure, personal loan, commercial real estate and residential housing beyond Rs.20/- lakh. 0.40% Of the outstanding dues in all Standard Assets belonging to all other categories.Categories of NPAsBanks are required to classify NPAs further into following categories, based on the period for whichasset has remained non-performing and realisability of dues.  Sub-standard Asset  Doubtful Asset  Loss Asset N.L.Dalmia Institute of Management and Research[17]
  18. 18. NPA MANAGEMENTSubstandard Assets:With effect from 31st March 2005, substandard asset is one which has remained NPA for a period lessthan or equal to 12 months. Its Asset Code is 20. The provision requirement in substandard asset wasearlier flat 10% of the outstanding dues, irrespective of the category of the advance (secured or clean).Now RBI has removed the CAP on the unsecured exposures and individual Bank Boards were giventhe freedom to formulate their own policy guidelines for prudential norms on unsecured exposures.Simultaneous with this liberalisation, RBI has made norms of provision requirement on unsecuredexposure of Banks more stringent. Unsecured exposure is defined as an exposure where therealisable value of security as stipulated and ascertained by the valuation is not more than 10% `abinitio’. That means all clean / unsecured advances when they become NPA as substandard asset, willnow (w.e.f. 31.3.2005) require a provision at 20% of the outstanding N.L.Dalmia Institute of Management and Research[18]
  19. 19. NPA MANAGEMENTbalances. As against this, the normal secured advances, when moving to NPA as substandard assetwill require 10% of the outstanding balance as provision (no change from existing system). Thus from31.3.2005 onwards the substandard asset will have 2 segments with different provision requirement asbelow :-(a) Substandard – secured assets – Code 21 – provision at 20% of outstanding dues(b) Substandard – unsecured assets – Code 22 – provision at 20% of outstanding duesDoubtful Assets:It consists of 3 stages - Doubtful I, Doubtful II and Doubtful III. The provision requirement in each stageof Doubtful asset will be as under:Doubtful I (Code 31) - Assets remaining for a period of 12 months in Doubtful category – provisionrequirement shall be 20% of RVS + 100% of shortfall in security (i.e. NPAs over 12 months upto 24months)Doubtful II (Code 32) - Assets remaining for a period of further 24 months in Doubtful category –provision requirement shall be 30% of RVS + 100% of shortfall in security (i.e. NPAs over 24 monthsupto 48 months)However, effective June 2008, the provision requirement as per BOI policy shall be100% for ‘Code 31’ & ‘Code 32’ assets also.Doubtful III (Code 33) - Assets remaining for more than 3 years in Doubtful category. RBI has nowdecided that all advances classified as doubtful for more than 3 years (i.e. entering/entered toDoubtful III category) on or after 1st April 2004 shall require a provision of 100% forthe secured portion also w.e.f. year ending 31.3.2005. In other words all accounts migrating fromDoubtful II to Doubtful III on or after 1.4.2004 shall require 100% provision as on 31.3.2005 andthereafter (irrespective of RVS). N.L.Dalmia Institute of Management and Research[19]
  20. 20. NPA MANAGEMENTAs an intermediate measure for smooth transition, RBI had implemented a graded system of provisionrequirement at 60% and 75% of the RVS + 100% of shortfall for the year ending 31.03.05 and31.03.06 for accounts which were classified as Doubtful III category as on 31.03.04 (i.e. StockDoubtful III A/cs). However, these accounts also will require 100% provision from 31.03.07 onwards.As per the existing provisioning norms, all accounts entering into or already classifiedas Doubtful III will uniformly require 100% provision as on 31.3.07 and thereafter.Loss Assets – Code 40A loss asset is one where loss has been identified by Bank or internal or external creditors or RBIinspectors but the amount has not been fully written off. Such an asset is considered uncollectible andof such little value that its continuance is not warranted, even though there may be some small (lessthan 10%) salvage recovery value. The provision requirement is 100% of net outstanding dues. Theseloss assets should be gradually written off from the books. N.L.Dalmia Institute of Management and Research[20]
  21. 21. NPA MANAGEMENT N.L.Dalmia Institute of Management and Research[21]
  22. 22. NPA MANAGEMENT N.L.Dalmia Institute of Management and Research[22]
  23. 23. NPA MANAGEMENTSome facts about NPAs : ♦ From 1989-95, more than three quarters of members of IMF experienced serious & costly banking crisis (around 63 countries suffered systemic banking crisis in the 1990s) ♦ Direct cost of restructuring the financial system can be typically very high : 55% of GDP in Argentina, 42% in Thailand, 35% in Korea & 10% in Turkey ♦ As at end-March 2007, 82 out of 84 banks operating in India maintained CRAR at or above 9% (corresponding figure for 1995-96 was 54 out of 92 banks) ♦ As on March 31, 2007; NPAs stood at: Priority Sector Non-priority Sector Public Sector Banks 50.11% 49.89% (PSBs) Private Sector Banks 29.22% 70.78% N.L.Dalmia Institute of Management and Research[23]
  24. 24. NPA MANAGEMENT MONITORING AND FOLLOW UP MEASURESWith the Income Recognition and Asset Classification Norms becoming stricter, Branches are requiredto be more alert and proactive in monitoring the accounts. For this purpose, monthly interestapplication has become a useful tool to tackle potential delinquencies or defaults in standard accounts.To retain the asset quality, Branches should promptly act and :-  Recover the overdues or at least the critical amount through active follow up with borrowers;  Put the accounts under holding on operations in case of temporary cash flow mismatches;  Reschedule the repayment terms as per expected cash flows;  Restructure the dues in keeping with the expected cash flows and gaps in cash flows, if any as per guidelines given in the restructuring policy.Any one or more of the above actions should be taken before the account becomes NPAMeasures for follow up of Watch Category Accounts / NPAAccountsThe various means of monitoring/resolving NPAs generally available to the Banks are listed below :- A) Before the account becoming NPA (Watch Category A/c)1. Close monitoring for compliance of sanction terms to maintain asset quality.2. Reminders to be sent promptly whenever irregularities are observed.3. To recover overdues quickly to ensure account does not slip to NPA category4. Periodic inspection of the unit and charged assets along with analysis of financial data.5. To restructure the dues before accounts become NPAs. Remedial action includes enhancement of moratorium period, funding of interest, deferment of installments. Such rescheduling /restructuring/ rehabilitation to be done under Bank’s Restructuring Policy / BIFR approved scheme / CDR Mechanism. N.L.Dalmia Institute of Management and Research[24]
