DEFINITION OF NPAS

A NPA is a loan or an advance where;

Interest and/ or installment 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
The bill remains overdue for a period of
more than 90 days in the case of bills
purchased and discounted
The installment or interest remains overdue
for two crop seasons in case of short
duration crops and for one crop season in
case of long duration crops
1

CATEGORIES OF NPA
Substandard Assets Which has remained
NPA for a period less than or equal to 12
months.
Doubtful Assets Which has remained in
the sub-standard category for a period of
12 months
Loss Assets where 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.

FACTORS CONTRIBUTING TO
NPAS
Poor Credit discipline
Inadequate Credit & Risk Management
Diversion of funds by promoters
Funding of non-viable projects
In 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
3

FACTORS CONTRIBUTING TO
NPAS
Since 1970s, the SCBs functioned as units cut
off from international banking and unable to
participate in the structural transformations
and new types of lending products.
Audit and control functions were not
independent and thus unable to correct the
effect of serious flaws in policies and
directions
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

FACTORS CONTRIBUTING TO
NPAS
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.
5

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
6

INCOME
RECOGNITION
Income Recognition Policy
The policy of income recognition has to be
objective and based on the record of
recovery.
Internationally
income
from
nonperforming
assets
(NPA)
is
not
recognized on accrual basis but is booked
as income only when it is actually received.
Therefore, the banks should not charge and
take to income account interest on any NPA.

The policy of income recognition has to

be objective and based on the record of
recovery. Internationally income from
nonperforming assets (NPA) is not
recognised on accrual basis but is
booked as income only when it is
actually received. Therefore, the banks
should not charge and take to income
account interest on any NPA.
8

However, interest on advances

against term deposits, NSCs, IVPs,
KVPs and Life policies may be
taken to income account on the
due date, provided adequate
margin is available in the accounts.

Presented by Dr. Vibha

Fees and commissions earned by the

banks as a result of renegotiations or
rescheduling of outstanding debts
should be recognized on an accrual
basis over the period of time covered by
the
renegotiated
or
rescheduled
extension of credit.

Presented by Dr. Vibha

10

If
Government
guaranteed
advances become NPA, the interest
on such advances should not be
taken to income account unless
the interest has been realized.

Presented by Dr. Vibha

11

Reversal of Income
If any advance, including bills
purchased and discounted, becomes
NPA, the entire interest accrued and
credited to income account in the
past periods, should be reversed if
the same is not realized. This will
apply
to
Government
guaranteed accounts also.
Presented by Dr. Vibha

12

In
respect
of
NPAs,
fees,
commission and similar income
that have accrued should cease to
accrue in the current period and
should be reversed with respect to
past periods, if uncollected.

Presented by Dr. Vibha

13

Leased Assets
The finance charge component of finance
income [as defined in AS 19 Leases issued
by the Council of the Institute of Chartered
Accountants of India (ICAI)] on the leased
asset which has accrued and was credited
to income account before the asset became
nonperforming, and remaining unrealized,
should be reversed or provided for in the
current accounting period.
3.3
Presented by Dr. Vibha

14

Appropriation of
Recovery in NPAs
Interest realized on NPAs may be
taken to income account provided
the credits in the accounts towards
interest are not out of fresh/
additional
credit
facilities
sanctioned
to
the
borrower
concerned.

Presented by Dr. Vibha

15

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), banks should adopt an
accounting principle and exercise the
right of appropriation of recoveries in a
uniform and consistent manner.

Presented by Dr. Vibha

16

Interest Application
On an account turning NPA, banks should
reverse the interest already charged and
not collected by debiting Profit and Loss
account, and stop further application of
interest. However, banks may continue to
record such accrued interest in a
Memorandum account in their books. For
the purpose of computing Gross Advances,
interest recorded in the Memorandum
account should not be taken into account.
Presented by Dr. Vibha

17

Provisioning Norms
The primary responsibility for making equate
provisions for any diminution in the value of
loan assets, investment or other assets is that
of the bank managements and the statutory
auditors. The assessment made by the
inspecting officer of the RBI is furnished to
the bank to assist the bank management and
the statutory auditors in taking a decision in
regard to making adequate and necessary
provisions in terms of prudential guidelines. l
Presented by Dr. Vibha

18

In conformity with the prudential norms,

provisions should be made on the nonperforming
assets on the basis of classification of assets into
prescribed categories as detailed in paragraphs 4
supra. Taking into account the time lag between
an account becoming doubtful of recovery, its
recognition as such, the realisation of the
security and the erosion over time in the value of
security charged to the bank, the banks should
make provision against substandard assets,
doubtful assets and loss assets as below:
19

Loss assets
Loss assets should be written off. If
loss assets are permitted to remain
in the books for any reason, 100
percent of the outstanding should
be provided for.

