3 NPA Management - Ramesh Mahilyan

7/31/2019 3 NPA Management - Ramesh Mahilyan

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Presentation at Board Meeting

on 11thand 12thSept. 2005By:

General Manager (Recy.,Legal Cr. Montg. & Ascrom)

Recovery Department


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Introduction

Narsimhan Committee constituted for giving suggestionfor improving financial help for commercial banks basedon the recommendations of the said Committee. RBI hasimplemented prudential norms for asset classification,income recognition and provisioning which came intoeffect from the accounting year which closed on 31stMarch 1993.

Norms have been and are being implemented in a phasedmanner from the year 1994-95.

Due to the implementation of the prudential normsAccrual Concept has been changed to RecoverabilityConcept in recognizing the income of NPA.


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. Income from NPA is not recognized on Accrual but isbooked as income only when it is actually recovered, hence,once an account becomes NPA, interest income accounted

on Accrual basis during the year has to be reversed.

Once an account has become NPA interest accrued shouldnot be credited to the Profit & Loss A/c but it can be creditedto Accrued Interest Suspense Account by debiting to thecustomers account.

This practice is followed by several banks. Most of thenationalized banks follow the practice of maintaining amirror account and the interest due on NPA are recorded.only in the mirror account.

Any subsequent recovery in NPA should first beappropriated towards interest arrears and balance, if any,to principal.


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RBI Guidelines on NPA

As per the extant guidelines of the Reserve Bank of India the

policy of income recognition should be objective and based

on record of recovery rather than on any subjective

considerations. Likewise, the classification of assets of bank

has to be done on the basis of objective criteria which

would ensure a uniform and consistent application of the

norms. Also, the provisioning should be made on the basis

of the classification of assets based on the period for which

the asset has remained non-performing and the availability

of security and the realizable value thereof.


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Definition of NPA

DEFINITIONS Non Performing Assets

An asset, including a leased asset, becomes non performingwhen it ceases to generate income for the bank.

A non performing asset (NPA) is a loan or an advancewhere :

interest and/or installment of principal remain overdue for aperiod of more than 90 days in respect of a term loan.

the account remains out of order as indicated in subsequent slidein respect of an Overdraft/Cash Credit (OD/CC).

the bill remains overdue for a period of more than 90 days in thecase of bills purchased and discounted.

the installment of principal or interest thereon remains overduefor two crop seasons for short duration crops.

the installment of principal or interest thereon remains overduefor one crop seasons for long duration crops.


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Definition of NPA (Cont.)

The amount of liquidity facility remains outstanding

for more than 90 days, in respect of a securitization

transaction undertaken in terms of RBI guidelines on

securitization 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 unpaidfor a period of 90 days from the specified due date of

payment.


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Identification of NPAs

Type of Loan Conditions:

Term loan Installment and/or interest remain overduefor a period of more than 90 days.

CC / OD The account remains out of order for a

period of more than 90 days.BP / BD The bills remains overdue for a period ofmore than 90 days in the case of BP & BD

Agricultural advances i) Short duration cropInstallment of Principal or Interest thereonremains overdue for two crop seasons.

ii) Long duration crop Installment of Principal or interest thereon

remains overdue for one crop season.


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Identification of NPAs Securitisation transaction: The amount of liquidity

facility remains o/s for morethan 90 days.

Derivative transactions: The overdue receivables(representing positive mark tomarket value of a derivative

contract) if these remain unpaidfor more than 90 days fromspecified due date.


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Out of order

An a/c should treated out of order if

i) O/s balance remains continuously in excess of thesanctioned limit/drawing power

ii) O/s balance in the principal operating a/c is lessthan the sanctioned limit/drawing power but thereare no credits continuously for 90 days

OR credits are not enough to cover the interestdebited during the same period.


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Overdue

Any amount due to the bank underany credit facility is overdue if it is

not paid on the due date fixed bythe bank.


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Categories of NPAs

As per RBI guidelines Banks are required to classify nonperforming assets further into the following three categories basedon the period for which the asset has remained non performingand the realisability of the dues.