  25. 25. NPA MANAGEMENT B) After the account becoming NPA – following measures to be initiated for recovering Bank’s dues.1. Appropriation of liquid securities (TDR, NSC, shares, margin money etc.) and pledged goods, to reduce outstanding balance2. Disposal of other securities, with the co-operation of borrowers.3. Restructuring under Bank’s policy, CDR, BIFR etc., for viable units4. Compromise settlement of dues through negotiation under Bank’s Recovery Policy and special RBI OTS Schemes (in force from time to time)5. Forum of Lok Adalat and Recovery Camps6. Recalling the advance7. Initiating action under SRFAESI Act against charged securities8. Filing suit in Court / DRT (Debt Recovery Tribunal) – Execution of decree9. ECGC claim, if any, to be lodged after recalling the advance, reporting the default and follow up for early settlement of the claim10. Sale of financial assets to ARCs11. Sale of financial assets to Banks / FIs / NBFCs12. Lastly, after all the chances of recovery of dues are exhausted, we may resort to writing off of the balance duesAll these means have to be effectively pursued for resolution of NPAs.Appointment of Nominee Director:As an effective measure for closely monitoring the NPA accounts where Bank of India’s exposure issubstantial or where they are the sole bankers (or in consortium where they have substantial share),they may appoint Nominee Director in consultation with the borrower company. Recommendations forappointing Nominee Director shall be submitted by the Zonal Office for approval at Head Office. Acommittee of 3 General Managers shall process the requirement and after their clearance, the sameshall be submitted to Executive Director and Chairman & Managing Director for approval. TheNominee Director shall be an official of the Bank, not below the rank of Assistant General Manager, N.L.Dalmia Institute of Management and Research[25]
  26. 26. NPA MANAGEMENTwho is conversant with the affairs of the company. The appointments (and also changes due totransfer/retirement of officials) shall be subject to annual review. N.L.Dalmia Institute of Management and Research[26]
  27. 27. NPA MANAGEMENTNON-LEGAL REMEDIES(COMPROMISE SETTLEMENTS)A compromise is a settlement of disputes reached by mutual consent. It is a negotiated settlement withsacrifice component on all the parties to the dispute. It is a non legal remedy for reduction of NPAs ofthe Bank. Negotiated compromise settlements should be made to maximise the compromise amounts.Special one-time settlement schemes of RBI announced from time to time like RBI OTS Scheme2000, Scheme for small borrowers, Scheme for small and marginal farmers and RBI OTS Scheme of2003, RBI OTS for small and marginal farmers, RBI OTS 2005 for SME etc. are not covered by thefollowing guidelines. Separate guidelines will be issued from time to time for such schemes as per theinstructions of the RBI and delegation of powers for approval of such schemes will be advisedseparately.The following procedures and systems are applicable for compromise settlement as per Bank’s ownrecovery policy. Presently there are following 2 different schemes of OTS in BOI.A] Regular compromise settlementB] Special OTS for small NPAs / written off accounts with outstanding balances upto Rs.50000/-A] Regular compromise settlements Negotiation Process The Bank should endeavour to maximise recoveries / compromise amounts taking into accountvarious parameters as below: - age of the NPA. - strength of documentation. - age and stage of proceedings in the suit. - condition and availability of charged and uncharged assets of the borrower/ guarantor. - the possibility of deterioration and alienation of assets leading to threat to security/recovery. - capacity for negotiation by the Bank and the borrower. - Position of group accounts and present status of activity of the borrowersIn the process of negotiation, sacrifice of various components of the dues as below in the order ofdesirability would be considered – N.L.Dalmia Institute of Management and Research[27]
  28. 28. NPA MANAGEMENT - penal interest - incidental expenses including inspection/insurance charges. - ECGC/DICGC guarantee fees. - legal expenses incurred and to be incurred. - compounding effect of interest. - uncharged interest - Ledger write off is to be considered only when it is unavoidable.The following factors would also be considered while negotiating : - Time value of money and probable future recoveries compared with the offer amount. - Realisable value of security evaluated on a distress sale basis. - means of borrowers/guarantors other than the security charged in the account or attached in execution proceedings and their current income if they are engaged in gainful activities. - the amount repayable to DICGC/ECGC on settlement. - if there are credit balances in the name of the borrower in margin or other deposit accounts. - component of amount outstanding and uncharged interest in the total dues (age of NPA) - stage of recovery action such as recall, filing of suit, decree, etc. - strength and weaknesses of bank’s case in respect of documentation, realisation of security, etc. - cost of maintaining the suit, maintaining the security (godown charges, inspection expenses, receiver dues, insurance, security wages, etc.) - impact of accepting the compromise proposal on P&L A/c (by way of write back of provisions and recovery of uncharged interest).Compromises may be negotiated with –  principal borrower  guarantors either for partial payment or full payment  parent company  other interested parties like drawees of bills, legal heirs, etc.Eligibility a) The eligibility criteria for entering into compromises are – i. The account should be classified as non-performing asset. Accounts which have become non- performing assets, during the course of the year, for which provision is to be made at a future date are also eligible N.L.Dalmia Institute of Management and Research[28]
  29. 29. NPA MANAGEMENT ii. The default should have occurred due to reasons beyond the control of the borrower iii. Efforts for upgradation either by restructuring or rehabilitation have either failed and/ or may not yield desired results. iv. The securities, income/ worth of the borrower/ guarantors is not sufficient to ensure full recovery of the dues. v. Any other reason in which continuation of relationship with the borrower is considered not in the interest of the Bank. vi. All suit filed/decreed A/c’s, A/c’s under BIFR/AAIFR reference as well as A/c’s considered under CDR and other restructuring schemes are also eligible to be considered for OTS under Bank’s Recovery Policy. b) Ineligible CasesThe following cases are not eligible in the normal course and are not entertained by the regulardelegatees below the level of General Manager, HO, ARD - Wilful defaulters - Cases of malfeasance/ misfeasance - Fraud/ cheatingBefore identifying an applicant as wilful defaulter Branch should keep sufficient data / records to proveand establish that the borrower is a wilful defaulter. In the absence of such proof the borrower shouldbe given the benefit of the policy. Even in case of wilful default or fraud accounts, the compromiseoffers, if valuable in money terms, shall be referred to Head Office through Zonal Office.Compromise settlement and sacrifice :The authority for approval is determined by the “sacrifice” proposed under a settlement. Thesacrifice is the difference between notional amount due calculated asbelow and the OTS amount offered. For these purposes the Notional Amount due andsacrifice is arrived at as under – a) Notional amount due : Considering the age of NPA, nature of asset classification and the ground realities, the Bank has now adopted a two way system of arriving at the notional dues as below :- (i) In accounts where the asset classification is Substandard or Doubtful for calculating the notional dues, simple interest @ 2% over Bank rate (presently 6% + 2% = 8%) is added to the ledger outstanding balance as on date of NPA/ date of interest ceasing. Simple interest at the above mentioned rate shall be calculated from the date of ceasing interest till the last date of previous month of the submission of the compromise N.L.Dalmia Institute of Management and Research[29]
