MANAGEMENT OF NON-PERFORMING ASSETS

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MANAGEMENT OF NON-PERFORMING ASSETS

• PRESENTATION BY
• MR. S. RAVI

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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

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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.

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PROVISIONING NORMS

• Standard Assets general provision of a minimum
  of 0.25
• Substandard Assets 10 on total outstanding
  balance, 10 on unsecured exposures identified
  as sub-standard 100 for unsecured doubtful
  assets.
• Doubtful Assets 100 to the extent advance not
  covered by realizable value of 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
• Loss Assets 100 of the outstanding

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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
• 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

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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

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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.

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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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CURRENT STATUS OF NPAS

• All SCBs average Net NPA Ratio for 2005-06 is
  1.22 (As per RBIs Statistics)
• 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.

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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

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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

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NPA MANAGEMENT - RESOLUTION

• Compromise Settlement Schemes
• Restructuring / Reschedulement
• Lok Adalat
• Corporate Debt Restructuring Cell
• Debt Recovery Tribunal (DRT)
• Proceedings under the Code of Civil Procedure
• 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
  (SRFAESI)
• Liquidation

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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.

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Restructuring and Rehabilitation

• Banks are free to design and implement their own
  policies for restructuring/ rehabilitation of the
  NPA accounts
• Reschedulement of payment of interest and
  principal after considering the Debt service
  coverage ratio, contribution of the promoter and
  availability of security

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Lok Adalats

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

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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
  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

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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

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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.

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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

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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

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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 PL
  account and if it is higher, the excess provision
  will be utilized to meet the loss on account of
  sale of other NPA.

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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.

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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

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

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Second Amendment SARFESI

• Tribunals have largely failed to serve the
  purpose for which they were set up. NCLT would be
  over-burdened 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.

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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

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NEGOTIATION PROCESS FOR SETTLEMENT OF NON
PERFORMING ASSETS
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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.

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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.

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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

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THANK YOU