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NON PERFORMING ASSETS --

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INCOME RECOGNITION , ASSET CLASSIFICATION , NPA MANAGEMENT & RECOVERYTop of Form
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CLASSIFICATION OF LOAN A/Cs
Assets are classified into 4 categories namely Standard (including Special Mention category), sub-standard, doubtful and loss. But NPAs are classified into 3 categories i.e. Sub-standard, Doubtful and Loss.
ASSETS CLASSIFICATION
GROUP
DEFINITION
STANDARD
Accounts which are in order
SUB STANDARD
Accounts which have been classified as NPAs for a period not exceeding 12 months
DOUBTFUL
Sub standard accounts, which have remained NPAs for a period exceeding 12 months
LOSS ASSETS
Accounts which have become unrealizable, where losses have been identified by the   bank / internal / external auditor / RBI Inspectors.
SMA
Special mentioned assets: RBI has instructed banks to identify a/cs which are overdue/out of order but not NPA & maintain a special watch.
CATEGORY
  PROVISION REQUIREMENTS
STANDARD ASSETS
Direct Agri & SME  sectors
All other loans & Advances
Commercial Real Estate
Teaser Rate – Housing Loan
0.25%
0.40%
1%
2%
SUB-STANDARD ASSETS
Secured Sub-standard
Unsecured Sub-standard : Where the value of security is not more than 10% right from the beginning i.e. ab-initio
15% of outstanding dues
25% of outstanding dues*
*20% for Infrastructure Loans with escrow arrangement
DOUBTFUL ASSETS
D1
D2
D3
First 12 months
Next 24 months
Over 36 months
RVS
Shortfall in Security
RVS
Shortfall in Security
100% Uniformly
25%
100%
40%
100%
LOSS ASSETS
The entire assets should be written off. If permitted to remain in the books for any reason, 100% of the outstanding should be provided for.



PERIOD OF CLASSIFICATION IN DIFFERENT CATEGORIES:
The time period of their classification is restricted as under:
1. Standard - Regular : No restriction on the time period
1a. Standard - Irregular (called Special Mention Account,SMA) : 90 days (If account became SMA on Dec 12, 2009, it will remain SMA up to Mar 11, 2010).
2. Sub-Standard : 12 months (This account becomes sub-standard on Mar 12, 2010 and remains sub-standard up to Mar 11, 2011).
3a.Doubtful- up to one year : 12 months (This account becomes D-1 on Mar 12, 2011 and remains D-1 up to Mar 11, 2012)
3b. Doubtful - above one year but up to 3 years : 24 months (This account becomes D-2 on Mar 12, 2012 and remains D-2 up to Mar 11, 2014)
3c. Doubtful - above three years : Uncertain period (This account becomes D-3 on Mar 12, 2014 and remains D-3 for uncertain period)
4. Loss: Account is a loss account when security loss is 90% or more. The period is uncertain.





SUMMARY OF PROVISIONS PERCENTAGES
1-a. Standard accounts : General provision : 0.40%
1-b. Standard accounts: Direct Agriculture & SME : 0.25%
1-c. Standard a/c : Commercial Real Estate : 1.00%
2. Sub-standard: Provision to be made on the entire balance without bifurcation into secured or unsecured.
2a. Sub-standard Secured : 15%
2b. Sub-standard Unsecured : 25% (Substandard unsecured means an account, where at the time of sanction either no security was taken or security value was only up to 10% of sanctioned amount).
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3. Doubtful : On unsecured portion of the balance in any category of DF : 100%
On secured portion of the balance as per doubtful category as under:
3a. Doubtful - upto 12 months (D-1) : 20% (Balance is Rs.10 lac. Security value is Rs.8 lac. Provision will be @ 100% on unsecured balance of Rs.2 lac and @20% on the secured portion of Rs.8 lac. Total provision = 2 lac + 1.60 = 3.60 lac)
3b. Doubtful - more than 12 months but upto 3 years : 30% (Balance is Rs.10 lac. Security value is Rs.8 lac. Provision will be @ 100% on unsecured balance of Rs.2 lac and @30% on the secured portion of Rs.8 lac. Total provision = 2 lac + 2.40 = 4.40 lac)
3c. Doubtful - more than 3 years (secured/unsecured): 100% (Balance is Rs.10 lac. Security value is Rs.8 lac. Provision will be @ 100% on unsecured balance of Rs.2 lac and @100% on the secured portion of Rs.8 lac. Total provision = 2 lac + 8 lac = 10 lac)
Note: In doubtful accounts, no provision to be made for amount secured by guarantee of govt., CGTMSE, DICGC or ECGC.