  30. 30. NPA MANAGEMENT proposal. Value-dating of credits / debits shall be done while calculating the interest from date of NPA / interest ceasing. (ii) In accounts where the asset classification is “loss asset” or the ledger balances is already written off NO interest shall be loaded to the ledger balances from the date of account classified as NPA. b) Sacrifice : Amount by which the Notional Amount due exceeds the proposed compromise amount constitutes the sacrifice. Such sacrifice determines the delegated authority who should approve the compromise.Payment : a) The amount of settlement should preferably be paid in one lumpsum within three months from the date of conveying the approval. Interest will not be charged if the payment is made within three months of conveying the approval. b) In case where the borrowers are unable to pay the entire amount in one lumpsum, the following procedure may be adopted - Normally minimum upfront/ down payment of 5% of the compromise offer proposed be deposited as token payment in a “No Lien” account. Upfront must be insisted upon; however, it shall not come in the way of entertaining OTS proposal if otherwise acceptable. In case where the compromise amount is expected to be paid by the sale of securities charged to the Bank, the down payment may not be insisted upon. c) Repayment of compromise to be fixed such that minimum 25% is paid within 3 months. d) Balance amount of 75% should be recovered in equal monthly / quarterly installments within a period of further 9 months maximum together with interest on reducing balance at the existing PLR from the date of conveying of approval upto the date of final payment. The delegatees shall approve repayment period as per the details given.Delegation N.L.Dalmia Institute of Management and Research[30]
  31. 31. NPA MANAGEMENTThe delegation for approval of sacrifice in the compromise proposals is as under :- (Rs. In lakhs) Managing Committee Full powers Chairman and Managing Director 50.00 Executive Director 37.50 General Manager, H.O., ARD 30.00 General Manager (Zonal Manager) 25.00 Dy.General Manager/ Scale VI (and DGM, 20.00 H.O.,ARD) 10.00 Asst. General Manager/Scale V 2.50 Chief Manager Scale IV 1.00 Manager (large Branch) Scale III N.L.Dalmia Institute of Management and Research[31]
  32. 32. NPA MANAGEMENTSARFAESI Act(The Securitisation & Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002)The Securitisation 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 interests and recover thedues thereby reducing NPAs. The Act has three segments – • Securitisation and Asset Reconstruction Companies • Central Registry • Enforcement of Security Interest The SARFAESI Act enables the Bank wherever the Bank is a secured creditor to enforce security interest for recovery of its dues without the intervention of the Court or Debt Recovery Tribunal provided that secured interest has been properly created in favour of the Bank.Criteria for invoking provisions of the SARFAESI Act:Before enforcing security interest, branches should ensure that the borrowal accounts comply with thefollowing criteria – ♦ The contractual dues in the account should be more than Rs.1.00 lakh. ♦ The default must have occurred i.e. the account should have become NPA as per RBI norms. ♦ 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. ♦ 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 are in force even at the time of the Action that will follow for enforcement of security i.e. at least upto one year from the date of serving the notice. ♦ The security documents should be duly filled in and no column should be kept blank. N.L.Dalmia Institute of Management and Research[32]
  33. 33. NPA MANAGEMENT ♦ Either Bank of India must be the sole Banker to the borrower i.e. 100% lending is done by us or in case of joint lending, at least lenders representing 75% of the contractual amount due and out-standing agree to take Action. ♦ In case of Multiple Banking, if the security is exclusively charged, the Bank can proceed as though it is the sole Banker.Exemptions :The following are exempted from the purview of the Act –  Accounts where the contractual dues are less than Rs.1.00 lakh.  When the security interest is created on agricultural land. However, other agricultural related assets like tractor, implements etc. can be enforced, if charged as security to Bank’s advance.  Where the contractual dues remaining unpaid is less than 20% of the principal i.e. total amount disbursed and interest.  Assets under pledge, lien / assets financed under lease or hire purchase are not covered.Due Diligence Study :Before invoking the provisions of the SARFAESI Act, a due diligence study should be conducted inrespect of the secured assets to be taken into possession covering nature, value of such assets,probability of finding a buyer in the shortest period (it will be better if a buyer is identified beforeundertaking the exercise) expenses to be incurred in connection with safe-keeping / storage, N.L.Dalmia Institute of Management and Research[33]
  34. 34. NPA MANAGEMENTappointment of security guards, estimated realisable value of the assets in case of sale etc. Branchesshould keep the above in mind before initiating enforcement Action.PROCEDURE FOR PROCEEDING UNDER THE SARFAESI ACT: I. Identification of accounts & Obtention of Approval for Action ♦ The entire NPA portfolio of the Branch should be gone through and accounts fulfilling the eligibility conditions as given above should be identified. ♦ Out of those identified accounts such accounts should be short-listed in which charged security can be taken into possession for sale/lease for recovery of Bank’s dues. ♦ The Branch must put up the proposal before the Competent Authority for approval for Action under the Act as per the prescribed format. ♦ On obtention of approval, 60 days notice(s) should be sent under the signature of the Authorised Officer. ♦ There is no waiting period for issuing notices under the Act. As soon as the account becomes NPA, notices under the Act should be issued after obtaining appropriate approval from Competent Authority. N.L.Dalmia Institute of Management and Research[34]
  35. 35. NPA MANAGEMENT II. Issue of notices Service of proper notice is a pre-requisite for enforcement of security interest. Hence, it shouldbe ensured that proper notices are served on the borrowers/ guarantors who have created the securityinterest. The authority for approving proposal for issuing notice and taking Action under the SARFAESIAct is as under :- (Rs. In Lakh) Chairman and Managing Director Full powers Executive Director 2500.00 General Manager/ Scale VII 1000.00 Dy. Gen. Manager/ Scale VI 750.00 Asst. Gen. Mgr./ Scale V 250.00 Chief Manager / Scale IV 50.00 Senior Branch Manager (Large Branch) Scale III 10.00Note: 1. The amounts represent suit claims/ contractual dues. 2. The delegatee approving issue of notice should not have sanctioned the credit proposal. In such a case, it should be submitted to the next higher authority. N.L.Dalmia Institute of Management and Research[35]
  36. 36. NPA MANAGEMENT 3. The powers are to be exercised by the chief incumbent at the Branch. In respect of administrative/ controlling/ Zonal Offices, designated officers of the rank of Chief Manager/ Scale IV and above may exercise the above delegation within their functional area. 4. At Head Office Level the powers will be exercised by Dy. General Manager (Law/ARD) onwards as per the above delegation.Other important instructions regarding issuing of notices: a) Though approval for issuing notices can be given as above, notices are signed by the officer duly authorised by the Zonal Manager as `Authorised Officer’. b) The period of notice will be 60 days. c) Notices can be issued not only to the principal borrower but also to the guarantor if security interest is created by the guarantor. However, if no security is created by the borrower but only by the guarantor then notice can be issued ONLY to the guarantor who has created security and the borrower should be issued usual “RECALL NOTICE”. Notices must be issued in the prescribed format, specimen of which are given in Annexure I & II. d) The service of the notice is to be made by Regd. Post / A.D., Speed Post, Courier, E-mail, UPC, Fax etc. In case of non-delivery of service, the service is to be affected by affixing the notice on the conspicuous part of the building where the borrower / guarantor resides and / or carries on business and also on the property in which the security interest is created. It may also be published in two leading newspapers, one in vernacular language having sufficient circulation in that locality and the other in English. e) Where the borrower is a Body Corporate, the Demand Notice shall be served on the Registered Office and also on any of the branches of such Body Corporate as specified under Sub Rule (1) of Rule 3 of Security Interest Enforcement Rules 2002. f) When there is more than one borrower, the Demand Notice shall be served on each borrower. N.L.Dalmia Institute of Management and Research[36]