Substandard Assets With effect from 31st March 2005, a substandard asset would be

one, which has remained NPA for a period less than or equal to 12months. In such cases, the current networth of the borrower/guarantor or the current market value of the security charged isnot enough to ensure recovery of the dues to the bank in full. Inother words, such an asset will have well defined creditweaknesses that jeopardize the liquidation of the debt and arecharacterized by the distinct possibility that the bank will sustainsome loss, if deficiencies are not corrected.

ASSET CLASSIFICATION


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A loss asset is one where

but the amount has not been written offwholly. In other words, such an 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 (Cont.)


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INCOME RECOGNITION

Income Recognition Policy

Branches should not charge and take to incomeaccount, interest on any NPA.

However, interest on advances against term deposits,NSCs, IVPs, KVPs and Life policies is to be taken toincome account on the due date, provided adequatemargin is available in the accounts.

Fees and commissions earned by the bank as a result

of renegotiation and rescheduling of outstanding debtis to be recognized on an accrual basis over the periodof time covered under the renegotiated or rescheduledextension of credit.


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If Government guaranteed advances become NPA, the

interest on such advances should not be taken to income

account unless the interest has been realized.

Reversal of Income

On an account turning NPA, branch should reverse theinterest already charged and not collected for past periods

by debiting Profit and Loss account and stop further

application of interest. This will apply to Government

guaranteed accounts also

INCOME RECOGNITION (Cont.)


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In respect of NPAs, fees, commission and similarincome that have accrued should cease toaccrue in the current period and should be

reversed or provided for with respect to pastperiods, if uncollected.

Appropriation of recovery in NPAs

Interest realized on NPAs is allowed to be takento income account provided the credits in the

accounts towards interest are not out of fresh /additional credit facilities sanctioned to theborrower concerned.

INCOME RECOGNITION (CONT.)


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In the absence of a clear agreement between the bank and

the borrower for the purpose of appropriation of recoveries in

NPAs (i.e. towards principal or interest due), where suit not

filed, recoveries effected in the account (including recovery

under Public Money Recovery Act) from time to time shall be

appropriated in the following manner :

Towards Principal (instalment)

Towards unapplied interest

Recovery in suit filed/decreed accounts shall be appropriatedfirst towards legal charges awarded by the court, thereafter

interest due and finally principal amount.



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Upgradation of loan accounts classified as NPAsIf arrears of interest and principal are paid by the borrowerin the case of loan accounts classified as NPAs, the accountshould no longer be treated as non-performing and maybe classified as standard accounts.

Asset Classification to be borrower-wise and notfacility-wise

It is difficult to envisage a situation when only one facilityto a borrower/one investment in any of the securities issuedby the borrower becomes a problem credit / investmentand not others. Therefore, all the facilities granted by thebank to a borrower will have to be treated as NPA andnot the particular facility / investment or part thereofwhich has become irregular.



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. Advances under consortium arrangements

Asset classification of accounts under consortium is basedon the record of recovery of the individual member bankand other aspects having a bearing on recoverability of

the advances. Where the remittances by the borrowerunder consortium lending arrangements are pooled withone bank and / or bank member bank receivingremittances is not parting with the share of othermember bank, the account will be treated as not

serviced in the books of the other member bank andtherefore, be treated as NPA.



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SARFAESI ACT

Relevant provisions


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When notice can not be given When Bank has lien on any goods, money or

security under Contract Act or any otherLaw for the time being in force.

A pledge of movable within the meaning ofSec.172 of the Indian Contract Act. Any security interest created in

agricultural land.

Any case in which the amount due is lessthan 20% of the Principal amount andinterest thereon.


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When notice cant be given (contd.)

Any security interest for securing repaymentof any financial asset not exceeding Rs.1/- lac

Any properties not liable to attachment

(excluding the properties specifically chargedwith the debt recoverable under this Act) orsale under the first proviso of sub section (1)code of the Civil Procedure, 1908.

Any rights of unpaid sellers under sec. 47 ofthe Sale of Goods Acts.


