NPA Management And

Recovery Strategies

K K JINDAL
NPA-Non Performing Assets
• A/c which ceases to generate income for the
bank
• Defined as a credit facility in respect of which
the interest and / or instalments of principal has
remained ‘overdue’ for a ‘specified period’ of
time
• Under IRAC norms, specified period at present
is 90 days
IRAC Norms
• An a/c is an NPA:
• Interest and Principal remain overdue for a period of
more than 90 days.
• Account remain out of order in respect of an overdraft
/ cash credit for more than 90 days.
• Bill remain overdue for a period of more than 90 days
in the case of bills purchased and discounted.
• Any amount to be received remains overdue for more
than 90 days.
• Direct Agricultural advances, a/c is NPA- overdue based
on crop seasons.
Asset Classification
Provision for NPAs
Asset Classification Provision
Requirements
Standard Assets 0.25%

Sub-standard Assets 10%

Doubtful Assets (Doubtful I) 20%

Doubtful Assets (Doubtful II) 30%
Doubtful Assets (Doubtful 50%
III)
Loss Asset Should be written off
Some General Guidelines
• No further charging of interest.
• Asset classification will be borrower wise not facility
wise.
• Under consortium-Based on recovery record of individual
Banks.
• Loan a/c -> NPA -> Standard a/c
• But in case of Re-structuring NPA-> Standard a/c
after 1 year.
• Infrastructure Projects-Treated as Substandard if date of
completion extends by 1 yr.
YoY NPA as Percentage of Total Assets
Type of Banks Gross NPAs/Total Net NPAs/Total Assets
Assets

2006- 2007- 2008- 2006- 2007- 2008-

07 08 09 07 08 09
Public Sector Banks 1.6 1.3 1.2 0.6 0.6 0.6

Private Sector Banks 1.2 1.4 1.7 0.5 0.6 0.7

Foreign Banks 0.8 0.8 1.5 0.3 0.3 0.7

All Scheduled 1.5 1.3 1.3 0.6 0.6 0.6

Commercial Banks
YoY NPA as Percentage of Advances
Type of Banks Gross NPAs/Gross Net NPAs/Net
Advances Advances

2006- 2007- 2008- 2006- 2007- 2008-

07 08 09 07 08 09
Public Sector Banks 2.7 2.2 2.0 1.1 0.8 0.7

Private Sector Banks 2.2 2.5 2.9 1.0 1.2 1.5

Foreign Banks 1.8 1.8 4.0 1.0 0.9 1.7

All Scheduled 2.5 2.3 2.3 1.0 1.0 1.1

Commercial Banks
WILFUL DEFAULTERS
• Wilful Default is deemed when:
• Unit has defaulted even when it has the capacity.
• Unit not utilised the finance from the lender for the
specific purposes.
• Unit has siphoned off the funds.
• Siphoning of Funds
• Funds utilized for un-related operations of borrower.
• Detriment to the health of the lender or any other
entity.
• Decision based on the lender’s judgement.
DIVERSION OF FUNDS
• Utilization of short term WC funds for long term
purposes.
• Deployment of funds for other activities not in sync for
which it was sanctioned.
• Transfer of funds to subsidiaries.
• Investment in other companies –acquiring equities/debt
–without approval.
• Shortfall in deployment in funds.
PENAL MEASURES
• No additional facilities granted.
• Debarred from Institutional finance- 5 years.
• Legal proceedings & Recovery of dues.
• Proactive approach – change of management of wilfully
defaulting unit.
• Tracking of Repayment performance to the lenders.
• RBI publishes booklet-list of suit filed accounts.
Reasons for Non Performing Assets

• Incremental Component (Internal Factors)