  37. 37. NPA MANAGEMENT g) In case of Joint Financing/Multiple Lending, whenever it is decided to proceed under the Act, all the Banks shall issue their notices separately for their respective dues. h) The Authorised Officers so issuing the notice as well as monitoring and follow up of the action will have immunity granted for all Action done in good faith and without negligence while exercising the right on the securities created.III. Objection / Representation received from the borrower on receipt of Notice: After issuance of notice under Section 13(2) of the SARFAESI Act by the Bank, if anyborrower/guarantor having the security interest makes a representation or raises any objection, thenthe Bank, being a secured creditor, has to consider such representation or objections and if the Bankcomes to the conclusion that such representation or objection is not acceptable or tenable, then theBank has to communicate within one week from receipt of such representation or objection, thereasons for non-acceptance of the representation or objections to the borrower. A three member ZonalCommittee headed by Zonal Manager should finalise the reply in all cases irrespective of any amount.It is made clear that at the stage of communication of reasons, it shall not confer any right upon theborrower to prefer an application to the DRT under Section 17 or the Court of District Judge underSection 17A of the said Act.IV. Designating Chief Managers and above as Authorised Officers : In terms of the provisions of the aforesaid Act, the rights of the secured creditor under the Actmay be exercised by one or more of his officers authorised in this behalf. As per the definition given in N.L.Dalmia Institute of Management and Research[37]
  38. 38. NPA MANAGEMENTthe Rules, “Authorised Officer” means an officer not less than a Chief Manager of a Public SectorBank or equivalent as specified by the Board of Directors of the secured creditor. The Board ofDirectors has accorded approval for designating all the officers of the rank of Chief Manager andabove of the Bank as “Authorised Officer” for exercising the powers of the Bank under SARFAESI Act,2002 and for authorising the concerned Zonal Manager and in his absence the Guardian GeneralManager of the Zone at Head Office or elsewhere to allot specific cases to Authorised Officers. V. Issuance of Notice Notices may be sent to the principal borrower/guarantors who have createdequitable/legal/Registered mortgage/charge/hypothecation/assignment in the Bank’s favour.VI. After issuance of 60 days’ Notice Branches need not wait for completion of 60 days statutory notice period to initiate follow upAction. Continuous follow up and personal contacts should be made with the borrowers so thatpressure is built up for liquidation of the Bank’s dues.VII. Accounts referred to B.I.F.R.: . Bank can issue notice and take possession and other measures under Section 13 (4) of theAct for recovery of the Bank’s dues {where there is no rehabilitation scheme in operation} when BOI isthe sole Banker or our dues against the borrowers constitute 75% in value of the amount outstandingagainst financial assistance disbursed to the borrower/s whose units have been referred to BIFR.Where our Bank is neither the sole Banker nor Bank’s dues constitute 75% as aforesaid, then fortaking Action under the Act, the consent of secured creditors representing not less than 75 % in valueof the amount outstanding against such borrower is required. Alternatively, in such cases our Bankcan give consent to other secured creditors / Lead Bank for taking Action. However, our Bank mustissue the Notice under Section 13 (2) for our dues only, after taking permission from appropriateauthority. Once the Notice is issued and/or possession of a secured asset is taken or any othermeasure under Section 13 (4) is taken by any of the secured creditor then the reference before BIFRshall abate and further Action for recovery of Bank’s dues can be initiated / continued before otherforums, DRTs etc. N.L.Dalmia Institute of Management and Research[38]
  39. 39. NPA MANAGEMENTVIII. Enforcement action in suit filed / DRT accounts: The Government has promulgated an Ordinance on 11.11.04 named as Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Ordinanace,2004. By the said Ordinance, Section 19 of the DRT Act has been amended. The said Ordinance was repealed and the Act was passed and notified in the Gazette on 31.12.04. The amended Section 19 of the DRT Act prohibits the Banks and Financial Institutions from taking simultaneous action under the SARFAESI Act as well as DRT Act. Prior to the above said amendment, the Banks were taking simultaneous action for recovery under the SARFAESI Act as well as DRT Act. However, Bank of India has taken a view that the said Amendment Act is not having retrospective effect i.e. the said amendment became effective prospectively from the date of the promulgation of the Ordinance on 11/11/2004. In case of suits pending before the amendment of Section 19 of the DRT Act i.e. suits filed prior to 11/11/04, Bank can always take simultaneous action under the SARFAESI Act as also the DRT Act. As regards the suit filed/decreed cases after 11/11/2004 where the Bank had not taken any action so far under the SARFAESI Act and it now desires to take action i.e. after the issuance of the Ordinance , then in our view a suitable application may be filed before the Hon’ble DRT/Civil Court to keep the Bank’s OA/Suit adjourned with liberty to the Bank to revive the same after the completion of the proceedings initiated under the SARFAESI Act. It is possible that the Hon’ble DRT/Court may not entertain the Bank’s Application in that case the Bank will have to continue the proceedings before the Hon’ble DRT/Court as withdrawing the OA / Suit against the borrowers/guarantors, the Bank may lose its legal right to file fresh OA / Suit as it will be hit by the provisions of the Limitation Act. We may clarify that for issuing Notice under Section 13 (2) of the said Act, permission of DRT/Court is not required. Needless to mention, Branches should ensure that before proceeding under the SARFAESI Act in Pending Suit Filed Accounts, the rights of the Bank as mortgagee/ hypothecatee are not barred by Law of Limitation. Enforcement Action : A. If full payment is made during the notice period, no further Action is called for. If part payment is made, the Bank retains the right to claim the balance amount. N.L.Dalmia Institute of Management and Research [39]