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When notice cant be given (contd.)

Any conditional sale, hire purchase or lease orany other contract in which no securityinterest has been created.

Creation of any security interest in any aircraft or defined in sec. 2 of the Air craftAct.

Creation of any security interest in any

vessel as defined in clause 55 of sec. 3 of theMerchant Shipping Act.


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When notice can be given

An account is classified as NPA & is notfalling in any of the category of casesenumerated in sec. 31.

In cases of consortium advances, the noticecan be given unless the secured creditorsrepresenting 3/4th in value of the amountoutstanding as on record date and such actionshall be binding on all secured creditors.

.


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When notice can be given (contd.)

Notice must contain the contractualdues.

Notice must contain the details of themortgaged property including theboundaries.

Since Limitation Act applies to action

under SARFAESI, care should betaken that the action is within time. Notice period is 60 days.


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Representation by Mortgagor /

Borrower / Guarantor Sec. 13 (3A)

If borrower on receipt of noticerepresents to the Bank or raises anyobjection, the Bank shall communicatewithin 1 week of receipt of suchrepresentation / objection for non-

acceptance of the representation /objection.


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Service of the Notice

Service of Notice may be made by deliveringor transmitting the notice at the place whereborrower or his agent actually and voluntarilyresides or carries on business or personally

works for gains by : Registered post AD. Courier. Any other means of transmission of documents

like fax or electronic mail service. If the borrower is a body corporate, the

demand notice shall be served on the registeredoffice or any of the branches of such bodycorporate.


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Service of the Notice(Contd.)

The demand shall be made on allborrowers, if more than one.

If notice returned unserved then serviceshall be effected by affixing copy of thedemand notice on the outer door or someother conspicuous part of the house /building and also by publishing the

contents of the demand notice in twoleading newspapers, one in vernacularlanguage having sufficient circulation inthat locality.


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Possession of the Movable Property

When amount demanded in demand notice is notpaid within time, the Authorised Officer (AO)shall proceed to realize the amount by adoptingany of the means provided in sec.13 (4).

AO shall take possession of secured asset in thepresence of two witness known as Panchs. AOshall draw Panchnama as given in Annexure - I.

AO shall make inventory of the secured assets

taken into possession in the form as given inAnnexure J.


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Possession of the MovableProperty (contd.)

AO shall keep the movable property taken intopossession in his custody or a person authorizedor appointed by AO.

AO must sell the movable property immediately ifit is subject to speedy or natural decay.

AO shall take steps for preservation andprotection of the movable property till sold.

AO shall obtain valuation, if movable propertyand fix the reserve price in consultation with thesecured creditor.


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Sale of the Movable Property

AO may sell the movable property takeninto possession in one or more lots, by

adopting any of the following methods : By obtaining quotations from parties dealingin movable properties or otherwiseinterested in buying such movable property.

By inviting tenders from the public. By holding public auction.

By private treaty.


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Sale of the Movable Property (contd.)

In case sale by public auction or by inviting tender

from the public, a public notice in two leadingnewspapers and out of them one in vernacular languagehaving sufficient circulation. The public notice mustgive the following details : Details about borrower & the secured creditor.

Description of movable secured assets to be soldfor identification.

Reserve price. Time & place of public notice.

Depositing of Earnest Money. Sale must be on as is where is and whatever is

basis. There should be clear 30 days between the notice to

the borrower & public notice and the actual sale.


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Sale of the Immovable Property AO must give notice demanding possession.

AO must fix possession notice on the outer door orat such conspicuous place of the property.Inventory of articles be also prepared.

Possession notice should be published in two leadingnewspapers, one in vernacular language havingsufficient circulation in that locality

After possession of the immovable property AOshall take steps for preservation & Protection ofSecured assets.


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Sale of the Immovable Property

(Contd.)

AO may sell the immovable property taken intopossession in one or more lots, by adopting any ofthe following methods :

By obtaining quotations from parties dealing inmovable properties or otherwise interested inbuying such immovable property.