• Overhang Component (External Factors)
Incremental Factors
• These are due to the environment reasons,
business cycles etc.
• Eg. Includes: Sluggish legal system - Long
legal tangles
• Scarcity of raw material, power and other
resources.
• Industrial recession.
• Government policies like excise duty
changes, Import duty changes etc
Overhang Components
• These are due to the environment reasons,
business cycles etc.
• Eg. Includes: Sluggish legal system - Long
legal tangles
• Scarcity of raw material, power and other
resources.
• Industrial recession.
• Government policies like excise duty
changes, Import duty changes etc
Income Recognition
• Income from non-performing assets (NPA) is not
recognized on accrual basis
• Interest on advances against term deposits, NSCs, IVPs,
KVPs and Life policies may be taken to income account
on the due date
• Fees and commissions earned by the banks as a result
of re-negotiations or rescheduling of outstanding debts
should be recognized on an accrual basis over the
period of time covered
Reversal of Income
• If any advance becomes NPA as at the close of any year,
interest accrued and credited to income account in the
corresponding previous year, should be reversed or
provided for if the same is not realized.
• Fees, commission and similar income that have accrued
should cease to accrue in the current period and should
be reversed or provided for with respect to past periods,
if uncollected
Recovery Action
• To recycle the funds to meet the banks objectives
• Banks are free to design and implement their own
policies for restructuring / rehabiliation of NPA accounts
• Action recommended only when there is no hope of
revival or recovery without legal action
NPA Management – Compromise
Settlements
• Settlement of disputes reached by mutual consent
• Non Legal remedy
• Objective: Negotiate settlements to maximise the
compromise amounts
• Banks free to design & implement their own recovery
policies 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
Lok Adalat
• Administering justice w/o resort to courts
• Simpler, quicker & cost effective disposal
• Both parties need to volunteer
• Lok adalat award = court decree
• Maximum claim dealt in Lok Adalat is 20 lakhs
• Cases for court can be refered
Types of Legal Action
• Enforcement Action under SARFAESI Act 2002 to
enforce banks rights
• Debts above 10 lakhs, Recovery application before DRT
• Debts below 10 Lakh, filed through civil courts
• Registered company winding up, the Bank can file claim
before Official liquidator
• Insolvency proceedings before the Insolvency courts
Legal Action under DRT
• DRT Centre vested with power to entertain Bank’s
application for recovery
• Not bound by Code of Civil procedure,1908
• Lesser time to award Recovery Certificates
• Applicable when
• SARFAESI act not feasible
• Dues above 10 lakhs
• Full dues of the bank not recovered from sale of
assets
Recovery through civil suit
• Dues less than 10 lakh
• Filed in form of:
• Mortgage suit
• Mortgage obtained as security for advance
• Money suit
• Suit filed to get a money decree
• No securities by way of mortgage
• Recover money on the basis of loan document or
money paid
Recovery through civil suit -Summary suit
• Suit against a borrower on a promissory note where in
no security is enforced
• Suit against a borrower on a Pro-Note where in no
security is enforced against either
• Suit against a guarantor on his letter of Guarantee when
no security is enforced
• In Bills of purchase suit against the borrower wherein no
security is enforced
Recovery through winding up petition
Filing of insolvency proceeding
• Bank can file insolvency against borrowers
• Debtor is a judgment debtor and failed to pay the
decretal dues
• Debtor owing Rs 2000 or above commits:
• Transfer of property to delay creditors
• Departs out of India
Recovery using Recovery Certificate
• Recovery Officer proceeds to recover the amount in any
of the following ways :
a) attachment and sale of the movable and immovable
property
b) arrest and detention of the defendant
c) appointing a receiver for the management of the
movable or immovable properties
d) issue Garnishee Order against third parties.
• Reacting promptly would be in favour of the Bank
Waiver of Appeal
• Suit filed by the Bank has been dismissed by the Court
• Suit is decreed in Bank’s favour but for the amounts
lower than prayed for
• Reasons for award of lower than the prayed for and
chances of success of appeal
• Availability of security from which to recover the dues
• Cost benefit analysis, if appeal is preferred
• Time value of money and the possibility of delay in
execution of decree in case of preferring appeal
Time frame for various actions
• For action under DRT Act
• Filing for Recovery Application before DRT, if permitted by Competent
authority, should be done within two months from date of sanction
• Within one month from date of passing of the Recovery Certificate it
should be taken on the record of the Recovery Officer for the purpose
of execution
• For action before Civil Courts
• In case of filing a civil suit before Civil courts, if permitted by Competent
authority, should be done within two months from date of sanction.
• Within one month from date of filing of the Bank’s Application/
Requisition it should be taken on the record of the Revenue authority for
the purpose of execution.
• Further, particulars of assets, location of assets and other necessary
particulars should also be provided to the Revenue Officials within one
month of date of filing of Bank’s Application / Requisition
Review of suit filed /decreed cases
• The developments of all suit filed and decreed
accounts shall be assessed and reviewed by the
Branch and reported to the Zone once in a
quarter.
• Further Review of all suit filed and decreed
accounts based on book-outstanding will be
done once in a year
BIFR
• Board for Industrial and Financial Reconstruction(BIFR)
is a body constituted under Sick Industries Companies
(Special Provision) Act (SICA) 1985
• Timely detection and power to consider revival and
rehabilitation of sick companies
• Any sick company can make a reference to BIFR within
60 days from date of adoption of annual accounts after
which the board of directors have come to a conclusion
that company has become sick
• Shipping companies, Industrial units registered as SSIUs
and service units like hotels are not eligible for reference