  40. 40. NPA MANAGEMENT B. If the borrower / guarantor fails to meet their liability in full within 60 days from the date of notice then the Authorised Officer may by himself or through empanelled Enforcement Agency take one or more of the following measures: ♦ Take possession of the secured assets ♦ Take over the management of the secured assets. ♦ Appoint a person to manage the assets so taken over. ♦ Issue notice for collection of receivables / book debts ♦ Bank can also sell or lease out the business and take over the management of the Company. ♦ In case the borrower refuses peaceful handing over of the secured assets, Bank can also file an application before the concerned Chief Metropolitan Magistrate /District Magistrate for taking possession of the secured assets. C. The possession should not be taken as a matter of routine. A due diligence should be conducted in respect of secured assets to be taken into possession covering nature and value of such asset, probability of finding a buyer in the shortest period (it will be better if a buyer is identified before undertaking the exercise), expenses to be incurred in connection with safekeeping/ storage, appointment of security guards, estimated realisable value of the assets in case of sale, etc. The total costs and expenses incurred should not be disproportionate to the amount of value of security and recovery expected. D. Procedure for taking possession/sale of the secured assets N.L.Dalmia Institute of Management and Research[40]
  41. 41. NPA MANAGEMENT Before taking Possession i. Where secured assets are intended to be taken in possession, a preliminary visit by the Authorised Officer, if necessary along with the Board Approved Valuer to the site is desirable to assess the likely response of the borrower, realisable value of the assets, the requirement of technical support, manpower and items necessary for effectively taking possession of the secured assets, guarding and/or taking the same in proper custody. If the attitude of the borrower is hostile and it appears to the Authorised Officer that the borrower shall not peacefully handover the secured assets or the premises are found locked, the Authorized Officer must seek the assistance of the Chief Metropolitan Magistrate/District Magistrate in terms of provisions of Section 14 of the Act in consultation with Legal Dept. of the Zone/Bank’s Panel Advocate for taking over the possession of the secured assets. ii. The decision to take possession of the secured assets will solely depend upon the realizable value of the secured assets and the expenses the Bank is likely to incur towards storage, security, insurance etc. If the realizable value of the secured assets is less than the expenses likely to be incurred by the Bank then before initiating the enforcement Action, the Authorised Officer should bring this fact to the notice of the Zonal Manager and seek the instructions. The Zonal Manager should consider the issue in its entirety and considering the demonstrative effect of the exercise decide the further course of Action. iii. Having made the assessment as stated in the preceding paras, the Authorised Officer, after making necessary preparation should proceed to take possession. He must have copies of the Notice served on the borrower/guarantor. He should be accompanied by hamal/mazdoors, carpenter (as per requirement) security guards from approved agency, two independent witnesses and a Valuer approved by the Board. He should also carry necessary formats as per Appendix to the Security Interest (Enforcement) Rules for preparation of Panchnama, inventory, Possession Notice, pad locks and other necessary items for putting the secured assets under lock and seal of the Bank wherever necessary. A Sign Board showing Bank’s possession of the site/secured assets may also be carried for putting it up at the site. N.L.Dalmia Institute of Management and Research[41]
  42. 42. NPA MANAGEMENT iv. Before taking possession of the secured assets, the Authorised Officer must ensure that the property which is sought to be taken into possession is listed in the notice and the description thereof tallies. For this purpose the Authorised Officer should carry photocopies of the charge creating documents i.e. Memorandum of Entry/Hypothecation Deed etc.D . 1) Movable Assets a) Taking Possession Normally the movable assets are stocks in trade, work in progress, raw material, finished goods,semi finished goods, parts, tools, stores, movable machinery, book debts, receivables etc. or as maybe hypothecated/charged to the Bank. Authorised Officer assisted by persons accompanying him shalltake possession of the property in the presence of two independent witnesses. Possession should betaken after sunrise and before sunset. i. Panchnama shall be prepared and signed by the two independent witnesses and the Authorised Officer. The Panchnama should be drawn as nearly as possible in accordance with Annexure III. Necessary details as required in the format, as per facts and circumstances of the case should be mentioned in the Panchnama (Rule 4 (1)). ii. After taking over the possession, the Authorised Officer shall make or cause to be made an Inventory of the property immediately in the form given in Appendix II to the Rules. The N.L.Dalmia Institute of Management and Research[42]
  43. 43. NPA MANAGEMENT Inventory must give all the requisite particulars of the property e.g. description of the article, estimated value etc. as per requirements in the Annexure IV. Apart from the necessary particulars as required in the format of Inventory, details about quality/quantity, measurements, nature/condition of the property should be mentioned in the inventory. It is to be signed by the Authorised Officer and the borrower or his authorised representative. In case there is refusal by the borrower/representative to sign the inventory, a statement to that effect must be recorded in the Inventory as well as Panchnama and signed by the two independent witnesses and the Authorised Officer. iii. Authorised Officer shall deliver or cause to deliver the copy of the Inventory to the borrower or any other person entitled to receive it on behalf of the borrower. An acknowledgment should be obtained. In case of refusal, the fact of refusal should be recorded in the Inventory. A copy of the Inventory should be despatched to the borrower by Registered Post with acknowledgement due/fax or E-mail. Inventory is to be attached to the Panchnama. iv. Secured assets shall be kept in the custody of the Authorised Officer or in the custody of any other person authorised or appointed by him in this behalf. The seized assets shall be taken care of in the same manner as the owner of ordinary prudence would take of his own assets. Under no circumstances the possession of the asset should be with the Enforcement Agents appointed by the Bank. v. The Authorised Officer shall take steps for preservation and protection of secured assets. Wherever the secured assets are not insured or insurance coverage has expired, the Authorised Officer shall take insurance coverage/ continue it till the assets are disposed off. An independent godown/warehouse (as per requirement) should be identified/made available with independent access to the Bank wherein seized assets could be stored and all necessary steps should be taken for protecting and preserving the seized assets including arrangement of security agency for providing security guards to protect the secured assets from theft, pilferage etc. N.L.Dalmia Institute of Management and Research[43]
  44. 44. NPA MANAGEMENT vi. If the seized assets are subject to speedy or natural decay or the expenses of keeping such assets in custody are likely to exceed its value, the Authorised Officer may direct sale of such goods immediately so as to prevent loss due to decay after completing the aforesaid formalities. In such an event the Authorised Officer shall have to issue Sale Certificate to the purchasers in the prescribed form as given in Annexure V on receipt of Payment. The Sale Certificate shall specify the movable secured assets sold, price paid and the name of the purchaser. b) Valuation / Sale of the Movable Assets i. After taking possession of the movable assets and before the sale, the Authorised Officer shall obtain the estimated value of the movable assets from a Valuer approved by Bank’s Board and if considered necessary then fix the Reserve Price of the assets in consultation with the Zonal Manager. ii. The Authorised Officer or any representative of the Bank should accompany the Valuers at the time of conducting valuation. iii. Valuers should be advised to furnish a realistic and reasonable value of the assets after taking into consideration the market conditions and the present prices in general. iv. Wherever prospective buyers are not available for purchasing the unit as a whole, seized assets should be sorted out in different lots for the convenience of effecting sale. c) Manner of Sale The Authorised Officer shall sell the seized assets in one or more lots by any of the followingmodes to secure maximum price for the assets to be sold: i. By obtaining quotations from parties dealing in the seized assets or otherwise interested in buying the seized assets. N.L.Dalmia Institute of Management and Research[44]