Presented by Dr. Vibha

20

Doubtful Assets:

(i) 100 percent of the extent to

which the advance is not covered
by the realizable value of the
security to which the bank has a
valid recourse and the realizable
value is estimated on a realistic
basis.
Presented by Dr. Vibha

21

(ii) In regard to the secured portion,

provision may be made on the
following basis, at the rates
ranging from 25 percent to 100
percent of the secured portion
depending upon the period for
which the asset has remained
doubtful:
Presented by Dr. Vibha

22

Period for which the advance

has
remained
in
doubtful
category Provision requirement
Up to one year 25%
One to three years 40%
More than three years 100%
Note: Valuation of Security for provisioning purposes
Presented by Dr. Vibha

23

With a view to bringing down divergence arising out of

difference in assessment of the value of security, in
cases of NPAs with balance of Rs. 5 crore and above
stock audit at annual intervals by external agencies
appointed as per the guidelines approved by the
Board would be mandatory in order to enhance the
reliability on stock valuation. Collaterals such as
immovable properties charged in favour of the bank
should be got valued once in three years by valuers
appointed as per the guidelines approved by the
Board of Directors.
Presented by Dr. Vibha

24

Substandard assets
(i) A general provision of 15
percent on total outstanding
should be made without making
any allowance for ECGC guarantee
cover and securities available.

Presented by Dr. Vibha

25

(ii)

The unsecured exposures which are

identified as substandard would attract
additional provision of 10 per cent, i.e., a total
of 25 per cent on the outstanding balance.
However, in view of certain safeguards such as
escrow accounts available in respect of
infrastructure lending, infrastructure loan
accounts which are classified as sub-standard
will attract a provisioning of 20 per cent instead
of the aforesaid prescription of 25 per cent.

26

(iii)
In
order
to
enhance
transparency and ensure correct
reflection
of
the
unsecured
advances in Schedule 9 of the
banks' balance sheet, it is advised
that the following would be
applicable from the financial year
2009-10 onwards :
Presented by Dr. Vibha

27

(a)

For determining the amount of

unsecured advances for reflecting in
schedule 9 of the published balance sheet,
the rights, licenses, authorisations, etc.,
charged to the banks as collateral in
respect of projects (including infrastructure
projects) financed by them, should not be
reckoned as tangible security. Hence such
advances shall be reckoned as unsecured.

Presented by Dr. Vibha

28

(b) However, banks may treat annuities

under build-operate-transfer (BOT) model in
respect of road / highway projects and toll
collection rights, where there are provisions
to compensate the project sponsor if a
certain level of traffic is not achieved, as
tangible securities subject to the condition
that banks' right to receive annuities and
toll collection rights is legally enforceable
and irrevocable.
Presented by Dr. Vibha

29

(c) Banks should also disclose the total

amount of advances for which intangible
securities such as charge over the rights,
licenses, authority, etc. has been taken as
also the estimated value of such intangible
collateral. The disclosure may be made
under a separate head in "Notes to
Accounts". This would differentiate such
loans from other entirely unsecured loans.

30

Standard Assets
(i) The provisioning requirements
for all types of standard assets
stands as below.. Banks should
make
general
provision
for
standard assets at the following
rates for the funded outstanding on
global loan portfolio basis:
Presented by Dr. Vibha

31

(a) direct

advances to agricultural and

Small and Micro Enterprises (SMEs)
sectors at 0.25 per cent;
(b) advances to Commercial Real Estate
(CRE) Sector at 1.00 per cent;
(c) housing loans extended at teaser rates
and
restructured
advances
asas
indicated in Para 5.9.13 and 5.9.14
respectively
Presented by Dr. Vibha

32

(d)

all other loans and advances not included in

(a) (b) and (c) above at 0.40 per cent.
(ii) The provisions on standard assets should not
be reckoned for arriving at net NPAs.
(iii) The provisions towards Standard Assets need
not be netted from gross advances but shown
separately as 'Contingent Provisions against
Standard

33

Provisions on Leased Assets

Substandard Assets:
(a)Ten percent of the sum of the net
investment in the lease and the
unrealized portion of finance income
net of finance charge component.
(b)Unsecured lease exposures would
require additional provision of 10%
in total 20%.
Presented by Dr. Vibha

34

Doubtful Assets: 100% of the extent to which,

the finance is not secured by the realisable
value of the leased asset.
Loss Assets: The entire asset should be
written off. If for any reason, an asset is
allowed to remain in books, 100% of the
sum of the net investment in the lease and
the unrealised portion of finance income
net of finance charge component should be
provided for.
35

CURRENT STATUS OF NPAS

All SCBs average Net NPA Ratio for 2011 be
seen according to the given list. The banks
have been able to report lower NPA
percentage mostly by providing against or
writing off NPAs.
The provision to certain extent was
facilitated by higher profits on account of
treasury management
The better Net NPA ratio was also facilitated
by higher credit off take resulting in larger
asset portfolio/ book size.

