‘ Out of Order’ status 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, these accounts should be treated as 'out of order'. ‘ Overdue’ 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.
Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held)
hgsIn the early 1990s PSBs started suffering from acute capital inadequacy and lower/ negative profitability. The parameters set for their functioning did not project the paramount need for these corporate goals. The banks had little freedom to price products, cater products to chosen segments or invest funds in their best interest
Audit and control functions were not independent and thus unable to correct the effect of serious flaws in policies and directions Inadequate mechanism to gather and disseminate credit information amongst commercial banks Effective recovery from defaulting and overdue borrowers was hampered on account of sizeable overhang component arising from infirmities in the existing process of debt recovery, inadequate legal provisions on foreclosure and bankruptcy and difficulties in the execution of court decrees. Banks were not sufficiently developed in terms of skills and expertise to regulate the humongous growth in credit and manage the diverse risks that emerged in the process
RBI also releases a list of borrowers with aggregate outstanding of Rs.1 crore and above against whom banks have filed suits for recovery of their funds Special mention accounts for early identification of bad debts. Loans and advances overdue for less than one and two quarters would come under this category. However, these accounts do not need provisioning . RBI has advised banks to examine all cases of wilful default of Rs.1 crore and above and file suits in such cases. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff accountability. Norms of Lender’s Liability – framing of Fair Practices Code with regard to lender’s liability to be followed by banks, which indirectly prevents accounts turning into NPAs on account of bank’s own failure
Thirty three Debt Recovery Tribunal and five Debt Recovery Appellate Tribunal across the country.
BIFR- Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) commonly known as the SICA
and write off incorporation compromise and negotiated settlements with board approval
The First Lok Adalat was held in Chennai in 1986. Members one social worker and one lawyer. Lok Adalat accepts the cases which could be settled by conciliation and compromise, and pending in the regular courts within their jurisdiction. Main condition of the Lok Adalat is that both parties in dispute should agree for settlement. The decision of the Lok Adalat is binding on the parties to the dispute and its order is capable of execution through legal process. No appeal lies against the order of the Lok Adal
The Securities Contracts (Regulation) Amendment Bill 2007 Include “securitised instruments” in the definition of “securities”. The amendment has paved way for listing and trading of securitized debt on stock exchanges. SEBI (Public Offer and Listing of Securitized Debt Instrument) Regulations, 2008 The Regulations lay down the broad parameters for eligibility of the issuer and the other conditions for the public offer and listing of securitized debt instruments.
A financial asset may be sold to the SC/RC by any bank/ FI where the asset is:
Bank documents – same document given to many banks. Bank shud evaluate the realizable value and then only consider for acceptance Ability of the bank to sell that asset shud be assessed before the acceptance Ability & source of the borrower shud be checked and identified. The credit rating of the guarantor can also be checked before acceptance
Vulnerability of the borrower shud be considered. As discussed about the credit rating A proper time frame shud be formed and adhered to Bank’s staff shud have the strength & zeal to work towards the recovery of NPA. It differs from private to public sector undertakings Bank’s policy shud be complied to and the acceptance of the proposal must adhere to the policy framework The success rate of the such type of deals/proposals shud be kept in mind before accepting
Management of Non-Performing Assets K K JINDAL Managing Director Global Management Services New Delhi
The instalment of principal or interest thereon remains overdue for one crop season for long duration crops
The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
Categories of NPAs *Asset Classification to be borrower-wise and not facility-wise.
The objective of CDR is to ensure a timely and transparent mechanism for restructuring of the debts of viable corporate entities affected by internal and external factors, outside the purview of BIFR, DRT or other legal proceedings
The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA). All participants in the CDR mechanism must enter the ICA with necessary enforcement and penal clauses.
The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with outstanding exposure of Rs.100 crores and above.
The CDR system is applicable to standard and sub-standard accounts with potential cases of NPAs getting a priority.
Packages given to borrowers are modified time & again
Drawback of CDR – Reaching of consensus amongst the creditors delays the process
The banks and FIs can enforce their securities by initiating recovery proceeding under the Recovery if Debts due to Banks and FI act, 1993 (DRT Act) by filing an application for recovery of dues before the Debt Recovery Tribunal constituted under the Act.
On adjudication, a recovery certificate is issued and the sale is carried out by an auctioneer or a receiver.
DRT has powers to grant injunctions against the disposal, transfer or creation of third party interest by debtors in the properties charged to creditor and to pass attachment orders in respect of charged properties
In case of non-realization of the decreed amount by way of sale of the charged properties, the personal properties if the guarantors can also be attached and sold.
However, realization is usually time-consuming
Steps have been taken to create additional benches
For claims below Rs.10 lacs, the banks and FIs can initiate proceedings under the Code of Civil Procedure of 1908, as amended, in a Civil court.
The courts are empowered to pass injunction orders restraining the debtor through itself or through its directors, representatives, etc from disposing of, parting with or dealing in any manner with the subject property.
Courts are also empowered to pass attachment and sales orders for subject property before judgment, in case necessary.
The sale of subject property is normally carried out by way of open public auction subject to confirmation of the court.
The foreclosure proceedings, where the DRT Act is not applicable, can be initiated under the Transfer of Property Act of 1882 by filing a mortgage suit where the procedure is same as laid down under the CPC.
BIFR has been given the power to consider revival and rehabilitation of companies under the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA), which has been repealed by passing of the Sick Industrial Companies (Special Provisions) Repeal Bill of 2001.
The board of Directors shall make a reference to BIFR within sixty days from the date of finalization of the duly audited accounts for the financial year at the end of which the company becomes sick
The company making reference to BIFR to prepare a scheme for its revival and rehabilitation and submit the same to BIFR the procedure is same as laid down under the CPC.
The shelter of BIFR misused by defaulting and dishonest borrowers
In December 2002, the Indian Parliament passed the Companies Act of 2002 (Second Amendment) to restructure the Companies Act, 1956 leading to a new regime of tackling corporate rescue and insolvency and setting up of NCLT.
NCLT will abolish SICA, have the jurisdiction and power relating to winding up of companies presently vested in the High Court and jurisdiction and power exercised by Company Law Board
The second amendments seeks to improve upon the standards to be adopted to measure the competence, performance and services of a bankruptcy court by providing specialized qualification for the appointment of members to the NCLT.
However, the quality and skills of judges, newly appointed or existing, will need to be reinforced and no provision has been made for appropriate procedures to evaluate the performance of judges based on the standards
The bank may purchase/sell NPA only on without recourse basis.
If NPA has remained a NPA for at least two years in the books of the selling bank.
The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banks.
If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.
Negotiation Process For Settlement Of Non Performing Assets