  45. 45. NPA MANAGEMENT ii. By inviting tenders from public iii. By holding public auction or iv. By private treaty. d) Sale Notice - To Borrower/owner of assets The Authorised Officer must serve to the Borrower a Notice of 30 days for sale of the movableassets. Service of Sale Notice is to be done in the same manner as Demand Notice under Section13(2) of the Act is served. The Act/Rules do not prescribe any format for this notice. This Noticeshould contain the Reserve Price, fixed if any and mode of sale, place, date and time of sale andshould give the borrower an opportunity to participate in the sale process. e) Publication of Sale Notice in Newspapers If the sale is being effected by either inviting tenders from public or by holding public auction, aPublic Notice in two leading newspapers, one in vernacular language, having sufficient circulation inthat locality must be published. Sale can be conducted only after expiry of 30 days from the date onwhich the Sale Notice was published in the newspaper or after expiry of 30 days from the date ofservice of the Sale Notice to the buyer/guarantor whichever is later. The Public Notice shall set out theterms of sale, which may include the following: N.L.Dalmia Institute of Management and Research[45]
  46. 46. NPA MANAGEMENT i. Details about the borrower and Bank. ii. Description of movable secured assets to be sold with identification marks or numbers if any on them; iii. Reserve Price, if any, and the time and manner of payment; iv. Time and place of public auction or the time after which sale by any other mode shall be completed; v. Depositing earnest money as may be stipulated by the Bank; vi. Time and place for inspection of the movable assets;vii. Any other thing which the Authorised Officer considers it material for the purchaser to know in order to judge the nature and value of the movable assets;Wherever Sale Notice is being published in newspaper a copy thereof should be sent to the borroweralong with 30 days Sale Notice referred above. f) Inspection by Prospective Purchasers The prospective purchasers/tenderers will have to be provided with the details of assets undersale and opportunity for inspection. For convenience, a common date and time may be fixed forinspection for all prospective purchasers and intimation to this effect to be made part of the SaleNotice to be published in newspaper. N.L.Dalmia Institute of Management and Research[46]
  47. 47. NPA MANAGEMENT g) Sale by Public Tender Wherever sale is to be conducted by Public Tender, all the tenders received should be openedby the Authorised Officer in the presence of the Tenderers and hence date, time and place of openingthe Tenders should also be mentioned in the Sale Notice. h) Sale by other methods than public auction/public tender Sale by any method other than public auction or public tender shall be on such terms as maybe settled between the parties in writing. However, an endeavour should be made to get the maximumsale price for the assets i.e. more than the Reserve Price. Further, if the amount offered is less thanthe Reserve Price, the property can be sold by the Authorised Officer only with the consent of theBank and borrower/guarantor i.e. owner of the property. i) Issuance of Sale Certificate Where movable secured assets are sold, sale price of each lot shall be paid as per the terms ofthe public notice or as per terms settled between the parties as the case may be and in the event ofdefault of payment the secured assets shall be liable for sale again. On payment of sale price, theAuthorised Officer shall issue Sale Certificate in the prescribed form as given in Annexure V to thesaid Rules specifying the movable secured assets sold, price paid and name of the purchaser andthereafter the sale shall become absolute. The Sale Certificate so issued shall be prima facie evidenceof title of purchaser. The possession of the assets sold shall be delivered to the purchaser. j) Sale of other movable assets The aforesaid procedure with necessary change shall be followed while taking possessionand selling the following movable secured assets also: - A mortgage, charge, hypothecation of movable property. N.L.Dalmia Institute of Management and Research[47]
  48. 48. NPA MANAGEMENT - Any right or interest in the security whether full or part underlying at debt or receivable (payable to the Bank). - Any beneficial interest in the property or in a debt or receivable. k) No Sale or Transfer if Dues are paid If the dues of the Bank together with all costs, charges and expenses incurred by Bank aretendered to the Bank at any time before sale or transfer, the secured asset shall not be sold ortransferred by the Bank. l) Procedure relating to other secured assets not in possession of the borrower i. If the secured asset is in the form of a debt (not secured by negotiable instrument) not in possession of the borrower, the Authorised Officer shall obtain possession or recover the debt by service of notice prohibiting the borrower from recovering the debt or any interest thereon and the debtor from making payment thereof to the borrower and directing the debtor to make such payment to the Authorised Officer. ii. If the secured assets are shares in a body corporate, the Authorised Officer shall serve a notice directing the borrower to transfer the same to the Bank and also the body corporate from not transferring such shares in favour of any person other than Bank. A copy of such notice so sent shall be sent to the concerned Body Corporate’s Registrar to the Issue or Share Transfer Agent, if any. iii. In case of any other movable property, the Authorised Officer shall serve the notice upon the borrower and the person in possession of such assets, calling upon them to handover the same to Authorised Officer and the Authorised Officer shall take custody of such movable property in the same manner as applicable to movable secured assets as aforesaid. N.L.Dalmia Institute of Management and Research[48]
  49. 49. NPA MANAGEMENTD. 2) Immovable Properties 1. Taking Possession Before taking possession of immovable property the Authorised Officer shall be guided as faras possible by the guidelines as appearing above vide para I (i) to (iv). i. The immovable property to be taken into possession may be house, residential flat, open plot of land, factory land and building, industrial Gala, warehouse, Plant & Machinery permanently attached to earth etc. As per nature of the property, appropriate preparations should be done for effectively taking possession thereof and keeping the same in safe custody and care. ii. Possession of the immovable property shall be taken by delivering Possession Notice, to the Borrower/Guarantor whose property is being taken in possession. Duplicate of Possession Notice has to be affixed on the outer door or most visible part of the property itself. If the property is land and large in area, a notice board also can be fixed giving the details of Possession Notice. Where there is refusal to acknowledge the Possession Notice, then the Possession Notice is to be served in the same manner as demand notice issued under Section 13 (2) of the Act is served. iii. Possession Notice shall be published in two leading daily newspapers (one in vernacular/local language) having wide circulation in that locality. iv. While taking possession of immovable property including plant and machinery embedded to the earth or permanently fastened to anything attached to the earth, the Authorised Officer or any person appointed by him shall prepare inventory of such assets giving full description and condition thereof including trade mark, capacity, survey nos., extent, boundaries etc. The inventory should also contain all the movable assets/contents found in the premises, which are taken possession or attached to the premises. Such inventory should be verified with two independent witnesses and should be prepared as far as possible in the form given in Annexure IV and should be delivered to borrower or any person entitled to receive it on behalf of borrower (i.e. owner of such assets) N.L.Dalmia Institute of Management and Research[49]