4. Loss account : 100%
SECURITY INCLUDES WHAT? : Primary + collateral security including Govt. guarantee, ECGC guarantee, DICGC guarantee, CGTMSE guarantee.
Example : Balance Rs.10 lac. Primary security value Rs.4 lac. CGTMSE guarantee cover of 75%. Account in D-2 category. Amount of provision. In this case balance of Rs.4 lac is covered by primary security. The remaining Rs.6 lac is covered by 75% guarantee cover i.e. Rs.4.50 lac. Hence unsecured amount shall be Rs.1.50 lac. The rate of provision shall be 100% on unsecured portion of Rs.1.50 lac, 30% on secured portion of Rs.4 lac and no provision on the amount secured by CGTMSE guarantee. Accordingly, total provision shall be = 1.20 + 1.50 = Rs.2.70 lac
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GUARANTOR'S NETWORTH : Not to be taken as security for provision purpose.
Example : Balance Rs.10 lac. Primary security value Rs.4 lac. Collateral Security value Rs.3 lac. Guarantor's networth Rs.5 lac. Account in D-2 category. Amount of provision = 100% on unsecured portion of Rs.3 lac and 30% on secured portion of Rs.7 lac = 3.00 + 2.10 = Rs.5.10 lac
TOTAL PROVISION COVERAGE RATIO: (including floating provisions) to be achieved by September 2010 : 70%
OTHER MATTERS:
1. Provision on Standard account to be kept as part of Other Liabilities in Schedule-5 of bank's balance sheet.
2. Provision on Standard accounts to be done on Global balance and for NPA accounts on Gross Balance
LOK ADALAT
1. Lok Adalat is created under Legal Services Authority Act 1987.
2. Cannot entertain dispute cases. Only compromise cases are eligible. No court fee is payable.
3. Decisions are consent decrees. No appeal against these decrees.
4. Civil Procedure Code is followed by these courts as they are like civil courts.
5. Banks can also call Lok Adalt with application to High Court.
6. Amount - Normal Lok Adalt : Up to Rs.20 lac (wef Aug03, 2004)
7. Above the aforesaid cut-off of Rs.20 lac - DRT Lok Adalat.
8. Eligible accounts - NPA (Loss and doubtful).
9. Decree for principal and interest should be sought by banks as per RBI guidelines.
10. After full payment discharge should be given.
11. Repayment : Preferably down-payment. If it is instalments, max period is 1-3 years.
12. As per Supreme Court direction personal loan cases up to Rs.10 lac, should preferably be settled
(SARFAESI ACT) 2002
1. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) came into force wef Aug 23, 2002 in entire India, including J&K. Act was amended in 2004 on intervention of Supreme Court in Mardia Chemicals vs Union of India and others.
2. Court jurisdiction : Cases under SARFAESI Act can be referred to DRT and appeal to DRAT only
3. Rights of banks as creditor - To take possession, take over management, appoint manager, recover money receivable from 3rd parties, sale of securities charged to the bank, without court intervention.
4. Designated officer who can initiate action under the Act - Scale IV and above in banks OR officers approved by BoD of the bank.
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5. Consortium/BIFR cases : In case of joint/consortium financing, consent of banks with 75% share by value required for action. BIFR cases can be recalled back with consent of banks holding 75% share.
6. Loans not eligible -
(1) Balance up to Rs.1 lac,
(2) if the security agricultural land,
(3) pledge & lien and loan against bank deposit)
(4) where recovery up to 80% of due amount already affected
(5) where limitation has expired
(6) if security is not charged to bank - say hypothecated, mortgaged etc.
7. Sale of securities charged to bank : If there is default, the security can be sold without court intervention after possession of the security.