BIFR
• Immediate effect of reference:
• No legal action/ recovery action can be instituted
against the borrower company and the guarantors
• All pending cases against the borrower/ guarantors
are suspended during the pendency of reference
• Legal proceedings can be instituted/ continued after
obtaining the permission of BIFR
Corporate Debt Restructuring(CDR)
• Objectives:
• ensure timely and transparent mechanism for
restructuring the corporate debts of viable entities
facing problems, outside the purview of BIFR, DRT
and other legal proceedings, for the benefit of all
concerned
• preserving viable corporate that are affected by
certain internal and external factors
• minimize the losses to the creditors and other
stakeholders through an orderly and coordinated
restructuring programme
CDR -Structure
CDR - Features
• Covers only multiple banking accounts / syndication /
consortium accounts with outstanding exposure of Rs.20
crores and above by banks and institutions
• applicable only to accounts classified as 'standard' and
'sub-standard‘
• BIFR cases not eligible
• Requests of any corporate indulging in wilful default,
fraud or misfeasance not considered
• Reference to CDR can be triggered by:
• any creditor who have minimum 20% share in either
working capital or term finance
• by the concerned corporate
Sale of NPA To Other Banks/FIs
• Only NPA accounts with outstanding balance over Rs. 25 lakh and
assets classified as NPA for atleast 2 years are eligible
• Purchasing bank should hold NPA for a minimum of 15 months
before selling it to other banks except to the bank which sold NPA to
it
• The sale consideration should be received from the purchasing
Bank in Cash
• NPA transferred to purchasing bank on “without recourse” basis
• If the sale is at a price below Net Book Value (NBV), the shortfall will
be debited to the P&L a/c of the year
• If sale is for a value higher than the NBV, the excess provision shall
not be reversed but will be utilised to meet shortfall on account of
sale of other NPAs in future
SARFAESI Act 2002
• The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002
(SARFAESI) empowers Banks / Financial Institutions to
recover their non-performing assets without the
intervention of the Court. 
Methods for Recovery
Securitization & Asset Reconstruction
• Securitisation is the process of pooling and repackaging of
homogenous illiquid financial assets into marketable
securities that can be sold to investors
• Securitisation company or reconstruction company may raise
funds from the qualified institutional buyers by formulating
schemes for acquiring financial assets
• Any securitization or reconstruction company can act as an
agent to a bank/financial institution for the purpose of
recovering their dues
• ARCs have authority to take over the management of the
business of the borrower
• ARC restructure NPAs and sell them to investors as “Pass
Through Certificates” (PTCs)
Provisions of the Act
• NPA loans with outstanding above Rs 1 lac
• Amount less than 20% of the principal and interest are
not eligible to be dealt with under this act
• Assets under pledge, lien/ assets financed under lease
or hire purchase are not covered
• Either a bank must be the sole Banker to the borrower or
in case of joint lending, at least lenders representing 75
% of the contractual amount due and out-standing agree
to take Action
• Any security interest created over agricultural land can’t
be proceeded with
SARFAESI Act- Empowerment to Bank
• The Act empowers the bank to:
• To issue demand notice to the defaulting borrower
and guarantor, calling upon them to discharge their
dues in full within 60 days from the date of the notice. 
• To give notice to any person who has acquired any of
the secured assets from the borrower to surrender the
same to the Bank. 
• To ask any debtor of the borrower to pay any sum due
or becoming due to the borrower
Procedure for Proceeding under SARFAESI
Act
• Identification of accounts & Obtain Approval for Action
• Issue of duly signed notices by Authorised Officer to
borrower and guarantor asking them to discharge their
dues within 60 days
• If borrower makes any representation or raises any
objection and if on careful consideration Bank doesn’t
accept it, then it has to communicate within one week
from receipt of such representation or objection with the
reasons for non-acceptance
Procedure for Proceeding under SARFAESI
Act
• If the borrower/guarantor fails to meet the liability within
notice period, bank can take one or more of the following
measures:
• Take possession of the secured assets
• Take over the management of the secured assets
• Issue notice for collection of receivables / book debts
• Bank can also sell or lease out the business and take
over the management of the Company
• If the sale proceeds are not sufficient to liquidate bank’s
dues then bank will have to file recovery suit / DRT
application before Civil Court / DRT for enforcing the
personal covenant against the borrower / guarantor
Appeal to DRT/DRAT
• If any person is aggrieved by any of the measures taken
by the bank, he may file an application to DRT within 45
days from the date such measures have been taken
• Borrower can also appeal to DRAT after DRT but only
after depositing 50% of the amount of debt due or
determined by DRT whichever is less but can’t be below
25%
Write Off Policy
• When the Bank has exhausted all possible
avenues of recovery and there are no more
chances for effecting the recovery
• Two kinds of write off
• Regular write off
• Prudential write off
Regular Write Off (General Conditions)
• Account is classified as Loss Asset.
• 100% provision is held in such loss assets as at the end
of previous quarter.
• Termination of suit proceedings and pending legal action
shall be taken before considering regular write off.
• All efforts under SRFAESI Act have been taken.
• In exceptional cases, in which whereabouts of borrower
and guarantor cannot be traced
• Where any further effort is considered cost-ineffective
Prudential Write Off
(General Conditions)
• Doubtful/Loss assets with outstanding balance >= Rs 50
lacs.
• Suit is filed for non-BIFR cases.
• All avenues of recovery are explored.
• There is no prospect of recovery in case of
ECGC/DICGC guaranteed accounts.
• In case of BIFR accounts
• Outstanding balance under OTS scheme.
• In case winding up has been ordered by BIFR.
• Under Rehabilitation scheme