  50. 50. NPA MANAGEMENT v. The Rules do not specify any Panchnama in case of immovable property but it is advisable to record a Panchnama detailing the fact of taking over of possession, its time, date etc, inventory of movables, if any, signed by two independent witnesses. vi. In case of taking possession of residential properties under Section 13 (4) (a), if peaceful possession of such residential properties is possible, a Panchnama with two independent witnesses is a must and the Panchnama should contain the details of all the contents of such premises such as furniture, fittings etc. If moveable assets found are not charged to Bank then the assets should be handed over to the true owner against proper acknowledgement. If the same is not possible then Inventory of such movables should be prepared as aforesaid and the immovables should be kept in safe custody and true owner be notified for taking possession along with a copy of Inventory.vii. Even if possession is obtained under an Order of the Magistrate, a Memorandum recording handing/taking over the possession should be drawn disclosing all the contents of such premises such as furniture, fittings etc. followed by handing over of Possession Notice by the Authorised Officer to the borrower and publication of Possession Notice in the newspapers as aforesaid.viii. If the possession of the immovable property has been taken, the property has to be kept in the custody of the Authorised Officer or in the custody of any other person authorised or appointed by Authorised Officer in this behalf who shall take as much care of the property in his custody as a owner of ordinary prudence would, under the similar circumstances, take of his property. Hence, the assets taken into possession must be maintained with care and all necessary repairs/cleaning up operations be carried out so as to maintain the property in proper condition. Under no circumstances the possession of the property should be given to the Enforcement Agents appointed by the Bank. N.L.Dalmia Institute of Management and Research[50]
  51. 51. NPA MANAGEMENT ix. The Authorised Officer shall take steps for preservation and protection of secured assets and insure them, if necessary, till they are sold or otherwise disposed of. If the seized assets are already insured by the borrower, the same may be renewed. If not, the same must be insured upto such value as may be deemed necessary and appropriate by the Authorised Officer taking into consideration the realizable value of such property. 2. Valuation / Sale of Immovable Property i. The concerned branch must be in touch with prospective buyer(s) (preferably before expiry of notice period of 60 days) for selling seized assets in order to ensure that there will not be any depreciation in value of the assets and costs for preserving the assets are minimum. ii. Before effecting sale of the immovable property taken into possession, the Authorised Officer shall obtain valuation of the property from a Valuer approved by the Board. iii. The Authorised Officer or any representative of the Bank should accompany the Valuers at the time of conducting valuation. A copy of the Title Deed should be taken during such inspection to identify the property and to ensure that the property as per Title Deeds is same as that being valued. N.L.Dalmia Institute of Management and Research[51]
  52. 52. NPA MANAGEMENT iv. Valuers should be advised to furnish a realistic and reasonable Value of the assets taking into account the market conditions and present property prices in general. v. The Authorised Officer shall fix the Reserve Price for the property in consultation with the Zonal Manager. In case the approval for Action in the account has been accorded by an authority above the rank of Zonal Manager, then Zonal Manager shall obtain approval of such authority for fixing Reserve Price and accordingly communicate to the Authorised Officer. vi. After fixing the Reserve Price the Authorised Officer may sell the whole or any part of such immovable property by any of following methods to ensure maximum price of such property : a) by obtaining quotations from the persons dealing with similar property or otherwise interested in buying such property or b) by inviting tenders from the public c) by holding public auction, or d) by private treaty.vii. The Authorised Officer shall serve to the borrower a notice of thirty days for sale of the immovable property. Service of Sale Notice is to be made in the same manner as service of Demand Notice is made. The Act/Rules do not prescribe any format for this notice. This notice should contain the Reserve Price fixed, mode of sale, place, date and time of sale and should give the borrower an opportunity to participate in the sale process.viii. If the sale is conducted by inviting tenders from public or by holding public auction, a Public Notice is to be published in two leading daily newspapers, one in vernacular language, having sufficient circulation in that locality the other in English by setting out the terms of the sale including the following: a) Name of the Bank and the borrower/guarantor i.e. owner of the property. N.L.Dalmia Institute of Management and Research[52]
  53. 53. NPA MANAGEMENT b) Description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor. c) The secured debt for recovery of which the property is to be sold. d) Reserve Price below, which the property may not be sold. e) Time and place of Public Auction or the time after which sale by any other mode shall be completed. f) Depositing earnest money as may be stipulated by the Authorised Officer of the secured creditor. g) Any other thing which the Authorised Officer considers material for a purchaser to know in order to judge the nature and value of the property.Wherever Sale Notice is being published in newspapers a copy thereof should be sent to the borroweralongwith 30 days Sale Notice referred above. ix. The Notice of Sale should also be affixed on a conspicuous part of the immovable property to be sold. If the Authorised Officer deems fit, the Sale Notice may be put on the Bank’s website also. x. The Authorised Officer/concerned Branch must make arrangement for facilitating the inspection of property under sale and information to this effect should be mentioned in the Sale Notice. For the sake of convenience a common date/s and time may be fixed for inspection by prospective bidders/purchasers. xi. In case of sale by obtaining quotations from interested parties, quotations from at least 3 interested parties should be invited The invitation for quotations should be mailed to as many interested parties as possible. (For example, if the immovable property to be sold is factory N.L.Dalmia Institute of Management and Research[53]