8. Possession - 60 days notice to be served by bank before possession.
9. Remedy with borrower - If borrower objects to possession, bank to justify the possession by sending reply within one week. If borrower still not satisfied, it could approach DRT within 45 days without deposit of any amount
(Earlier provision Sec 17 to deposit 75% amount was deleted in 2004 on Supreme Court intervention in Mardia Chemicals vs Union of India and others).
10. DRT's decision is appealable (within 30 days) to DRAT by bank or borrower. Borrower can appeal after deposit of 50% of amount that could be reduced to 25% by DRAT.
11. Sale - Before sale, 30 days notice to be served on the borrower.
12. Sale price : Sale cannot be below the reserve price to be fixed by bank. For sale below reserve price, consent of the borrower is required.
13. Method of sale: Sale can be by tenders or through public auction. If sale is through public auction, public notice in two news papers (one of which to be regional) to be given.
14. Purchase price : Sale is confirmed by bank on receipt of 25% amount immdly. Balance is payable in 15 days.
15. DRT pending case: Banks can make use of SARFAESI Act for sale of security for such pending cases as per Supreme Court judgement in Transcore vs Union of India).



DEBT RECOVERY TRIBUNAL
1. Created under Recovery of Debt Due to Banks & FIs Act 1993 (except JK).
2. These are like other civil courts for a special purpose of helping in quicker NPA recovery in large loan accounts.
3. DRT headed by Presiding officer who is assisted by Registrar and Recovery Officer. DRAT is headed by Chairperson.
4. Eligible account - Loans of banks and FIs with recoverable dues of Rs.10 lac or more.
5. Jurisdiction : No other court has jurisdiction over such cases.
6. Time limit - On receipt of application, show cause notice will be served on borrower within 30 days. Disposal by DRT is expected in 180 days. Disposal of appeal by DRAT is expected in maximum 180 days.
7. Appeal - Order by DRT appealable to DRAT within 45 days from date of receipt. If borrower has to appeal, deposit of 75% of decree amount is mandatory. DRAT may reduce or waive the deposit of this amount.
8. Order- After claim is upheld, Recovery certificate is issued. Recovery officer is to make the recovery. He has powers such as take possession of assets, sale of securities, attachment etc. as per provisions of Sec 226 of Income Tax Act.
9. Complaint can be made to presiding officer of DRT against order of Recovery Officer within 30 days and against Registrar within 15 days, if need be.
10. Fee - Min Rs.12000. For each additional Rs.1 lac Rs.1000. Max 1.50 lac. For appeal - Min Rs.12000 for decree of less than Rs.10 lac, 20000 (10 lac to less than Rs.30 lac) and Rs.30000 (Rs.30 lac & above).
ASSET RECONSTRUCTION COMPANIES
1. Set up for taking over distressed assets from banks/FIs and reconstruct or re-pack for sale. (First ARC - ARCIL).
2. Recovery plan should be for a maximum period of 5 years (2 year extension given in Apr 2009).
3. To be set up as a joint stock company.
4. RBI registration must before commencement for business as ARC. Business to be commenced within 6 months of registration with RBI. RBI can extend it by another 1 year in aggregate.
5. Net worth not less Rs.100 cr or 15% of acquired assets, whichever lower.
6. Capital adequacy ratio min 15% of Risk Weighted Assets.
7. Asset would be classified as sub-standard for 12 months, doubtful for 12 months and loss account if remains NPA for more than 36 months.
8. Provision on sub-standard 10%, on unsecured portion of doubtful 100% and secured portion of doubtful 50%. On loss accounts 100%.
9. ARC to invest at least 5% in security receipts created out of each securitization of debt.
CORPORATE DEBT RESTRUCTURING SYSTEM
1. A mechanism prescribed by RBI outside BIFR or DRT for restructuring of loan account. It is not a judicial system. It is based on mutual agreement between borrower and banks.
2. Structure : CDR is a 3-tier structure.
(a) CDR Forum (at top - the policy making body, having Chairman of banks as members - meets at least once in 6 months),
(b) CDR Empowered Group (sanctioning authority having EDs of banks as members - has 90 days to take decision on case. In exceptional case up to 180 days) and
(c) CDR Cell (operating wing to prepare the proposals within one month from reference).