36

NPA MANAGEMENT PREVENTIVE

MEASURES
Formation of the Credit Information Bureau
(India) Limited (CIBIL)
Release of Wilful Defaulters List. 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
Reporting of Frauds to RBI
Norms of Lenders Liability framing of
Fair Practices Code with regard to lenders
liability to be followed by banks, which
indirectly prevents accounts turning into
NPAs on account of banks own failure
37

NPA MANAGEMENT PREVENTIVE

MEASURES
Risk assessment and Risk management
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.
Reporting quick mortality cases
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
38

TOOLS AVAILABLE FOR NPA

MANAGEMENT
Compromise Settlement Schemes
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Board
for
Industrial
&
Financial
Reconstruction (BIFR)
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
(SRFAESI)
Liquidation

39

Compromise Settlement
Schemes
Banks are free to design and
implement their own policies for
recovery and write off incorporation
compromise
and
negotiated
settlements with board approval
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 31st March 2007.
Presented by Dr. Vibha

40

Lok Adalats
Small NPAs up to Rs.20 Lacs
Speedy Recovery
Veil of Authority
Soft Defaulters
Less expensive
Easier way to resolve

41

Corporate Debt Restructuring

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.10 crores and above.
The CDR system is applicable to standard and substandard 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

42

DRT Act
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
43

Proceeding under Code of Civil

Procedure
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.
44

BIFR AND AAIFR

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
Presented by Dr. Vibha

45

NATIONAL COMPANY LAW TRIBUNAL

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
Presented by Dr. Vibha

46

SALE OF NPA TO OTHER BANKS

A NPA is eligible for sale to other banks only if it
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 but not to bank, which originally sold
the NPA.
The NPA may be classified as standard in the books
of the purchasing bank for a period of 90 days from
date of purchase and thereafter it would depend on
the record of recovery with reference to cash flows
estimated while purchasing
The bank may purchase/ sell NPA only on without
recourse basis
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.
Presented by Dr. Vibha

47

SARFESI Act 2002

SARFESI provides for enforcement of security
interests in movable (tangible or intangible
assets including accounts receivable) and
immovable property without the intervention of
the court
The bank and FI may call upon the borrower by
way of a written 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.
Presented by Dr. Vibha

48

SARFESI Act 2002

Chapter II of SARFESI provides for setting up of
reconstruction and securitization companies for
acquisition of financial assets from its owner,
whether by raising funds by such company from
qualified institutional buyers by issue of security
receipts representing undivided interest in such
assets or otherwise.
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, enforcement of
security interest, settlement of dues payable by
the borrower 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
49

Whether
Second Amendment to
Companies Act and
SARFESI Provide
effective and
compatible
enforcement

50

Second Amendment & SARFESI

The second amendment and SARFESI are a
leap forward but requirement exists to
make the laws predictable, transparent
and affordable enforcement by efficient
mechanisms outside of insolvency
No definite time frame has been provided
for various stages during the liquidation
proceedings
Need is felt for more creative and
commercial approach to corporate entities
in financial distress and attempts to revive
rather
than
applying
conservative
approach of liquidation
51

Second Amendment & SARFESI

Tribunals have largely failed to
serve the purpose for which they
were set up. NCLT would be overburdened with workload. Change in
eligibility criteria for making a
reference would itself generate a
greater workload.
The second amendment stops short
of
providing
a
comprehensive
bankruptcy code to deal with
corporate bankruptcy.
52

Second Amendment & SARFESI

Does not introduce the required
roadmap of the bankruptcy proceeding
viz:
Application for initiating
Appointments & empowerment of trustee
Operational and functional independence
Accountability to court
Monitoring and time bound restructuring
Mechanism to sell off
Number
of
time
bound
attempts
for
restructuring
Decision to pursue insolvency and winding up
Strategies for realization and distribution
Need for new laws & procedures to handle bankruptcy
proceedings in consultation with RBI
53

NEGOTIATION PROCESS FOR

SETTLEMENT OF
NON PERFORMING ASSETS

54

Factors Affecting the Acceptance

of Proposal by Bank
Banks Documentation.
Security value. Realizable sale value.
Banks ability to sell.
Ability & Source of the borrower.
Ability & Source of the guarantor.
Vulnerability of the borrower/guarantor.
Time frame.
Strength and Zeal of bank's field staff.
What message is bank sending out (No in a
fraud case.)
Banks Policy.
Success rate.
55

Preparation Stage
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.
56

ROLE OF CHARTERED
ACCOUNTANTS
Assist and Prepare Viability study
Conduct Business, Assets & Share
Valuation
Carry out Due Diligence Study for
Business Restructuring
Verification and Vetting of Documents
Preparation of Scheme of Arrangement
Consultancy on Taxation aspects
Monitoring of Accounts
Credit Audit of borrowers
Stock Audits
57

THANK YOU

58