  54. 54. NPA MANAGEMENT land and building, the interested parties could be owners of properties in the neighbourhood, owners of factories engaged in similar Activity etc.). xii. Wherever sale is to be conducted by Public Tender, all the tenders received should be opened by the Authorised Officer in the presence of the Tenderers and hence date, time and place of opening the Tenders should also be mentioned in the Sale Notice.xiii. Sale by any method other than Public Auction or Public Tender shall be on such terms as may be settled between the parties in writing.xiv. Every endeavour should be made to obtain a price above the Reserve Price and the property has to be sold only to the Purchaser who has offered the highest sale price in his bid or tender or quotation or offer. Further, if the amount offered is less than the Reserve Price, the property can be sold by the Authorised Officer only with the consent of the Bank and borrower/guarantor i.e. owner of the property. xv. Sale by any method can be conducted only after expiry of 30 days from the date on which the Sale Notice was published or from the date of service of Sale Notice to the borrower/guarantor (i.e. owner of the property) whichever is later. Assets shall be sold in favour of the purchaser who has offered the highest price in his bid/tender or quotation or offer to the Authorised Officer and the sale shall be subject to the confirmation by the Bank.xvi. On every sale of immovable property, the purchaser shall immediately pay a deposit of twenty five percent of the amount of the sale price, to the Authorised Officer conducting the sale and in default of such deposit, the property shall forthwith be sold again.xvii. The balance amount of purchase price payable shall be paid by the purchaser to the Authorised Officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the parties. N.L.Dalmia Institute of Management and Research[54]
  55. 55. NPA MANAGEMENTxviii. In default of payment within the period mentioned as above, the deposit and earnest money shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit all claims to the property or to any part of the sum for which it may be subsequently sold. xix. On confirmation of sale by the Bank and if the terms of payment have been complied with, the Authorised Officer exercising the power of sale shall issue a Certificate of Sale of the immovable property in favour of the purchaser in the form given in Appendix V to the said Rules. All expenses relating to stamp duty, registration etc. including all costs, charges and expenses in relation thereto are to be borne by the purchaser. xx. Where the immovable property sold is subject to any encumbrances, the Authorised Officer may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him. xxi. On such deposit of money for discharge of the encumbrances, the Authorised Officer may issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make the payment accordingly.xxii. The Authorised Officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified above.xxiii. The Certificate of Sale issued in respect of property under encumbrances shall specifically mention that the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not. N.L.Dalmia Institute of Management and Research[55]
  56. 56. NPA MANAGEMENT E. Secured Assets in possession /custody of the Court/Court Receiver/Official Liquidator/Provisional Official Liquidator Where the assets to be taken into possession are in possession/custody of the above noted authority, the Authorised Officer can not take possession of such assets without specific and prior permission from the concerned Court etc. This restriction would apply in case of assets belonging to a corporate borrower against which winding up order has been passed by the Company Court. F. Immovable property in possession of tenants Sec. 13(4) of the Act empowers the Secured Creditor /Authorised Officer to take possession of the property either Actually or constructively and transfer it by way of lease/assignment/sale and any such transfer of secured assets after taking possession shall vest in the transferee as if the transfer has been made by owner of the assets. However, such deeming power has been given to the secured creditors/Authorised Officers only for the limited purpose of releasing the securities to convey good marketable title to the buyer but property does not vest in the secured creditor/Authorised Officer, who shall not have any power to evict a tenant who is in lawful possession of such property. In such cases, the Authorised Officer can take constructive possession of the property after observing the necessary formalities as provisions of the Rules and as detailed in this Annexure. Such properties can be sold on as is where is basis i.e. subject to tenancy rights/encumbrance. The Authorised Officer can serve notice to the tenants under Section 13 (4) (d) of the Act for payment of the rents to the Bank and on receipt of rent the Authorised Officer can give the tenant a valid discharge by issuing receipts. However, where the tenant does not appear to be bonafide but tenancy appears to have been created in connivance with the borrower then the Authorised Officer should immediately bring facts to the knowledge of Legal Dept. of the Zone for guidance. G. Constructive / Symbolic possession N.L.Dalmia Institute of Management and Research[56]
  57. 57. NPA MANAGEMENT In this regard, the properties in possession of the tenants, taking symbolic possession of the properties, as a rule, may not be the appropriate mode and the same may not serve any purpose and there may be complications in cases involving unscrupulous borrowers/owners of the immovable properties. We explain this as under :- 1. Possession is taken in order to hand over the same to the purchaser of the property on confirmation of the sale. Symbolic possession will not ensure Actual possession of the property, which the intending purchaser will require. Apart from that, when the property is not in vacant possession of the Bank, the same may not attract fair value as it should because of the uncertainty and the apprehension in the minds of the intending purchaser about some litigation following the sale in order to thwart the delivery of possession. As such, Actual and vacant possession in the hands of the Bank shall always command highest price as compared to a situation where only symbolic possession is obtained by the Bank. 2. In case symbolic/constructive possession is taken by delivering the copy of Possession Notice, then any unscrupulous owner of such property may try to part with the possession of the property and contend that he has already delivered possession of the property to the Bank against Possession Notice. This situation will be very complicated when the Bank will have to account for the same. No Enforcement Agent need be appointed to take symbolic / constructive possession. 3. Symbolic/constructive possession will have to be converted into Actual possession at the time or after the sale of the property, as vacant possession has to be given to the purchaser of the property unless the purchaser agrees to purchase without insisting for vacant possession. Hence, for aforesaid reasons, it is not advisable to postpone taking of Actual possession, as a rule. However, in specific cases involving special circumstances, symbolic possession may be taken after following formalities e.g. property in possession of tenants or where taking possession of the property will entail large expenses for maintaining and safe guarding the property and the owner of such property is cooperative enough to execute necessary declaration and undertaking in favour of the Bank stating that Bank has taken possession of the property and, at his request, the Bank has again put him in possession of the property as its agent and that he will hold the possession on behalf of the Bank as the agent, and shall be N.L.Dalmia Institute of Management and Research[57]