Banking Awareness Topic Wise - Non- Performing Assets and its Resolution
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Banking Awareness Topic Wise - Non- Performing Assets and its Resolution
1. NPA
“An asset(mostly loan) becomes non-performing, when it ceases to generate income for
the bank”
Interest and / or installment of principal remain overdue for a period of more than 90 days
in respect of a term loan.
If the cash credit account or overdraft account becomes out of order.
Committee on Financial System (CFS) headed by Shri M. Narasimham was constituted in
the year 1991 and the committee gave recommendations in line with the international
practices.
RBI introduced norms for IRAC - Income Recognition Asset Classification
The policy of income recognition should be objective.
Banks are urged to ensure realistic repayment schedules on the basis of cash flows with
borrowers.
In spite of these precautions taken by banks, NPAs are on the rise either due to reasons
beyond their control or willful defaulting.
Interest and / or installment of principal remain overdue for a period of more than 90 days
in respect of a term loan.
If the cash credit account or overdraft account becomes out of order.
NPA Measured under three categories
Substandard Asset
Doubtful Asset
Loss Asset
2. Substandard Asset
Which remained NPA for a period less than or equal to 12 months.
Indicates distinct possibility that banks may sustain loss.
3. Doubtful Assets
Which remained in the substandard category for a period of 12 months.
4. Loss Assets
Where loss has been identified by the bank or internal or external auditors or during RBI
inspection but the amount has not been written off.
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Banking Awareness Topic Wise - Non- Performing Assets and its Resolution
5. Actions Taken banks against NPA
i) If it is a genuine reason for non-repayment
Banks offer Restructuring of loans
Longer repayment period
Provide Moratorium period
Additional loan
Reduction in interest rate.
Appoint a member from bank to help borrowers business
ii)If it is not a genuine reason for non-repayment
Referring the matter to Debt Recovery Tribunals (DRTs)
Referring the matter to Asset Reconstruction Companies (ARCs) as per SARFAESI Act,
2002
Filing winding up petitions in court of law
By filing criminal cases against the willful defaulters
If a loan becomes NPA, Banks Classify them as Special Mention Accounts
SMA-0 (up to 30 days)
SMA-1 (31 to 60 days)
SMA-2 (61 to 90 days). so as to take corrective action.
6. JLF(JOINT LENDERS’ FORUM)
It is mandatory to constitute Joint Lenders’ Forum (JLF) at SMA-2 stage, if the loan
exposure is Rs.100 crores or more. It is a formed group of lender banks.
7. SDR(STRATEGIC DEBT RESTRUCTURING)
Converting debt into equity i.e., banks will assume the role of management (ownership)
to look for turn around of the company.
8. CDR(Corporate Debt Restructuring )
It is part of restructuring of loan by banks.
Implemented by RBI from August 2001.
Aimed at corporates affected by certain genuine internal and external factors.
It covers only multiple banking accounts, consortium accounts / syndicated loan
accounts,
where the outstanding exposure is Rs.10crores or more.
CDR mechanism banks can allow
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Banking Awareness Topic Wise - Non- Performing Assets and its Resolution
i)Extension of repayment period.
ii)Reduction in interest rate.
iii) Moratorium for some period.
iv) Additional loan.
CDR is approved, if at least 75% of the banks by value of the loan and 60% by number
agree to the proposal.
Restructured loans will go out of the books of NPAs
The biggest worry is that more and more cases are coming up for restructuring, sometimes
without genuine reasons.
9. DRT(DEBT RECOVERY TRIBUNALS)
These are established in various cities under the “Recovery of Debts Due to Banks and
Financial Institutions (RDDBFI) Act, 1993”.
Banks or FIs can file an application with DRT to recover dues from persons / companies.
As per the Act, the issue is to be settled in 6 months.
So far, the success rate is around 20% to 30%.
10. ARC(SARFAESI ACT)
These are formed as per the “Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002”.
It empowers Banks & FIs to recover NPAs without the intervention of the court.
This was brought to circumvent the inefficiency of DRTs.
Banks have got powers to sell the “declared bad loans.”
This is applicable for loans with outstanding of Rs. 1 Lakh and above.
RBI has power to issue licences to ARCs and Asset Reconstruction Company (India) Ltd
(ARCIL) is the first ARC established in India.
11. Petition in court Law
Criminal cases can be filed against the borrower, if the bank feels that the non- repayment
of debt is due to “willful default.”
But, it is rarely resorted to by the banks.
12. Criminal cases against willful defaulters
Winding up petitions can be filed, if the borrower fails to pay back the loan, under the
Companies Act.
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Banking Awareness Topic Wise - Non- Performing Assets and its Resolution
“Official liquidator” will be appointed by the competent authority, if there is genuine
reason.
It is a long drawn procedure in courts and has not given satisfactory results to Banks.
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