3. Eligible account - Multi-lender a/cs only (such as consortium, multiple banking etc). Fund and non-fund exposure of Rs.10 cr or more.
4. Reference to CDR in case of Category I accounts (i.e. Standard & Substandard accounts) by a bank /FI with 20% share (by value). Borrower can also make a reference with support of a bank / FI having 20% share by value.
5. Category II accounts (Doubtful account) can be referred jointly by banks / FIs having 75% shares by value & 60% in number.
6. Suit filed a/c eligible with consent of banks / FIs having 75% shares by value & 60% in number.
7. Fraud and willful default cases are not also eligible. Large value BIFR cases, can be taken up on specific recommendation of CDR core group.
8. Stand still clause - Borrower and banks/FIs to sign Debtor-Creditor agreement, for no legal action for 90 days (extendable to 180 days), when case is pending with CDR.
Creditors to enter into Inter-creditor Agreement, valid for 3 years. It can be extended for 3 years.
9. Time schedule: Preliminary restructure case to be prepared by lead institution within one month for submission to CDR Cell. CDR cell to prepare restructure plan within 30 days for decision by CDR Empowered Group within 90 days (180 days in special circumstances).
10. Decision criteria followed by CDR - (1) Unit to become viable in 7 years. (2) Restructured debt should be paid within 10 years. (3) Return on capital employed, DSCR and IRR should be acceptable (4) Promoter should contribute 15% of sacrifice of creditors.
11. Asset classification of restructured loans : Account classification to be changed to standard category only after 12 months regular repayment as per the revised due date schedule. Fresh loans to remain standard for one year. After one year, the classification will be according to record of recovery.
12. Asset classification for the period when case was pending with CDR : If approved package implemented within 4 months, asset classification at the time of reference, to be restored.
13. Implementation on approval : Decision binding on all creditors where 75% by value and 60% in number, agree. Provision shall be made for this in the inter-creditor agreement.
RESTRUCTURING OF SME ACCOUNTS
1. Eligible - All non-corporate SMEs whether single bank or multi-lender. Corporate SMEs enjoying any amount of limits from one bank and in multiple accounts funded and non-funded exposure up to Rs.10 cr

SALE & PURCHASE OF NPA BY BANKS
These guidelines of RBI are applicable to banks, FIs and NBFCs.
Sale of NPAs to Asset Reconstruction Companies, is as per provisions of SARFAESI Act.
CONDITIONS TO BE SATISFIED BY SELLER BANK:
(a) Minimum age of NPA in the books of selling bank - 2 years.
(b) sale on cash basis only. Loan account and securities to be transferred only after receipt of full consideration amount
(c) Sale on without recourse basis i.e. the seller bank shall have no obligation of any type, after sale and
(d) Seller bank cannot re-purchase the sold account.
CONDITIONS TO BE SATISFIED BY BUYER BANK:
(a) Max time for realisation of purchased NPAs - 3 years . Not less than 10% should be recovered in first year and 5% in each HY during 2nd and 3rd year.
(b) Minimum period the purchasing bank is to keep the account with it, if it wants to sell to another bank: 15 month from date of purchase.
(c) Asset classification of NPA by purchaser bank - For first 90 days, it will be treated standard. If recovery is not as planned, the treatment to be given as sub-standard.
(d) For CAR purposes, for purchased NPA, risk weightage = 100%.
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INITIATION OF NPA SYSTEM: The process of prudent guidelines on NPA was initiated by RBI in the year 1992-93, on recommendations of Narasimham Committee.
WHEN ACCOUNT BECOMES NPA DUE TO PROBLEM IN RECOVERY / REPAYMENT :
1. Term Loan : interest and/or instalment of principal remain overdue for a period of more than 90 days (Due date of instalment payment was Dec 12, 2009 which borrower failed to pay. Account becomes irregular from Dec 13 and NPA after 90 days (i.e. 19+31+28+12) on Mar 13, 2010.