By inviting tenders from the public.

By holding public auction. By private treaty.

S l f th I bl P t


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Sale of the Immovable Property(Contd.)

In case sale by public auction or by inviting tenderfrom the public, a public notice in two leadingnewspapers and out of them one in vernacularlanguage having sufficient circulation. The publicnotice must give the following details :

Details about borrower & the secured creditor. Description of immovable secured assets to be sold

for identification.

Reserve price.

Time & place of public notice.

Depositing of Earnest Money.

Sale must be on as is where is and whatever isbasis.

There should be clear 30 days between the notice to

the borrower & public notice and the actual sale.


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Sale of the Immovable Property (Contd.)

Sale shall be confirmed in favour of the higherbidder /tender

Sale shall be confirmed by the secured creditor

Sale shall not be confirmed if the sale priceoffered is below reserve price. However, AO maywith the consent of Secured creditor and theborrower effect the sale at such price

The purchaser shall immediately pay 25% of thesale price & the balance on or before the 15th dayof confirmation of sale.


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Sale of the Immovable Property(Contd.)

If default of payment within the periodmentioned, the deposit shall be forfeited andproperty shall be resold and the defaulting

purchaser shall forfeit all claim to the propertyor to any part of the sum for which it may besubsequently sold.

On confirmation of Sale by secured creditorand if the terms of payment are complied with,the AO shall issue a certificate of sale of theimmovable property in favour of the purchaser

C f di i


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Cases for discussionUTI v/s Dy. Comm. Central Excise

Priority of secured creditors & govt. dues

Saptagiri Pee Gee Fruits Processing (P) Ltd v/s UCo Bank

Interpretation of as is where is basis

N. Kandasamy v/s Authorised officer, SBI

AO not required to open tenders in the presence of all tenderers

Makbool Husain Razakmiyan v/s Bank of Baroda

Validity of Title

Ulhas Chandra Sahoo v/s Bank of India

If highest bidder fails to pay

Akola oil Industries v/s SBI

SARFAESI can be invoked pending winding up proceedings


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Sale of FA(NPA PWO )to

ARC / ASC&

Banks /NBFCs / FIS


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What is sale of financial

assets? It is an assignment of secured financial

debt by seller Bank in favour of purchaser

(ARC /ASC & Banks/NBFCs/FIs) along with

security interest in the securities charged

to the seller Bank


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Eligible NPA A/Cs for sale

NPAs (incl. Exposure in bonds/debentures etc.) older than 2

years in books of selling Bank.

NPAs less than 2 years can be considered for sale to

ARC/ASC only.

Outstanding more than 1 crore for a/cs under sole banking.

No minimum outstanding balance limit if account in

consortium/multiple banking.


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Preferred Accounts for sale

Partial write-off & NPAs (doubtful, loss)with substantial provision.

Accounts already acquired by ARCs / Banks/ FIs etc.

Accounts where recovery, Prolonged due topending litigation,/ BIFR Ref.

Accounts where chances of recoverythrough compromise are bleak.


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Factors influencing value of asset

Nature of charge on tangiblesecurity.

Banks exposure in total lending toborrower. Enforceability of security documents.

Proper charge registration with ROC. Counter claims if any against Bank. Net worth of promoters / guarantors.

B f B k b l f NP


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Benefits to Bank by sale of NPA

NPA account taken off from the books

Investment in these transactions is treated as performing asset

Elimination of future expenses releasing resources for core

operations.

Timely resolution of assets becomes possible for Purchaser under

one roof enhancing value of asset

Assignment of debts to ARC restrict the borrower from taking

shelter under SICA

With 75% debt aggregation BIFR reference stand abated and

SARFAESI Action becomes easy


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Common Deficiencies

observed in flash reports Valuation reports older than 6 months Latest ROC search reports not obtained

O/s of other banks /FIs not mentioned Facility wise O/s and security details notgiven

Non submission of fresh Inspection

reports Latest net worth not obtained Details of statutory dues not mentioned


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3 NPA Management - Ramesh Mahilyan

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