Management of Non-Performing

Assets
K K JINDAL
Managing Director
Global Management Services
New Delhi

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Contents
Assets
What is an NPA?
Categories of NPAs
Provisioning Norms
Factors contributing to NPAs
Impact of NPAs on operations
NPA management preventive measures
NPA management - resolution
Negotiation process for settlement of
non performing assets

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Assets of a Bank
Cash Securities
Loans
Property and
equipment that
allows it to operate.
Assets
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NPA
A non performing asset (NPA) is a loan or an
advance where:
interest and/ or instalment of principal remain overdue for
a period of more than 90 days in respect of a term loan
the account remains out of order in respect of an
Overdraft/Cash Credit (OD/CC)
The bill remains overdue for a period of more than 90
days in the case of bills purchased and discounted
The instalment of principal or interest thereon remains
overdue for two crop seasons for short duration crops
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NPA
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.
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Categories of NPAs
Substandard
Asset
w.e.f March 31, 2005,remained an NPA <= 12 months
Net worth of borrower/ guarantor or the current market value of the security
charged is not enough to ensure recovery, i .e., Losses would incur if
deficiencies are not corrected
Doubtful
Asset
w.e.f March 31, 2005, remained in substandard category for 12 months
Has all weakness of substandard asset + on the basis of currently known facts,
conditions and values make collection or liquidation in full highly questionable
and improbable
Loss Assets
loss has been identified by the bank or internal or external auditors or the RBI
inspection but the amount has not been written off wholly.
Asset is considered uncollectible and of such little value that its continuance as
a bankable asset is not warranted although there may be some salvage or
recovery value.
*Asset Classification to be borrower-wise and not facility-wise.
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Trends
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2004-05 2005-06 2006-07 2007-08 2008-09
Gross NPAs/Gross
Advances
Scheduled Commercial Banks
Public Sector Banks
Nationalised Banks
0.0
0.5
1.0
1.5
2.0
2.5
2004-05 2005-06 2006-07 2007-08 2008-09
Net NPAs/Net Advances
Scheduled Commercial Banks
Public Sector Banks
Nationalised Banks
*Percentage
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Provisioning Norms
Responsibility of making adequate provisions for any
diminution in the value of assets is that of the bank
managements and the statutory auditors.
provisions should be made on the nonperforming
assets on the basis of classification of assets.
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Provisioning Norms
should be written off /100 percent of the outstanding should be provided for.
Loss Assets
100 % of the extent to which the advance is not covered by the realisable value
of the security
In case of secured portion, provision may be made in the range of 20% to 100%
depending on the period of asset remaining sub-standard
Doubtful Assets
10 % on total outstanding
additional provision of 10 % for unsecured exposures which are identified as
substandard .
100% for unsecured doubtful assets.
Substandard assets
direct advances to agricultural and SME sectors at 0.25%;
all other loans and advances at 0.40%
Standard assets (w.e.f November 15, 2008 )
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FACTORS CONTRIBUTING TO NPAS
Poor Credit discipline
Inadequate Credit & Risk Management
Diversion of funds by promoters
Funding of non-viable projects
The parameters set for functioning did not project the paramount
need for these corporate goals.
Bound by rules of investing and loan issuance
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FACTORS CONTRIBUTING TO NPAS
Audit and control functions were not independent
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
Inadequate mechanism to gather and disseminate credit
information amongst commercial banks
Effective recovery from defaulting and overdue borrowers
was hampered due to external factors
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IMPACT OF NPAS ON OPERATIONS
Drain on Profitability
Impact on capital adequacy
Adverse effect on credit growth as the bankers prime focus becomes
zero percent risk and as a result turn lukewarm to fresh credit.
Excessive focus on Credit Risk Management
High cost of funds due to NPAs
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NPA MANAGEMENT PREVENTIVE
MEASURES
Formation of the Credit Information Bureau (India) Limited (CIBIL)
Reporting of Frauds to RBI
Release of Willful Defaulters List.
Norms of Lenders Liability framing of Fair Practices Code
Risk assessment and Risk management
Reporting quick mortality cases
Special mention accounts for early identification of bad debts.
NPA Management - Resolution
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Compromise Settlement Schemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Proceedings under the Code of Civil Procedure
NPA Management - Resolution
Board for Industrial & Financial Reconstruction (BIFR)/
AAIFR
National Company Law Tribunal (NCLT)
Sale of NPA to other banks
Sale of NPA to ARC/ SC under Securitization and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 (SARFAESI)
Liquidation

