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NPA Management

A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time.

NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs.

With a view to moving towards international best practices and to ensure greater transparency, it had been decided to adopt the ‘90 days’ overdue’ norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (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’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
  • The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
  • Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes
  • Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
  • Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility
  • No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 90 days.
  • Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

    • Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months.
    • Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months.
    • Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the amount has not been written off, wholly or partly.

    Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. All those assets which cannot be recovered are called as Loss Assets.

    NPAs result from what are termed “Bad Loans” or defaults. Default, in the financial parlance, is the failure to meet financial obligations, say non-payment of a loan installment. These loans can occur due to the following reasons:

    • Usual banking operations /Bad lending practices
    • A banking crisis (as happened in South Asia and Japan)
    • Overhang component (due to environmental reasons, business cycle, etc)
    • Incremental component (due to internal bank management, like credit policy, terms of credit, etc)
    • NPAs do not just reflect badly in a bank’s account books, they adversely impact the national economy. Following are some of the repercussions of NPAs:

      • Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses
      • Bank shareholders are adversely affected
      • Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments
      • When bank do not get loan repayment or interest payments, liquidity problems may ensue.

      NPAs results in

      • decrease profitability.
      • Reduce capital assets and lending limits.
      • increase loan loss reserves.
      • bring unwanted attention from government regulators.

      SARFAESI ACT 2002 The full form of SARFAESI Act as we know is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilize this act as an effective tool for bad loans (NPA) recovery. It is possible where non-performing assets are backed by securities charged to the Bank by way of hypothecation or mortgage or assignment.

      • Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court.
      • SARFAESI is effective only for secured loans where bank can enforce the underlying security eg hypothecation, pledge and mortgages. In such cases, court intervention is not necessary, unless the security is invalid or fraudulent. However, if the asset in question is an unsecured asset, the bank would have to move the court to file civil case against the defaulters.

      The SARFAESI Act, 2002 gives powers of "seize and desist" to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:

      • Take possession of the security for the loan;
      • Sale or lease or assign the right over the security;
      • Manage the same or appoint any person to manage the same.

      The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions. The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs). RBI has issued guidelines to banks on the process to be followed for sales of financial assets to ARCs.

      The above observations make it clear that the SAFAESI act was able to provide the effective measures to the secured creditors to recover their long standing dues from the Non performing assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated in the law.

      • The borrowers can at any time before the sale is concluded, remit the dues and avoid loosing the security.
      • In case any unhealthy/illegal act is done by the Authorised Officer, he will be liable for penal consequences.
      • The borrowers will be entitled to get compensation for such acts
      • For redressing the grievances, the borrowers can approach firstly the DRT and thereafter the DRAT in appeal. The limitation period is 45 days and 30 days respectively.

      The Act stipulates four conditions for enforcing the rights by a creditor.

      • The debt is secured;
      • The debt has been classified as an NPA by the banks;
      • The outstanding dues are one lakh and above and more than 20% of the principal loan amount and interest there on.
      • The security to be enforced is not an Agricultural land.

      According to this act, the registration and regulation of securitization companies or reconstruction companies is done by RBI. These companies are authorized to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default. This act makes provisions for two main methods of recovery of the NPAs as follows:

      • Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets;
      • Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by either proper management of the business of the borrower, or by taking over it or by selling a part or whole of the business or by rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisions of this Act.

      Further, the act provides Exemption from the registration of security receipt. This means that when the securitization company or reconstruction company issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is not need of registration unless and otherwise it is compulsory under the Registration Act 1908. However, the registration of the security receipt is required in the following cases:

      • There is a transfer of receipt; and
      • The security receipt is creating, declaring, assigning, limiting, extinguishing any right title or interest in a immovable property.

      However, Debt Recovery Tribunals have been empowered to entertain appeals against the misuse of powers given to banks. Any person aggrieved, by any order made by the Debts Recovery Tribunal may go to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.

      The Chief Metropolitan Magistrate or District Magistrate has been mandated to assist secured creditor in taking possession of secured asset. These officers will make sure that once the creditor has given him in writing that all other formalities of the act have been done, the CMM or DM will take possession of such asset and documents relating thereto; and forward such assets and documents to the secured creditor. Now, here, you have to note that such an act of the CMM or DM can not be called in question in any court or before any authority.

      The act allows taking the matter to high courts only in some matters related to the implementation of the act in Jammu & Kashmir. However, High Courts have been entertaining writ petitions under article 226 (Power to issue writs) of the constitution of India. The government had approved bill to amend the act. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts — Sarfaesi Act 2002, and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). Via these amendments:

      • Banks and asset reconstruction companies (ARCs) will be allowed to convert any part of the debt of the defaulting company into equity. Such a conversion would imply that lenders or ARCs would tend to become an equity holder rather than being a creditor of the company.
      • The amendments also allows banks to bid for any immovable property they have put out for auction themselves, if they do not receive any bids during the auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property. This enables the bank to secure the asset in part fulfillment of the defaulted loan.
      • Banks can then sell this property to a new bidder at a later date to clear off the debt completely.

      However lenders will be able to carry this property on their books only for seven years, as per the Banking Regulation Act, 1949.

      Our Jobs

      • pre – takeover examination of identified units / assets including survey;
      • facilitating bank in seizure of securities / taking possession of movable & immovable assets;
      • obtaining assistance of District Magistrate / Chief Metropolitan Magistrate as and if required, for taking over possession of the securities;
      • to prepare Panchanama, Inventory etc., as desired by the Act;
      • to act as custodian of Secured Assets;
      • to act as ‘Manager’ to manage the secured assets, possession of which has been taken over; providing security / watch & ward for preservation and protection of secured assets including insurance etc.;
      • valuation of various types of secured assets;
      • assisting bank in sale of assets through auction / otherwise (though 60-70% of the cases crack down on taking possession itself) and other allied jobs;
      • AND providing assistance for collection / recovery from borrowers / debtors.

      work experience

      We have handled / are handling the jobs for various banks since 2003 and our exercises have brought wonderful results in various fields, viz.:

      • the defaulters have started maintaining the financial discipline;
      • we had received a business of more than 2,500.00 Crore till date;
      • we have been instrumental in recovering dues to the tune of ` 250.00 Crore approximately during every Financial Year;
      • we have been instrumental in getting the SARFAESI Act’2002 implemented in the state of J&K. We are the only one carrying out the implementation of the Act in the troubled state of J & K.
      • we have taken approximately 50,000 physical possessions of various properties viz. Residential Houses, Commercial Buildings, Educational Institutes, Industrial Buildings, Filling Stations, Vehicles, Tractors etc.

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