2. Bills account: Bill remains overdue for a period of more than 90 days (Due date of bill was Dec 12, 2009. The drawee failed to pay. Bill becomes overdue on Dec 13 and NPA after 90 days (i.e. 19+31+28+12) on Mar 13, 2010.
3. Other loans : Any amount to be received remains overdue for a period of more than 90 days
4. Cash credit / Over draft : The account remains out of order for a period of more than 90 days. (Account became out of order as balance exceeded the sanctioned limit wef Dec 12, 2009. Account becomes NPA after 90 days (i.e. 20+31+28+11) on Mar 12, 2010.
5. Out of order is an account
(a) where the balance is more than sanctioned limit or drawing power (Balance exceeded the limit on Dec 12, 2009. Account became out of order on Dec 12, 2009). OR
(b) balance is within limit or drawing power but
(i) where as on date of balance sheet, there is no credit in the account for 90 days or
(ii) credit is less than interest debited or
(iii) where stock report has not been received for 3 months or more.
Further, if the sanction of limit is not renewed on due date, the account becomes sub-standard after 6 months (Date of sanction - Jan 10, 2008. Due date of renewal - Jan 09, 2009. If limit not renewed for 6 months, account becomes NPA on Jul 10, 2009).
6. Special mention account (SMA): During period of irregularity up to 90 days, before becoming NPA, the account is called SMA, which is part of Standard account.
CLASSIFICATION OF SPECIAL CATEGORY OF ACCOUNTS:
1. Agriculture: As per recommendations of VS Vyas Committee, in case of crop based loans (whether crop loans or other loans like finance for tractor etc.), the normal SMA period of 90 days is not applicable. Instead, a loan for short duration crops will be treated NPA if the instalment of the principal or interest thereon remains unpaid for two crop seasons beyond the due date. For a loan for long duration crops the above period would be one crop season beyond the due date. Decision regarding classification of crop duration, is taken by SLBC in each State.
2. Loan against liquid securities (Bank Deposit/NSC/IVP/KVP/LIP) : As long as latest security value is more than the latest balance, account not to be treated as NPA. (This rule is not applicable to govt. securities, mutual fund units, gold loans etc).
3. Consortium loans : Each bank will classify the account as per its own conduct of account and will not take into account the classification with other consortium banks. It is possible that different banks have different classification of the account (one having standard and others sub-standard).
4. Govt. guaranteed accounts : State govt. guaranteed accounts to be treated like other accounts. But in case of Central Govt. guaranteed accounts, account will be treated Standard and provision not be made. Income to be taken into profit only if interest is recovered. But if govt. repudiates its guarantee (i.e. refuses to pay), it is to be treated like other accounts.
5. Restructured NPA account : Account classification cannot be changed immediately to standard category. It will be done after 12 months regular repayment as per the revised due date. (Account rescheduled on Jan 22, 2009. Revised due date for payment July 31, 2009. There is regular repayment. Account to be classified as Standard account on July 31, 2010).
6. Upgrading of account, if due amount is recovered in NPA account: Account to be classified standard immediately (Balance Rs.10 lac in sub-standard account. Due amount Rs.3 lac. Party made payment of Rs.3 lac on Jan 12, 2010. Account will be classified Standard on Jan 12, 2010.
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WHEN ACCOUNT BECOMES NPA IMMEDIATELY, DUE TO PROBLEM IN SECURITY IN THE ACCOUNT:
(a) Doubtful : When account is fully secured at the time of sanction but later on there is loss of security to the extent of 50% or more (in other words, when balance covered by security remains less than 50%).
(b) Loss : While account was fully secured at the time of sanction but later on there was loss of security to the extent of 90% or more. (in other words, when balance covered by security remains less than 10%).
(Balance Rs.10 lac. Initially fully secured. But later on damage to security to the extent of Rs.6 lac (i.e. 60%). Account will be treated doubtful immediately. But if loss is Rs.9.30 lac (i.e. 93%), account will be treated loss account immediately).
NON-SSI SICK AND WEAK UNITS (RBI definitions)
(a) Weak units : Account irregular for more than one year OR erosion in net worth of previous year 50% or more
(b) Sick unit : Accumulated losses > net worth.






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