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Compromise Settlement Schemes
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Banks are free to design and implement their own policies
for recovery
Specific guidelines were issued in May 1999 for one time
settlement of small enterprise sector.
Guidelines were modified in July 2000 for recovery of NPAs
of Rs.5 crore and less as on 31
st
March 2007.
Restructuring and Rehabilitation
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Banks are free to design and implement their
own policies for restructuring/ rehabilitation of
the NPA accounts
Rescheduling of payment of interest and
principal after considering the Debt service
coverage ratio, contribution of the promoter and
availability of security
Lok Adalats
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Lok Adalat is a system of alternative dispute resolution developed in
India.
Presided over by a sitting or retired judicial officer or other person of
respect and legal knowledge as the chairman, with two other members.
Fees
There is no court fee and no rigid procedural requirement.
Parties can directly interact with the judge.
Intake
Cases that are pending in regular courts can be transferred to a Lok
Adalat if both the parties agree.
Focus
The focus in Lok Adalats is on compromise.
Small NPAs up to Rs.20 Lacs
Advantages
Speedy Recovery
Veil of Authority
Less expensive
Easier way to resolve

Corporate Debt Restructuring
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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

DRT Act
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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
Proceeding under Code of Civil Procedure
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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 AND AAIFR
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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
It is a time consuming process
National Company Law Tribunal
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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
SARFAESI Act, 2002
The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI) empowers
Banks / Financial Institutions to recover their non-performing assets
The Act provides three alternative methods for recovery of non-
performing assets :
Securitization
Asset Reconstruction
Enforcement of Security without the intervention of the Court
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SARFESI Act 2002
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Legal notice to discharge in full his liabilities within 60 days from
the date of notice, failing which the bank would be entitled to
exercise all or any of the rights set out under the Act.
Another option available under the Act is to takeover the
management of the secured assets
Any person aggrieved by the measures taken by the bank can
proffer an appeal to DRT within 45 days after depositing 75% of
the amount claimed in the notice.
SARFESI Act 2002
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Chapter II of SARFESI provides for setting up of reconstruction and
securitization companies for acquisition of financial assets from its
owner
The ARC can takeover the management of the business of the
borrower, sale or lease of a part or whole of the business of the
borrower and rescheduling of payments, or take possession of
secured assets
Additionally, ARCs can act as agents for recovering dues, as manager
and receiver.
Drawback differentiation between first charge holders and the
second charge holders
Selling Of NPA
A NPA, including a non-performing bond/ debenture, and
a Standard Asset where:
the asset is under consortium/ multiple banking arrangements,
at least 75% by value of the asset is classified as non- performing
asset in the books of other banks/FIs, and
at least 75% (by value) of the banks / FIs who are under the
consortium / multiple banking arrangements agree to the sale of the
asset to SC/RC.
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Selling Of NPA
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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
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Factors - Acceptance of Proposal by
Bank
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Banks Documentation.
Security value. Realizable sale value.
Banks ability to sell.
Ability & Source of the borrower.
Ability & Source of the guarantor.
Factors - Acceptance of Proposal by
Bank
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Vulnerability of the borrower/guarantor.
Time frame.
Strength and Zeal of bank's field staff.
Banks Policy.
Success rate.

Preparation Stage
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Thorough study of the case
Find out our strengths and weaknesses in
the case.
Find out the vulnerable point/weaknesses
of the borrower.
Follow-up with the Borrower and
Guarantors.
Visit factory/Collaterals/residence.
Find out properties not charged to the bank.
Indicate that Bank is willing to compromise.
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Team 9
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